KC Fed's George: Macroprudential Pools Shouldn't Be First Financial Stability Defense

Macroprudential tools should not be considered the first line of defense against risks to financial stability and instead should be used in conjunction with monetary policy, said Esther George, president of the Kansas City Fed. "I often hear the view that macroprudential policy should be the 'first line of defense' for maintaining financial stability. Unfortunately, this approach expects too much of tools for which our understanding is imperfect. In addition, a growing body of research shows monetary policy plays a key role in affecting risk appetite and risk premiums," she said. George, known as one of the Fed's more hawkish members, said modestly tighter policy earlier in the business cycle expansion could moderate risk-taking and the potential for destabilizing financial imbalances to build.