Fed's Hammack Says Rate Cuts May Boost Risks, Prolong Inflation

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00:00Inflation has been running above the Fed's 2% objective for four and a half years.

00:05Lowering rates to support the labor market risks prolonging this period of elevated inflation,

00:10and it could also encourage risk-taking in financial markets.

00:14Financial conditions are quite accommodative today,

00:17reflecting recent gains in equity prices and easy credit conditions.

00:21Easing policy in this environment could support risky lending.

00:24It could also further boost valuations and delay discovery of weak lending practices in credit markets.

00:31This means that whenever the next downturn comes,

00:34it could be larger than it otherwise would have been, with larger impact on the economy.

00:39At that point, policy would have less space to further reduce rates and offset weak demand.

00:46Sometimes cutting rates is described in risk management terms

00:49as taking out insurance against a more severe slowdown in the labor market.

00:52But we should be mindful that such insurance could come at the cost of heightened financial stability risks.

00:58There's already a substantial body of research on how persistent inflation

01:02can increase risks for banks and put pressure on household finances.

01:06The challenging period we're currently experiencing for monetary policy

01:09could well be the subject of future research on the financial stability implications

01:13of having both sides of the Fed's mandate under pressure.

01:16However,

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