Archive

Cook - Current Assessment of Financial Stability

In this speech, Lisa Cook discusses the Federal Reserve's work in pursuit of financial stability and shares her current views on financial stability and emerging issues. The speech focuses on the Fed's financial stability framework, vulnerability monitoring, and the key areas of vulnerability, including household and firm leverage, financial leverage and funding risk, asset valuations, commercial real estate, private credit, and cyber risks. Cook highlights the importance of financial resilience and the role it plays in mitigating the adverse effects of potential shocks to the financial system.


Positivity Score: 75
Uncertainty Score: 40

Policy Rate Reversal Warnings

• Rate hikes are unlikely to resume unless forthcoming cuts prove premature. Cutting outside recessionary regimes has historically been prone to reversals to higher peaks.
• 1998’s cuts followed a shock that failed to prove recessionary. Fed cuts in 1967 sowed the seeds of a severe inflation problem. Both cutting cycles were more than reversed.
• Independent ECB hikes in 2008 and 2012 were rapidly proven policy mistakes. The BoE’s single 2005 cut was also wrong. Hopes that 2024 is benignly like 1989 may be misplaced.

By Philip Rush

Sweden Policy Rate 3.75% (consensus 3.75%) in May-24

• The Riksbank reduced the policy rate to 3.75%, motivated by inflation nearing the target amid a weakening economic outlook, with indications of further rate cuts if the favourable inflation outlook persists.
• Based on ongoing economic evaluations, future interest rate decisions will be cautiously managed, with potential additional rate reductions contingent on sustained positive inflation trends and economic stability.
• The central bank remains cautious about inflation risks related to external economic factors and the krona's volatility, ensuring a responsive and flexible monetary policy to navigate potential economic fluctuations effectively.

Hall - Monsters in the deep?

Significant recent advances in the capabilities of artificial intelligence (AI) raise the question of whether increasing use of AI models could have a negative impact on financial stability. In this speech, Jonathan will explore two ways in which firms using AI models could create potential risks to financial stability.

In this speech delivered by Jonathan Hall, an external member of the Financial Policy Committee at the Bank of England, he discusses the potential impact of advances in artificial intelligence (AI) on financial stability. He highlights the risks and potential mitigants associated with AI, emphasizing the need for collaboration between regulators, market participants, and AI safety experts to minimize harmful behavior. Hall explores the concept of deep learning and its potential applications in financial markets, discussing the potential for deep trading agents to become a reality. He raises concerns about model failure, model misspecification, and the potential for collusive or destabilizing behavior in AI trading algorithms. Hall suggests that the widespread adoption of AI trading algorithms could lead to a less resilient and highly correlated market ecosystem. He concludes by emphasizing the importance of balancing efficiency and profit with market stability and resilience.


Positivity: 70
Uncertainty: 80