Monetary policy

Oops, forgot financial stability

I believe the FOMC will emphasize its responsibility in maintaining financial stability in the communications next week after its March meeting. Beside the dual mandates in price stability and employment, the Fed assumed the role to supervise banking systems and to ensure financial stability since the financial crises in 2008.

Financial stability seems to be left behind as the central bank focused on inflation reduction in the past year and the Fed, in my view, did not make enough effort to look into economic growth in detail. Low unemployment numbers are misleading with high wage workers are being laid off, and low wage workers are highly demanded because of Covid related reopening activities. 

Stress test could extend to mid size banks with less stringent testing conditions than these for big banks. 

Moving forward, I think the central bank will stop interest rate hikes and rely more on balance sheet and forward guidance as key policy tools. I think the Fed should explicitly ask government’s support to address inflation. Institutions such as various regulators have powerful tools to limit price increases, though the measures, if taken, could be seen not meeting free market ideology.