Supervisory tools are the optimal way to lessen risks of instability from easy money policy, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Friday.
"Easy monetary policy could create risk of financial instability," Kocherlakota told a panel in new York, according to prepared slides released by the Fed. "My view: It is preferable to mitigate such risks using supervisory tools."
But the reality, he said, is "Supervision may leave residual systemic risk. This is especially true given the kinds of risks described in the [Monetary Policy Report]."
Assessing risk is difficult, Kocherlakota noted, since "financial instability may not be associated with usual suspects: Leverage, capital, liquidity, etc., etc."
Further, the pace of change in conditions, rather than the level itself, "could affect macro outcomes."
New theory and empirics are needed, he said.
