Self-Fulfilling Financial Stability Worries

A blog about business and economics.
May 22 2013 11:41 AM

High-Profile Central Bank Chatter About "Financial Instability" Causes Financial Instability  

For the Very Serious People of the world, whatever the question, the answer is "inappropriately tight monetary policy."

And now that worrying about inflation has gone out of style and the panacea canard is played out, the new hotness is to worry that appropriate monetary policy will lead to financial instability.

Advertisement

This is far too ridiculous an idea to take seriously, but unfortunately it's become clear over the past month that many high-level central bank officials are taking it seriously. And in doing so they're creating a dangerous level of financial instability. After all, do you know what undermines the stability of financial markets? Unpredictable swings in nominal variables. That's why clear guidance from central banks is so good. One can debate the merits of the specific quantities involved, but the basic QE 3 framework entailed some admirable clarity. How long would interest rates stay low? At least until the unemployment rate dropped below 6.5 percent or the Core Personal Consumption Expenditures Deflator rose above 2.5 percent. For any market participant, that was like having some nice bumpers in your bowling lane. No guarantees about the macroeconomic future (there never are) but at least some guidelines. Would you be facing a situation in a year in which unemployment is 6.7 percent, inflation is 1.9 percent, and interest rates are rising because the economy's getting stronger? No. By the power of the Evans Rule that would not be the case.

But today it's no longer clear that that's the case. Between FOMC statements, suddenly everyone's introduced a third completely undefined variable into monetary policy. Fed officials appear to be saying that even if employment and inflation conditions indicate that tighter money would be disastrous, they might do it anyway to avoid "financial instability." But nobody can be sure exactly what that means. Suddenly the future of policy has become hazier. And that itself undermines stability of financial markets.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Frame Game

Hard Knocks

I was hit by a teacher in an East Texas public school. It taught me nothing.

Chief Justice John Roberts Says $1,000 Can’t Buy Influence in Congress. Looks Like He’s Wrong.

After This Merger, One Company Could Control One-Third of the Planet's Beer Sales

Hidden Messages in Corporate Logos

If You’re Outraged by the NFL, Follow This Satirical Blowhard on Twitter

Sports Nut

Giving Up on Goodell

How the NFL lost the trust of its most loyal reporters.

How Can We Investigate Potential Dangers of Fracking Without Being Alarmist?

My Year as an Abortion Doula       

  News & Politics
Weigel
Sept. 16 2014 9:22 AM The Most Populist Campaign of 2014
  Business
Moneybox
Sept. 15 2014 7:27 PM Could IUDs Be the Next Great Weapon in the Battle Against Poverty?
  Life
Atlas Obscura
Sept. 16 2014 8:00 AM The Wall Street Bombing: Low-Tech Terrorism in Prohibition-era New York
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Tv Club
Sept. 15 2014 11:38 AM The Slate Doctor Who Podcast: Episode 4  A spoiler-filled discussion of "Listen."
  Arts
Brow Beat
Sept. 16 2014 9:13 AM Clive James, Terminally Ill, Has Written an Exquisitely Resigned Farewell Poem
  Technology
Future Tense
Sept. 16 2014 7:36 AM The Inspiration Drought Why our science fiction needs new dreams.
  Health & Science
Bad Astronomy
Sept. 16 2014 7:30 AM A Galaxy of Tatooines
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.