Tighter monetary policy earlier in the expansion cycle could head off risks to financial stability, Federal Reserve Bank of Kansas City President Esther George late Monday night.
"As policy eases, risk premiums have a tendency to decline, suggesting that attempts to lower already low risk premiums will likely do little in terms of future economic activity but may foster conditions that pose risks to financial stability," George said in a speech in the Philippines, according to prepared text released by the Fed.
"This line of thinking suggests to me that modestly tighter policy earlier in the business cycle expansion could moderate risk-taking and the potential for destabilizing financial imbalances to build."
Zero lower bound interest rates and quantitative easing have been used by central banks to impact "risk-taking, asset valuations and economic growth," she said. "While accommodative monetary policy can affect economic activity via this channel, it can also create financial market vulnerabilities, especially if sustained for a prolonged period. If financial imbalances in one sector turn out to have systemic consequences, then a reliance on the risk-taking channel of monetary policy to stimulate economic activity could prove more detrimental than beneficial over the longer run for achieving stable inflation and employment."
