‘Interplay’ with financial stability will be part of Fed’s upcoming monetary policy strategy review

As the Federal Reserve begins its review of monetary policy strategy – including how it informs the outside world of decisions affecting interest rates – some consideration is being given to the “interplay” with financial stability as the central bank announces its choices, the vice chairman of the agency board said Friday.

In remarks to the 2019 U.S. Monetary Policy Forum in New York, Federal Reserve Vice Chairman Richard Clarida said there “might be ways to improve communication about the coordination of policy tools or the interplay between monetary policy and financial stability.”

Clarida’s remarks focused on the Fed’s “broad review” this year of the agency’s monetary policy framework. He said the review will examine three parts: the policy strategy, tools, and communication practices that the Fed uses to pursue its dual-mandate goals of maximum employment and price stability.

The Fed vice chairman noted that the central bank is conducting the review not because it is dissatisfied with the way things are going now. However, he acknowledged that events over the last decade or so have presented an opportunity. “We believe it is a good time to step back and assess whether, and in what possible ways, we can refine our strategy, tools, and communication practices to achieve and maintain these goals as consistently and robustly as possible,” he said. “I note that central banks in other countries have conducted periodic reviews of their monetary policy frameworks, and their experience has informed the approach we are pursuing.”

His comments about the “interplay between monetary policy and financial stability” were among the third part of his outline of the review, on communications. To that end, he pointed to a research conference the Federal Reserve is holding June 4-5 in Chicago.

“The sessions will include overviews by academic experts of themes that are central to the review, including the FOMC’s monetary policy since the financial crisis, assessments of the maximum sustainable level of employment, alternative policy frameworks and strategies to achieve the dual mandate, policy tools, global considerations, financial stability considerations, and central bank communications,” he said.

The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices