A hike in interest rates would directly affect households’ purchasing power, especially given that households are increasingly taking variable-rate loans. A drop in house prices would also reduce their wealth. So, should interest rates rise and housing prices fall, it would have a bigger impact than before on households’ purchasing power, and thereby probably on consumption and saving as well. This brings me to the connection to price stability. Now and again we hear concerns in the public domain about the effects that households’ higher sensitivity to interest rates and asset prices could have on future consumption and thereby on economic developments in general. Several voices have called for monetary policy to be more attuned to this. Shouldn’t interest rates be raised to curtail a build-up of debt and a rise in housing prices? Should housing prices fall rapidly, might not demand and thus inflation be affected in a way that is not taken account of in the Riksbank’s forecasts? And, looking somewhat further ahead, might it not have a real economic impact that the Riksbank would also have reason to take into consideration? These highly legitimate questions are often based on concerns that some kind of speculative bubble has been blown up, in much the same way as in the commercial property market in the early 1990s or in the equity market ten years later. Let me first address the question of the forecasts.
Finally, it is important that the world’s major private financial institutions run themselves with a sufficiently strong financial cushion, a cushion calibrated not just against the risks they confront in this uncertain world, but to the much more central role they play in many markets. Particularly for those institutions whose size and scope make them systemically important, capital, liquidity, and the overall risk management and control architecture need to be exceptionally strong, stronger than would be necessary and appropriate for smaller institutions. The consequence of size is not just that failure or the perceived risk of failure at one of these institutions has larger negative implications for the financial system today than would be the case in a less consolidated world. It is also the case that their greater relative size limits their ability to take actions that would reduce their exposure in the event of a shock without creating the risk of magnifying the shock. Let me conclude by noting the overwhelming significance of the economic policy decisions we make here in the United States to the world’s capacity to deal with these broader challenges. Our impact on global economic activity and on international financial stability is greater than simple measures of our share of GDP. When we are strong economically, the world can more easily tolerate economic weakness outside the United States. When we are less strong, the impact on the world economy is powerful. This has been true for some time.