The Bank of England’s 2013 forward guidance had a specific financial stability “knockout” for monetary policy accommodation if the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the FPC.11 If, in the future, the United States did face a similar dilemma, where financial imbalances are growing rapidly against a backdrop of subpar economic conditions, the Federal Reserve may consider monetary policy for financial stability purposes more readily than some foreign peers because our regulatory perimeter is narrower, the capital markets are more important, and the macroprudential toolkit is not as extensive.
Even in these circumstances, however, it is important to be prudent about the role of monetary policy, recognizing that the necessary adjustments in monetary policy could have broader consequences. For example, a tightening in monetary policy sufficient to limit strong credit growth could depress employment and potentially trigger a sharp correction in financial markets.