Former Fed candidate warns of ‘risky mix’ of looser monetary policy, relaxed financial regulation

She may not have been considered by the Senate for a seat on the Federal Reserve, but former Federal Reserve official Nellie Liang is considering the link between monetary policy and reduced financial regulation – asserting that risk to financial stability is rising.

In a column posted on the website of the Brookings Institution (where she now serves as Miriam K. Carliner senior fellow – economic studies), long-time Federal Reserve official Liang writes that loosening monetary policy at the same time that financial regulations are being reduced is a recipe for trouble.

“In summary, financial stability risks are rising,” wrote Liang, who last year was nominated by President Donald Trump for a seat on the Federal Reserve Board. The Senate never took up Liang’s nomination before that Congress ended, and she removed her name from future consideration for a seat. To date, the seat remains unfilled.

“Financial regulations are being relaxed, even though we should expect financial vulnerabilities to rise and become more complex as monetary policy is loosening to cushion the economy from uncertainty from heightened trade tensions,” Liang wrote. “A guiding principle for financial reforms from the G-20 that emerged in the immediate aftermath of the financial crisis was to offset the procyclical effects of financial regulations in order to reduce the significant amplification of economic downturns by the financial system. This principle is even more relevant now when monetary policy has less room to cut rates to support the economy.”

Liang asserted that “recent actions” (such as a pullback from the Financial Stability Oversight Council [FSOC] and some recent proposed changes to bank capital requirements) are doing the opposite of what the G-20 called for. “As a consequence, an adverse shock will be amplified more by financial intermediaries that become less resilient as financial regulations are relaxed, resulting in greater losses in employment and wealth in the next recession,” she wrote.

A risky mix: Looser financial regulations when monetary policy is easing

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