Financial stability has become de facto third mandate of central banks
And it may mean much shallower tightening path
With central bank policy makers focusing increasing attention on maintaining financial stability, some say the issue has become an unofficial third mandate, in addition to price stability and full employment.
Jeff Emons writes Tuesday for Bloomberg that the development may mean central banks will adopt a much shallower tightening path than what they currently indicate:
“…in highly levered economies, like those we currently see in developed nations around the world, interest rates and financial stability are closely linked. That was evident in the recent ‘synchronized’ global sell-off in the rates markets triggered by central banks signaling concern about relatively high asset prices brought on by artificially low borrowing costs, and their potential to foster financial instability […]
What all this means for central banks is they face a bigger than normal challenge. They can opt for keeping inflation stable by tightening rates gradually, but that could add to financial stability risks. Or they can opt to tighten at a faster pace, which could cause an economic slowdown and also lead to financial instability […]
Given the delicate balance between financial stability and economic conditions, central banks may be forced to adopt a much shallower tightening path than what they currently envision.”