Goldman has a crack at it.
Although the market apparently took comfort from October’s better-than-expected US CPI print, with inflation still far above target, it’s clear that the major central banks’ inflation fight is far from over. The aggressive policy tightening so far—and still in the pipe—has raised concerns about what could break in a
global financial system that has grown accustomed to low rates. Which financial stability risks are worth watching, whether policymakers have the tools to effectively manage those risks, and if they could prompt central banks to slow or even pause the pace of tightening, is Top of Mind.
We first speak with Jeremy Stein, Professor at Harvard University, who was a vocal advocate of the view that monetary policy should be implemented with financial stability in mind during his tenure on the Fed’s Board of Governors in the aftermath of the Global Financial Crisis (GFC). Despite thislong-held view, he argues that the still-acute inflation problem the US faces today means that “the Fed’s only option is to continue to make inflation its number one policy priority for now.” That said, he warns that financial instability risks should not be discounted, and that the Fed’s ability to address those risks is probably more limited than the market expects and than in past episodes of stress. That’s not only because actions to quell stability risks—the so-called “Fed put”—would almost certainly run counter to the prevailing monetary policy goal of slaying inflation, but also because we can’t assume that the tools that addressed past crises—such as the emergency credit facilities implemented at the beginning of the pandemic—could be employed today.
