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.


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.



The World’s Politest Protesters

The Occupy Central demonstrators are courteous. That’s actually what makes them so dangerous.

The Religious Right Is Not Happy With Republicans  

The XX Factor
Oct. 1 2014 4:58 PM The Religious Right Is Not Happy With Republicans  

How Did the Royals Win Despite Bunting So Many Times? Bunting Is a Terrible Strategy.

Catacombs Where You Can Stroll Down Hallways Lined With Corpses

Homeland Is Good Again! For Now.


Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.


How Even an Old Hipster Can Age Gracefully

On their new albums, Leonard Cohen, Robert Plant, and Loudon Wainwright III show three ways.

The One Fact About Ebola That Should Calm You: It Spreads Slowly

Piper Kerman on Why She Dressed Like a Hitchcock Heroine for Her Prison Sentencing

Trending News Channel
Oct. 1 2014 1:25 PM Japanese Cheerleader Robots Balance and Roll Around on Balls
  News & Politics
Oct. 1 2014 6:41 PM The World’s Politest Protesters The Occupy Central demonstrators are courteous. That’s actually what makes them so dangerous.
Oct. 1 2014 2:16 PM Wall Street Tackles Chat Services, Shies Away From Diversity Issues 
Oct. 1 2014 6:02 PM Facebook Relaxes Its “Real Name” Policy; Drag Queens Celebrate
  Double X
The XX Factor
Oct. 1 2014 5:11 PM Celebrity Feminist Identification Has Reached Peak Meaninglessness
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
Brow Beat
Oct. 1 2014 6:39 PM Spoiler Special: Transparent
Future Tense
Oct. 1 2014 6:59 PM EU’s Next Digital Commissioner Thinks Keeping Nude Celeb Photos in the Cloud Is “Stupid”
  Health & Science
Oct. 1 2014 4:03 PM Does the Earth Really Have a “Hum”? Yes, but probably not the one you’re thinking.
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?