If you can´t handle two mandates, add a third!

From the WSJ:

The Federal Reserve’s prolonged policy of low interest rates and asset buys has helped to ease financial conditions but also creates the risk of market bubbles that should keep policy makers on their toes, a new paper from two prominent Fed staffers says.

Following the global financial crisis, central bank officials have increasingly recognized financial stability as the Fed’s unwritten third mandate – on top of its goals of keeping prices stable and employment humming. The findings from New York Fed economist Tobias Adrian and Nellie Liang, director of the Fed board’s Office of Financial Stability Policy and Research, reinforce that new focus.

Accommodative monetary policy eases financial conditions, but may also contribute to the buildup of financial vulnerabilities and hence increase risks to financial stability,” the authors write.

Why should the Fed take this into consideration at a time when it’s undershooting its inflation and employment targets?  Friday’s jobs report showed a disappointing net gain of 142,000 jobs in August, while the unemployment rate fell to a still-elevated 6.1%. At the same time, the Fed’s preferred measure of inflation has dithered below its 2% target for over two years.

But Mr. Adrian and Ms. Liang say the threat to economic growth from potential disruptions in financial markets is all too real.

“Vulnerabilities, such as compressed risk premiums, and excessive leverage or maturity and liquidity transformation in the financial system, can increase the probability of a financial crisis and severe recession in the future,” they say.

Instead of “adding mandates”, “simplify” the list to “maintain nominal stability”. Sailing will be much smoother!

One thought on “If you can´t handle two mandates, add a third!

  1. The only buildup of financial vulnerability is a buildup of ultra low inflation zealots on the FOMC who are willing to throw the baby out with the bathwater in order to defend the arbitrary 2% target in the face of an negative oil shock, or tighten already tight policy just because they get funny feeling in their bones… Heaven help us.

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