Federal Reserve Governor Jeremy Stein said monetary policy should be less accommodative when bond markets are overheated even if it raises the risk of higher unemployment.
The remarks suggest financial stability should receive strong consideration as the Fed pursues its two mandates -- stable prices and maximum employment -- because financial crises can do so much damage to jobs and growth.
“All else being equal, monetary policy should be less accommodative -- by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level -- when estimates of risk premiums in the bond market are abnormally low,” Stein said. He didn’t comment on the current stance of policy.
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