Blog: Financial Stability-The Third of Two Fed Mandates?

The Fed has continued to share news domination with AI. Last week, it became clear that the Fed's Dueling Mandates, stable employment and prices, were coming into conflict. While the Fed cut by 25 basis points, as expected, there were three dissenters. That by itself is not that unusual, but what was unusual was that the dissenters couldn't agree on policy either. This time there were three opinions. The majority felt that employment shows moderate weakness and a cut was necessary to move rates to neutral. Two felt that rates should have been left unchanged because sticky inflation is more of a problem. The third dissenter felt that rates needed to be cut more, by 50 basis points. This FOMC member believes that inflation is not a problem, but the economy is.

Unfortunately, in this discussion the third Fed mandate, financial stability, has been ignored. Last year I talked about the Fed's third mandate and how that could often conflict with the other two. I called it the Fed's Three Body Problem. At the time there was a prominent bank failure that raised talk of a 2008 style Minsky Moment. While there was small chance of that last year, the conditions are becoming more conducive to to such a problem.