June 5 Using monetary policy to try to reduce
the financial system's vulnerability to shocks poses real and
"sizable" risks, a top Federal Reserve official said on
Wednesday, but at least two new approaches hold promise and
merit further study.
One such approach calls for the central bank to act to keep
nominal income growth on a steady path, San Francisco Federal
Reserve Bank President John Williams said in remarks prepared
for delivery to the Deutsche Bundesbank Conference Housing
Markets and the Macroeconomy: Challenges for Monetary Policy and
So-called nominal income targeting can help avert
bankuptcies and foreclosures, which can worsen financial crises,
A second approach is to make interest-bearing accounts more
broadly available than just through banks, reducing the
incentive of private institutions to rack up short-term debt
that can contribute to financial instability, he said.
"I am not personally advocating either of these proposals,
but I do view them as creative ways to think of how to bend the
curve in terms of macroeconomic and financial stability
tradeoffs," Williams said.
Such approaches, he said, differ from the conventional idea
of using monetary policy to head off asset bubbles or respond to
looming risks. Although approaches involve tradeoffs and could
have unintended consequences, they merit further study because
they hold out the promise of ensuring a more stable financial
system without undermining the central bank's main aims of
stabilizing prices and boosting the economy.
The experience in Norway and Sweden, he said, suggests the
pitfalls of a more conventional approach to using monetary
policy to deal with financial stability concerns. There, such an
approach has led to a potentially harmful reduction in inflation
expectations, he said.
"Anchoring inflation expectations and responding in a
systematic way to economic developments are by far the most
important elements of good monetary policy," Williams said.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)