Some have lauded the U.S. Federal Reserve’s first interest rate hike after seven years as a beginning step toward the normalization of monetary policy. In recent remarks at the Bank for International Settlements’ Farewell Symposium in honor of outgoing Chairman Christian Noyer, the Fed’s vice chairman, Stanley Fischer, addressed the issue that has been raised by the BIS for years but ignored by the major central banks: That central banks should incorporate financial stability considerations in the conduct of monetary policy.
In 2003, then-BIS General Manager Andrew Crockett argued, “In a monetary regime in which the central bank’s operational objective is expressed exclusively in terms of short-term inflation, there may be insufficient protection against the build-up of financial imbalances that lies at the root of much of the financial instability we observe. This could be so if the focus on short-term inflation control meant that the authorities did not tighten monetary policy sufficiently preemptively to lean against excessive credit expansion and asset price increases. In jargon, if the monetary policy reaction function does not incorporate financial imbalances, the monetary anchor may fail to deliver financial stability.”
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