Fed's Plosser calls for stricter rules on policy

WASHINGTON (Reuters) - A top Federal Reserve official said on Tuesday the U.S. central bank needs stricter policies dictating when it should step in with bailouts, saying such measures would have reduced confusion during last year's financial crisis.

"Going forward, the Fed as well as other policy makers should strive to follow a systematic, more 'rule-like' approach in bad times as well as good," the president of the Philadelphia Federal Reserve, Charles Plosser, said in remarks prepared for delivery at a conference at Stanford University in Palo Alto, California.

"We must also apply a systematic approach to the central bank's financial stability policy, particularly its policy actions as the lender of last resort," said Plosser, who is not a voting member of the Fed's policy-setting committee in 2009.

The Fed financed the March 2008 rescue of investment bank Bear Stearns to the tune of $29 billion, but did not step in to prevent the demise of rival Lehman Brothers later that year, and then pumped hundreds of billions of dollars into credit markets to keep them open in the ensuing global panic.

"The lack of a clearly understood approach to the government's and the Fed's decisions about when assistance efforts would be provided created confusion and uncertainty," Plosser said.

His remarks were a direct shot at the Federal Reserve Board in Washington, which took the decisions over Bear and Lehman and has authority over emergency lending, as well as the Federal Reserve Bank of New York, which was also closely involved in the process.

In addition to the Fed's Board in Washington, which is appointed by the U.S. president, the U.S. central bank includes 12 regional Fed banks led by officers picked by their local business communities.

"A basic problem was that, in our desire to get financial markets working again, we offered no systematic view as to how and where the Fed would intervene -- we lacked a well-communicated systematic approach," Plosser said.

Regarded as an anti-inflation hawk, Plosser also repeated his long-held argument that the Fed should adopt an explicit inflation target to help anchor monetary policy and make central bank actions more predictable.

Plosser said that while critics of inflation targets complain that they reduce policy flexibility, this need not be the case, provided policy makers communicate why they have decided to take actions not guided by the target.

For instance, the Fed cut interest rates to almost zero percent during the financial crisis, an action that Plosser said was more than called for by models based on a rule developed by Stanford economist John Taylor, known as the Taylor Rule of central banking.

"When monetary policy makers who follow a rule choose to significantly deviate from the rule for unusual and temporary reasons, they must be transparent in explaining why so as not to undermine their credibility with the public," he said.

(Writing by Alister Bull; Editing by Leslie Adler)