Monetary policy “poorly suited” to deal with financial stability: SF Fed Pres. Williams

Singapore — While all tools should be considered to avoid a financial crisis, the president of the San Francisco Fed is “unconvinced that monetary policy is one of them.” Williams made the remarks in a keynote address to an international symposium on regulatory reform, co-hosted by the SF Fed and the Monetary Authority of Singapore.

Williams cited his concern that the tradeoffs between macroeconomic goals – like employment and price stability – and those aimed at financial stability were too costly. While those goals are generally harmonious, he said, there are circumstances under which they could come into conflict “such as when the economy is weak but risks to financial stability appear to be growing.” “In such a case, the concern over financial stability may suggest raising interest rates higher than would be appropriate for macroeconomic goals, resulting in higher unemployment and lower inflation.” He also noted that using monetary policy in pursuit of financial stability goals could unmoor inflation expectations, and that “while the costs of using monetary policy to address financial stability risks are clear and sizable, the potential benefits of such actions are much harder to pin down.”

Making his intentions clear, Williams kicked off his speech by saying, “Lest I bury the lede: My main conclusions are: (1) monetary policy is poorly suited for dealing with financial stability concerns, even as a last resort; (2) a macroprudential, financial system-wide perspective is needed—but in the United States, explicitly macroprudential tools are hard to find; and (3) given (1) and (2), we need to rely primarily on microprudential regulations and supervision to achieve macroprudential goals.”

The Federal Reserve Bank of San Francisco (SF Fed) serves the public by promoting a healthy, sustainable economy, and supporting the nation’s financial and payment systems. With offices in Los Angeles, Seattle, Salt Lake City, Portland and Phoenix, the Bank serves the Twelfth Federal Reserve District, which includes one-fifth of the nation’s population and represents the world’s fourth-largest economy. As part of the nation’s central bank, the SF Fed informs monetary policy, regulates banks, administers certain consumer protection laws and acts as a financial partner to the U.S. government.