Finally, if a sudden correction in asset prices does occur, the Fed’s first responsibility is to do its part to ensure the integrity of the financial infrastructure - in particular, the payments system and the systems for settling trades of securities and other financial instruments. If necessary, the Fed should provide ample liquidity until the immediate crisis has passed.
The Fed’s response to the 1987 stock market break is a 4 good example of what I have in mind. I have expressed these two principles in rather simple terms; they could be elaborated much further. Taken together, they provide a strategy for policy that has a number of advantages: It keeps monetary policy focused on the appropriate goal variables, economic activity and inflation.