"Clearly, we have learned a lesson from the extended economic weakness in Japan and the crisis in a number of other Asian countries," McDonough told members of the Executive Leadership Council.

"We learned that any version of a command economy, or any economic system in which private-sector competition is impeded or discouraged, will suffer inevitably from misallocation of resources, distortions in the relationship between risks and rewards, and a weak financial system," noted McDonough who added that "policy" loans quickly turn into "bad loans."

The New York Fed president also commented on Russia as a country whose economy is suffering from a weak banking system.

"A challenge in many developing countries, including those of Asia and the former Soviet bloc, is the creation of abanking system in which loan decisions are made solely on the basis of the credit-worthiness of prospective borrowers," McDonough also said.

Turning to the US economy, McDonough, who also is the vice chairman and permanent voting member of the Federal Open Market Committee (FOMC), reiterated the US economy is "in a period of price stability."

"The job of the Federal Reserve is to maintain price stability through the major instrument we have, control over short-term interest rates," said McDonough who explained this meant for the Fed to "avoid creating a financial environment in which resources are so stretched that inflation increases, one which leads inevitably to an economic slowdown or recession."

Commenting on the unusual combination of robust growth, subdued inflation and low unemployment, McDonough said he does not believe this stemmed from a "new paradigm... (under which) the potential for inflation is reduced to the point that policymakers need do nothing other than sit back andwatch."

McDonough is one of several US policymakers on the record this week, expressing concern over Asia and the potential for inflation pressure in a rapidly growing economy.