Nevertheless, the evidence suggests that even more modest capital market disruptions may have consequences that are large enough to warrant consideration when formulating monetary policy. If so, the indicated directional adjustment would be to be less aggressive in providing monetary accommodation in the face of above-target unemployment, all else being equal, when risk premiums are abnormally low. Of course, there are many caveats.
Foremost among them is the fact that the ability of increases in the EBP to predict future economic activity may not reflect a causal link from the former to the latter. Perhaps there are economic slowdowns that are caused entirely by nonfinancial factors, and, when investors see one on the horizon, they get skittish, causing the EBP to rise.