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

May 27, 2015

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.”

Sarah Tentler
Federal Reserve Bank of San Francisco
+65 8695 2406

The Federal Reserve Bank of San Francisco, with branch offices in Los Angeles, Seattle, Salt Lake City, and Portland, and a cash processing office in Phoenix, provides wholesale banking services to financial institutions throughout the nine western states. As the nation’s central bank, the Federal Reserve System formulates monetary policy, serves as a bank regulator, administers certain consumer protection laws, and is fiscal agent for the U.S. government. Follow us on Twitter at