It is not clear how the Federal Reserve should respond to the "purported" effect that low interest rates are causing excessive risk-taking in financial markets, said John Williams, president of the San Francisco Fed, on Thursday. In a speech to the Monetary Authority of Singapore, Williams said it could either argue for a more rapid rate hike to discourage further risk or imply a more gradual course of action to mitigate the risk of a market tantrum. These "ambiguous" effects of monetary policy on financial stability are a good argument for limiting the use of this tool, he said. Overall, Williams said he was "convinced" that monetary policy should not be used to address risks to financial stability given the "very real and sizable costs, not to mention that the potential benefits, are anything but certain."
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