The combined use of interest rate and macroprudential policies has some implications for investors: First, worries about a renewed housing bubble are not likely to push the Fed to raise interest rates. Those who want to argue that the rate increase will come sooner than the consensus target of the summer of 2015 need to argue about inflation and unemployment. Second, macroprudential policies are likely to reduce risks and profits in the financial sector. Less leverage should reduce the risk of another Lehman Brothers scale bank failure; it will also lower bank profits.
Some may wonder why macroprudential policy rules are needed – shouldn’t market discipline keep leverage in line and maintain credit standards? Hyman Minsky, a sometimes forgotten economist, noted that when good times persist people forget the risks and ignore the rules until the bubbles grow, leverage expands and banks and businesses fail. Macroprudential policy is partially an effort to control human nature.
This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.
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