Central bank tightening: what could break?

Goldman Sachs Exchanges

Goldman Sachs

Business

4.4 • 1K Ratings

🗓️ 22 November 2022

⏱️ 25 minutes

🔗️ Recording | iTunes | RSS

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Summary

Central banks’ aggressive policy tightening has raised concerns about what could break in a global financial system accustomed to low rates. In the latest Exchanges at Goldman Sachs, Goldman Sachs’ Allison Nathan speaks with Jeremy Stein, Professor at Harvard University and a former Federal Reserve Board Governor, and Vítor Constâncio, former vice president of the European Central Bank, about which financial stability risks are worth watching, whether policymakers have the tools to manage those risks, and if they could prompt central banks to slow or even pause tightening. The episode is based on Goldman Sachs Research’s latest Top of Mind report.

Transcript

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0:00.0	Since the 2008 global financial crisis, the financial system has gotten used to a low interest rate environment.
0:07.0	But that's now changed as policy makers in the US and Europe have aggressively increased interest rates to fight high inflation.
0:15.3	So what could break in the global financial system amid this rapid tightening?
0:19.2	I'm Alice and Nathan and this is exchanges at Goldman Sachs.
0:26.6	On this special episode,
0:28.1	we're breaking down our most recent top of my report,
0:31.0	now available on GS.com. We dig into what vulnerabilities the current
0:35.3	higher rate environment could expose, whether policymakers have the tools to
0:39.5	address these vulnerabilities, and if they could be worrisome enough to prompt
0:43.6	Central Banks to slow or even pause tightening ahead.
0:47.4	We first speak with Jeremy Stein, former member of the Federal Reserve Board of
0:50.9	governors.
0:51.9	During his tenure at the Fed, he argued that monetary policy
0:55.6	should be implemented with financial stability in mind.
0:59.4	Nowadays, though, he thinks the Fed's only option is to continue to focus on taming inflation.
1:05.2	Inflation is a very serious problem so given where it is now and the very real
1:09.9	risk of it getting embedded into expectations and becoming something of a self-fulfilling problem.
1:15.6	I think the Fed's only option for now is to continue to make inflation the number one policy priority.
1:21.3	I don't think you can preemptively pull back on fighting inflation
1:25.3	because of the risk of an unknown possible financial breakage that hasn't yet
1:30.5	manifested. That's not to say that I just count the risks.
1:33.1	There are plenty of risks out there,
	...

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