The Federal Reserve moved Monday to overhaul the financial apparatus behind derivatives trading, a regulatory step intended to assure that the failure of a major bank or investment firm would not create the systemic threat seen in March after the collapse of Bear Stearns.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York and one of the chief architects of the Bear Stearns bailout, convened a meeting of 17 major financial institutions Monday afternoon to discuss creating a central system for the trading and settlement of credit derivatives, a sophisticated type of financial instrument.
Fears about this so-called counterparty risk have rattled nerves on Wall Street amid a worsening credit crisis.
Some forecasters predict that inflation will worsen on the back of high oil prices, prompting the Fed to increase rates in an effort to cool off price increases.
While a rate increase is far from certain, Fed officials have emphasized concerns over inflation in recent days. Ben S. Bernanke, the Fed’s chairman, told a conference on Cape Cod Monday night that the Fed “will strongly resist an erosion of longer-term inflation expectations” in light of higher commodity prices, which he said had “added to the upside risks to inflation.”
Mr. Geithner, speaking in Midtown Manhattan, also expressed concern, saying that foreign central banks might be forced to raise rates to combat a “sustained rise” in prices.
But he stopped short of suggesting the Fed would raise rates, citing a more complicated economic situation in the
Mr. Geithner acknowledged that central bankers faced a delicate balance in seeking to avoid either suppressing innovation or rewarding reckless behavior.