A more accommodative policy has the usual benefit of lowering expected unemployment and thus reducing the expected shortfall term in the objective function.If, however, it also raises the conditional variance of the unemployment rate via an elevated-FMV channel – thereby increasing the risk term in the objective function – then there is a cost to be weighed alongside the benefit.
And importantly, this is true even when financial stability is not a separate objective in and of itself; as I have framed it, financial stability matters only insofar as it affects the degree of risk around the employment leg of the Federal Reserve’s mandate.