What does the revised statement say about financial stability?
In August 2020 , Powell noted the trend that in recent years, “a series of historically long expansions had been more likely to end with episodes of financial instability, prompting essential efforts to substantially increase the strength and resilience of the financial system.”
Given this history, the new statement explicitly addresses financial stability concerns as an important part of the Fed’s mandate. “[S]ustainably achieving maximum employment and price stability depends on a stable financial system. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.”
This change elevates financial stability in the Fed’s hierarchy of goals and suggests that, depending on the circumstances, the Fed may consider tightening monetary policy in response to financial stability risks if other tools (such as macroprudential regulatory policies) are inadequate. However, Brainard prioritized the use of regulatory policy over monetary policy to avoid instability. “It is vital to use macroprudential as well as standard prudential tools as the first line of defense in order to allow monetary policy to remain focused on achieving maximum employment and 2 percent average inflation,” she said.