The $700 billion financial market rescue package wont necessarily raise interest rates, Gary Stern, president of the Federal Reserve Bank of Minneapolis, said today, addressing the Council of Institutional Investors conference in Chicago.
There are people who believe a large budget deficit and lots of federal borrowing lead to higher interest rates, Mr. Stern told the gathering. Some 500 people registered to attend.
But many other things besides Fed borrowing affect interest rates, such as demand for funds worldwide, and monetary policy, he said. No one component alone affects interest rates, he added.
Mr. Stern pointed to recent years when borrowing grew but interest rates fell.
He also said overregulation isnt the solution to avoiding financial crisis.
Lets regulate everything. Thats not a costless approach and not likely to pass cost/benefit analysis, he said.
Overregulation would dampen innovation and raise the cost of credit, he noted.
I dont think relying on supervision and regulation will be effective alone over time, he said.
Market incentives for controlling leverage and risk are necessary. Its a question of getting the incentives right, he said.
He compared the current economic situation with the 1990s.
The recession of 1990-91 turned out to be brief, but not especially mild, Mr. Stern said. Despite the challenges, the 1990s turned out to be an excellent decade for the U.S. by most measures, he added.