The Federal Reserve must make its monetary policy with a view to how banks are responding to the economic environment. This was especially important during the “credit crunch” of 1990. Our supervisory responsibilities give us important qualitative and quantitative information that not only helps us in the design of monetary policy, but provides important feedback on how our policy stance is affecting bank actions.
The macroeconomic stabilization responsibilities of the Federal Reserve make us particularly sensitive to how regulatory and supervisory postures can influence bank behavior and hence how banks respond to monetary policy actions. For example, capital, liquidity, loan loss reserve, and asset quality evaluation policies of supervisors will directly influence the manner and speed with which monetary policy actions work.