Morning Must-Read: Gabriel Chodorow-Reich: Financial Stability and Monetary Policy

Gabriel Chodorow-Reich: Financial stability and monetary policy: “In the winter of 2008, the Federal Reserve…

…began an unprecedented campaign to combat the economic downturn…. A near zero federal funds rate, explicit communication regarding the forward path of the funds rate, and a balance sheet that ballooned to more than $4 trillion as of this writing. With memories of the 2008-09 financial crisis still fresh, the policies have prompted concern for their effect on financial stability…. The policies pursued by the Federal Reserve since late 2008 have… [had a] cumulative effect on life insurance companies appears to have been stabilising, as the benefit to legacy asset values and demand for new products outweighed any reaching for yield. While some money market funds did engage in reaching for yield in 2009-11, the compression in spreads in recent months has sharply limited the scope for such behaviour…. Financial-stability concerns for monetary policy should not stem from concerns about the riskiness of these sectors.

July 27, 2014

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