The Federal Reserve adopting a loose monetary policy—slashing interest rates and buying Treasurys—for an extended period can lead to “financial turmoil” several years later, the central bank stated in a new paper.
Economists at the Fed Bank of San Francisco published a new study, titled “Loose Monetary Policy and Financial Stability,” (pdf) trying to determine whether accommodative conditions can lead to financial turmoil in the future. The researchers assessed long-term data to figure out if expanding money and credit can birth rampant speculation, raise household debt, and initiate an investment boom and “capital overhang.”
This was the first comprehensive study to extend the evidence that “monetary policy has implications” for the stability of the U.S. financial system, authors noted. The study considered the dangers of “lower for longer monetary policy” that can lead to the consequence of financial crises….