The major central banks should put in place a standing network of currency swaps, collateral policies and account arrangements that would make it easier to mobilize liquidity across borders quickly in crisis. We have some of the elements of this framework in place today, and these arrangements have worked relatively well in the present crises. We should leave them in place, refine them further and test them frequently.

In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.  The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation.  We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.  Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.

Our experience in recent months has underlined the global interdependencies of financial markets. Globally active banks manage their positions on an integrated basis around the world, and pressures originating in one market are quickly transmitted elsewhere. Central banks should consider how to adapt their facilities to help these institutions mobilize their global liquidity in stressed market conditions and apply it to where it is most needed. That approach will require the consideration of arrangements with sound institutions in which central banks would accept foreign collateral denominated in foreign currencies. Those arrangements are under active study and a number of issues need to be resolved. It is possible that over time, major central banks could perhaps agree to accept a common pool of very safe collateral, facilitating the liquidity management of global banks.

Another instrument of liquidity provision that central banks are examining is currency swaps to facilitate granting liquidity in other currencies. The central banks found currency swaps useful because the impediments to intermediation in money markets naturally extended to transactions across currencies as well as across maturities and counterparties...

The financial distress since August has also underscored the importance of international cooperation among central banks. For some time, central banks have recognized that managing crises involving large financial institutions operating across national borders and in multiple currencies can present difficult challenges. Funding pressures can easily arise in more than one currency and in more than one jurisdiction. In such cases, central banks may find it essential to work closely together. For just this reason, the Federal Reserve, the ECB, and the Swiss National Bank have established currency swap arrangements and have coordinated their provision of dollar liquidity to international financial institutions over recent months.

Mr. Fisher was concerned that an adverse feedback loop was developing by which lowering the funds rate had been pushing down the exchange value of the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity.

Warsh said in response to a question afterward that any central bank, including the Fed, cannot be ``indifferent to the value of its currency.'' Three days ago, finance chiefs from the U.S. and other Group of Seven nations signaled concern on the dollar's slide and said the global economic slowdown may worsen amid an ``entrenched'' credit squeeze.

As reported by Bloomberg News

Successful coordination in the provision of liquidity raises the question of whether appreciable gains might be had from coordination of monetary policies more generally. John is skeptical, and so am I. Gains from formal policy coordination never seemed large, and it is not clear that globalization has increased them appreciably. Policies agreed to under one set of circumstances may no longer be appropriate when circumstances change, as they inevitably will. Monetary policy should be able to adjust quickly to such changes; agreements that must be renegotiated can tie policymakers' hands. That does not mean that no circumstances exist in which coordinated monetary policy actions would be beneficial, but such circumstances are probably quite rare. Ultimately, global stability depends on good performance in individual countries, and the record of recent decades suggests that, in general, good performance is most readily achieved when central banks focus on their own mandates for domestic price stability and growth.

With respect to monetary policy per se, although we keep each other apprised, each economy is in a different place, in a different situation, and there's no necessity that each country has to have the same policy. I think the policy that's chosen depends on the particular circumstances of that country or that region.

     And so, that's one of the benefits of having flexible exchange rates: It provides some insulation, some ability for countries to run independent monetary policies.

     And so, it's been our practice, as you know, for each major central bank to run an independent monetary policy. And while we keep each other apprised, I don't expect to see any extensive coordination in the near future.

From the Q&A session

The Federal Reserve Act gives us broad authority to act in response to these types of conditions. We will continue to examine ways to adapt our instruments as market conditions evolve.  We will do so in close cooperation with other central banks, as indeed we have since August.  And we will do so in the tradition of pragmatism and flexibility that has been one of the defining features of the central bank of the United States.

Again, from the Federal Reserve's perspective, our principal concern is the safety and soundness of the banking system. What we have done recently is worked with other regulators, such as the SEC and the OCC, and in some cases, also with foreign regulators -- the FSA in the U.K., for example, and German and Swiss regulators -- to do what we call horizontal reviews, which is that, collectively, we look at the practices of a large set of institutions -- both commercial banks and investment banks -- to see how they're managing certain types of activities, for example, the financing of leverage buyouts, equity -- bridge equity -- and the like, and trying to make an evaluation of what are best practices, trying to give back information back to the companies and trying to use that -- those reviews to inform our own supervision.

And so we are very aware of these issues from the perspective of the risk-taking by large financial institutions, and we are studying them, trying to provide information to the institutions themselves, and using them in our own supervisory guidance.

The Fed’s ability to set the short-term interest rate independently of foreign financial conditions depends critically, of course, on the fact that the dollar is a freely floating currency whose value is continuously determined in open, competitive markets. If the dollar’s value were fixed in terms of another currency or basket of currencies, the Fed would be constrained to set its policy rate at a level consistent with rates in global capital markets. Because the dollar is free to adjust, U.S. interest rates can differ from rates abroad, and, consequently, the Fed retains the autonomy to set its federal funds rate target as needed to respond to domestic economic conditions.

I would argue that international data deserve closer examination in order to understand the influences an integrated global economy has on our economy and our currency and the implications of that integration for our monetary policymaking.

In today’s rapidly evolving global economy, monetary policy makers cannot ignore the international dimension. As economies become more open, external developments inevitably affect price and output dynamics. The world may thus be more complex and, in some respects the conduct of monetary policy may be more challenging.

The external factors that have in recent years had a dampening impact on domestic inflation could, at some point, fade or reverse. And the forces that have produced this constellation of capital flows and market conditions will evolve in ways we cannot anticipate.

This obliges policymakers to devote more care to the process of understanding how change in the world affects the balance of opportunity, risk and uncertainty confronting policymakers.

Explicit coordination of policy setting across countries is not likely to happen in the foreseeable future, and I would argue that such explicit policy coordination would not be desirable. Policymakers have to be able to react quickly in many circumstances... Experience has shown that the best outcomes are achieved when each country's policy focuses on domestic stabilization.

Australian Treasurer Peter Costello Thursday attempted to put out the fire sparked by his comments on US interest rates which have prompted calls for his sacking at home and sent US markets soaring to all-time highs.

The Australian Financial Review Wednesday reported Costello as saying US Federal Reserve chairman Alan Greenspan was "very optimistic" about inflation and dismissive of speculation about a rise in US interest rates.

Analysts in the United States had been on tenderhooks in recent weeks over whether the Fed was concerned enough about inflationary pressures to take the pre-emptive measure of raising interest rates.

From an AFX report