WASHINGTON Federal Reserve Chairman Ben Bernanke said Wednesday regulators are still trying to make the central banks monetary policy mesh more with its financial stability goals.
"The recent crisis has underscored the need to strengthen our monetary policy and financial stability frameworks and to better integrate the two," said Bernanke in a speech before the National Bureau of Economic Research in Cambridge, Mass. "We have made progress on both counts, but more needs to be done."
He said both research and experience are needed to help the Fed and other central banks around the world develop "comprehensive frameworks" to integrate regulatory and supervisory policy, lender-of-last-resort policy, and standard monetary policy.
"The broader conclusion is what might be described as the overriding lesson of the Federal Reserve's history: that central banking doctrine and practice are never static," he said. "We and other central banks around the world will have to continue to work hard to adapt to events, new ideas, and changes in the economic and financial environment."
Bernanke has steadily elevated the importance of financial stability as his agency's responsibilities have swelled under Dodd-Frank.
He previously outlined further steps the central bank has taken to monitor the financial system for both regulatory and monetary policy purposes, using a "more systematic and intensive approach" led by the Fed's Office of Financial Stability Policy and Research.
The central banker has also repeatedly stressed that the Fed's goal of financial stability is of equal importance to setting its monetary policy.
"The Federal Reserve sees its responsibilities for the maintenance of financial stability as coequal with its responsibilities for the management of monetary policy, and we have made substantial institutional changes in recognition of this change in goals," said Bernanke. "In a sense, we have come full circle, back to the original goal of the Federal Reserve of preventing financial panics."
Bernanke acknowledged that the link between financial stability and monetary policy is not yet "fully understood." That's why the Fed's first line of defense against systemic risk is monitoring, supervising, and regulation. The Federal Open Market Committee uses that information in its assessment of the costs and benefits of its monetary policy actions.
The chairman's colleagues, including Fed Gov. Jeremy Stein, have also weighed in on the issue, calling on policymakers to consider using some of the central bank's monetary policy tools to help address gaps in regulation and foster greater financial stability.
"One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability," said Stein, in a speech in February. "As compared with inflation or unemployment, measurement is much harder, so even recognizing the extent of the problem in real time is a major challenge. Moreover, the supervisory and regulatory tools that we have, while helpful, are far from perfect."