But if the economy instead began to overheat, threatening to push inflation to an undesirably high level, the FOMC would have ample scope to respond through tighter monetary policy. Such asymmetric risks arguably call for a more gradual path of rate increases than indicated by the prescriptions of a simple policy rule.
Specifically, they can seek to curb excessive credit expansion, such as through time-varying capital requirements; offset amplification of systemic risk, as in the case of limits on maturity mismatches; and counteract structural vulnerabilities and spillovers of stress, such as with additional loss absorbency related to systemic importance. 1 An objective evaluation of effectiveness is essential for coherently implementing economic policies.