European Central Bank President Jean-Claude Trichet has warned policy-makers from around the world not to forget the lessons of the devastating financial crisis now that the worst has passed.
Speaking at the close of a two-day annual Federal Reserve retreat in Jackson Hole, Wyoming yesterday, Mr Trichet urged his peers to do everything they could to prevent a repetition of such "dramatic events."
"Now that we see some signs confirming that the real economy is starting to get out of the period of 'free fall' ... the largest mistake we could make would be to forget the importance and the urgency of this task," he said, warning of a possibly "very bumpy road ahead."
Mr Trichet and other central bankers, meeting in the shadows of Wyoming's majestic Grand Teton mountains, took cautious note of signs suggesting the worst of the devastating economic storm was over, while promising to rebuild fractured financial systems to better withstand future crises.
The economies of France, Germany and Japan have emerged from recession, and the US economy appears to be returning to growth as well. US stocks ended the week at 2009 highs on Friday after a big rise in home sales and optimistic comments from Fed chief Ben Bernanke.
Opening the conference, which drew together prominent academics and top officials from 35 central banks, Mr Bernanke said the global recession was ending, but he warned growth would be sluggish for a time.
However, the recovery is built on government life support and its sustainability is still in doubt. Officials tempered their optimism with talk of the difficulties that lie ahead, including the tricky question of how and when they should pull back the massive support they have provided their economies.
ECB governing council member Ewald Nowotny said yesterday that Europe's economy will improve in the second half of the year, but that a sustained recovery will likely not take hold until early 2010.
One worry for many policy-makers is whether the United States can reverse its aggressive programs that have flooded the ailing economy with cash in time to avoid inflation.
Another ECB official told participants that the ECB was not likely to deviate from its inflation targeting strategy, and warned that pulling benchmark euro zone rates down to near zero, as the Fed has done, could unsettle markets.
"The zero lower bound may interfere with the functioning of financial markets, thereby upsetting the stimulative impact of very low rates," said ECB executive board member Juergen Stark.
Some economists have criticised the ECB for moving less aggressively than the Fed to spur economic activity, and Mr Trichet defended the ECB's policy approach.
"Criticising a central bank that is acting with a steady hand for being 'behind the curve' rather misses the point," he said. "A gradualist approach of this kind may be the most effective antidote to the threat to price stability."
A paper presented at the conference argued the Fed's stated intention to keep interest rates low for an extended period could be incompatible with its goal of keeping inflation down, a conclusion rebutted by Fed vice chairman Donald Kohn.
"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," Mr Kohn said. "It's not designed to raise inflation expectations."
The Fed chopped benchmark US rates to near zero in December and it has pumped hundreds of billions of dollars into the economy to help boost economic activity and turn back a recession that has proven to be the deepest since the 1930s.
Mr Kohn also defended the US central bank's decision to buy long-term securities as an emergency measure to spur growth after it had cut interest rates as far as it could. Economists, including some officials at the Fed, have questioned how successful those purchases have been in lowering rates.
Reuters