Brainard presses use of countercyclical buffer to ‘temper’ financial cycle

Active use of macroprudential tools such as the countercyclical buffer is “vital” to enable monetary policy to remain focused on the Federal Reserve’s dual mandate, a Fed Board governor told a gathering Tuesday in New York.

Speaking at the 2019 William F. Butler Award New York Association for Business Economics, Fed Gov. Lael Brainard said changes in the macroeconomic environment underlying the Fed’s monetary policy review may have implications for financial stability.

“To the extent that the combination of a low neutral rate, a flat Phillips curve, and low underlying inflation may lead financial stability risks to become more tightly linked to the business cycle, it would be preferable to use tools other than tightening monetary policy to temper the financial cycle,” Brainard said. “In particular, active use of macroprudential tools such as the countercyclical buffer is vital to enable monetary policy to stay focused on achieving maximum employment and average inflation of 2 percent on a sustained basis.”

Brainard’s mention of the countercyclical buffer (CCyB) appear to align with those of the Fed’s top supervision official in recent months. Randal Quarles, the Fed’s vice chair for supervision, has said in various venues that he sees merit in exploring the use of a 1% countercyclical buffer that is in effect in normal times. Currently, the CCyB is a buffer ranging from 1% to 2.5% that can be switched on or off to counter overheating credit markets. The U.S. has, so far, kept that switch to “off.”

“It is worth noting that, in the United Kingdom, the CCyB is set equal to a positive level – 1% – in normal times,” Quarles said in September. “As a result, their buffer can be adjusted upward or downward based on the perceived risks of the time-varying credit cycle.”

“As I have recently said, I see real merit in exploring the U.K. approach as a tool to promote financial stability,” he said.

Federal Reserve Review of Monetary Policy Strategy, Tools, and Communications: Some Preliminary Views

RR: Quarles sees ‘real merit’ in switching on 1% capital buffer during normal times to deal with credit cycle (Sept. 27, 2019)