ECB, Fed Defend Responses to Global Financial Crisis at Forum

European Central Bank President Jean-Claude Trichet defended his institution against criticism that he’s been too cautious in combating the deepest economic slump since the 1930s.

The policies of the world’s major central banks, led by Trichet, Federal Reserve Chairman Ben S. Bernanke and Bank of Japan Governor Masaaki Shirakawa, were scrutinized by economists at the annual symposium in Jackson Hole, Wyoming, this weekend sponsored by the Kansas City Fed.

Economists including Nouriel Roubini, the New York University professor who predicted the financial crisis, have criticized the ECB for waiting too long to cut interest rates and for supplying less stimulus than the Fed. Trichet used a 20- page paper to argue the central bank was guided by its primary aim of delivering stable prices and by a need to revive bank lending.

“Criticizing a central bank that is acting with a steady hand for being ‘behind the curve’ rather misses the point,” Trichet said. “A gradualist approach of this kind may be the most effective antidote to the threat to price stability.”

The Fed in turn was faulted for its policy of keeping interest rates close to zero for an “extended period,” which Carl Walsh, professor at the University of California at Santa Cruz, said was “potentially inconsistent” with its price- stability goal. That prompted Fed Vice Chairman Donald Kohn to respond that the policy is aimed at ensuring inflation doesn’t get too low.

‘Falling and Falling’

“The commitment to low rates is designed to keep inflation from falling and falling persistently below what we might want it to be for a long time,” Kohn said during an audience-debate period at the symposium yesterday. “It’s not designed to raise inflation expectations. There’s no inconsistency there.”