John Williams, Speech: A Jack of All Trades Is a Master of None

“These issues recall a longstanding debate over what should be done when there is a trade-off between monetary policy and financial stability goals. In the decade before the pandemic, this debate occurred in the context of inflation running persistently below the FOMC’s long-run 2 percent target.^”

“On one side, there were those who argued that an extended period of accommodative policy aimed at boosting inflation would contribute to a buildup of asset prices, leverage, and risk-taking that would ultimately undermine financial stability. They concluded that policy should lean against the wind of financial stability risks, even at some cost to achieving the price stability goal.”

“On the other side, I and others have argued that using monetary policy to address longer-term financial stability considerations could come at a high cost in terms of current economic activity and could also undermine credibility in the central bank’s long-run inflation goal. For example, based on the estimated effects of monetary policy on GDP and house prices, using monetary policy alone to fully deflate the housing bubble that preceded the global financial crisis would have caused a decline in output much larger than the one that occurred during the recession of 2007-09.^”

“Today we are seeing this debate resurface, but in a very different economic reality. Some now argue that there is again a trade-off between price stability and financial stability goals, but this time it is because large and rapid shifts in monetary policy may contribute to stresses and expose vulnerabilities in global financial markets. Investors and financial institutions need to adjust to a rapidly changing and highly uncertain environment. And heightened uncertainty can add to market volatility, resulting in diminished market liquidity.”

Conclusion

“Debates around financial stability and monetary policy have been longstanding and have tended to focus on unfavorable trade-offs. Central banks must avoid being a jack of all trades and master of none. The time is now to find solutions that strengthen our financial system without compromising our monetary policy goals. These issues are complex, but the need for meaningful progress on strengthening the resilience of core financial markets is clear.”