Financial Stability Considerations and Monetary Policy

The Federal Reserve faces a dilemma with respect to financial stability. On the one hand, the simplest interpretation of its mandate gives the Federal Reserve a limited role in addressing financial stability risks. On the other hand, monetary policy can interact with financial stability considerations. Hence, the Federal Reserve cannot ignore financial stability and has strong incentives to ensure that risks are not only identified but also addressed. Given that no part of the U.S. government can mitigate all of the threats identified by the Fed, we argue that Congress should evaluate the effectiveness of the post-crisis regulatory reforms.