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Executive's Guide to Fed Policy and Associated Risks: Part 2

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Executive's Guide to Fed Policy and Associated Risks: Part 2

Understanding Financial Stability Risks as Monetary Policy Shifts

The Conference Board,

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Unconventional monetary policy tools could generate financial stability risks.

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8

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  • Applicable
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Recommendation

The Federal Reserve took extraordinary policy measures to stabilize and boost the US economy in the 2007–2009 Great Recession, as well as during the 2020 COVID-19 pandemic-induced downturn. In this follow-up explainer of the central bank’s inner workings, experts Dana Peterson and Hollis W. Hart explore the systemic risks associated with the Fed’s use of nontraditional monetary tools. Executives and financial professionals will find this a useful primer on the Fed’s policy shifts and adaptations.

Summary

The US Federal Reserve’s use of unorthodox measures could backfire.

The Federal Reserve shapes monetary policy to achieve its Congressional dual mandate of stable prices and maximum employment. But unusual economic crises call for extraordinary responses. The Great Recession and the COVID-19 pandemic saw the Fed deploying nontraditional policy measures, including a zero-tethered Federal Funds rate, quantitative easing (QE) and balance sheet expansion. 

In each challenging period, the Fed stepped up to provide liquidity to the financial system. But some observers worry that the Fed’s guarantees ultimately encouraged excessive risk...

About the Authors

Dana Peterson is chief economist at the Conference Board. Hollis W. Hart, a former executive at Citi, is a senior fellow at the Conference Board and an advisory board member at ReferencePoint.

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