Indeed, any decision to instead rely on morerestrictive interest rate policies to achieve financial stability at the expense of poorer macroeconomic outcomes must pass a cost–benefit test. And such a test would have to clearly illustrate that the adverse economic outcomes from more-restrictive interest rate  3  I should note that increases in interest rates since last spring have increased discount factors and thus lowered the present value of pension fund and other fixed nominal liabilities. For instance, see Fitch Ratings (2013). 4  BIS central bankers’ speeches  policies would be better and more acceptable to society than the outcomes that can be achieved by using enhanced supervisory tools alone to address financial stability risks. I have yet to see this argued convincingly. Macroprudential tools Let’s discuss some of these macroprudential tools. One simple but important tool is enhanced monitoring. Even before the recent financial crisis, central bankers were well aware of the key role played by stable financial markets in economic activity. Since the crisis, however, the analysis of financial stability issues has been greatly expanded and given a more prominent role in the FOMC’s deliberations. We comb through reams of data looking for evidence of incipient risks to financial stability. The Federal Reserve also has revamped its approach to bank supervision substantially to expand the focus on macrofinancial risks. Traditional bank supervisory tools are being used more intensively, and new tools have been developed. Bank capital stress tests are one wellknown addition to our supervisory toolkit.
References Evans, Charles, 2014, “Recurring themes for the New Year,” speech, Corridor Economic Forecast Luncheon, Coralville, IA, January 15. Federal Open Market Committee, 2013, meeting minutes (external), December 17–18. Fitch Ratings, 2013, “Fitch: U.S. corporate pension plans underfunded status improves,” press release (external), New York, August 15. 6  BIS central bankers’ speeches