Austan Goolsbee, Speech: Monetary Policy in Moments of Financial Uncertainty

Q&A Segment

The Q&A segment was a general discussion about monetary policy and the economy.  The details in the speech were not expanded upon.

Speech Segment

Banking Crisis

“I don’t say that because I believe we should stop prioritizing the fight against inflation if markets get upset. That’s a perspective I call “financial dominance”—that financial issues should dominate monetary policy concerns. Some people believe that should drive Fed actions. I absolutely do not. Congress gave us a job: maximize employment and stabilize prices. They didn’t say to always keep financial markets happy or make sure investors don’t lose any money.”

Fed Funds

“If they develop (tighter credit conditions), the Fed would need to account for these potential headwinds when setting monetary policy. In some ways, it’s almost mechanical; we’ve been tightening financial conditions to bring inflation down, so if the response to recent banking problems leads to financial tightening, monetary policy has to do less.”

“It’s not clear by how much less, but private sector analysts have speculated that it might amount to raising the funds rate by something in the range of 25 to 75 basis points. We need to get a handle on the size of the financial headwinds, and that’s why we need to monitor a wide variety of financial indicators.”

“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious. We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”

Rate Cuts

“There is a branch of the financial dominance school of thought that takes the argument even further. They argue that if there’s a chance of significant financial stress, we should preemptively cut rates to reduce the odds of it.”

“I think we should be careful with that logic, though, given our trouble getting inflation down in recent years—not to mention the dangers of setting a precedent for giving in any time the market throws a tantrum. The principal defense for avoiding or mitigating financial stress should be supervisory and regulatory tools that are aimed at ensuring the safety and soundness of both individual institutions and the financial system more broadly.”