Stephen B. Kaplan
Abstract: Following the 2008 financial crisis, the Federal Reserve restored its historic financial stability mandate with new monetary tools to help mitigate the credit crunch and stimulate the economy. This article develops a new theory about the Fed’s mandate trilemma, suggesting the central bank’s financial stability goals have complicated its ability to meet its dual mandate of full employment and price stability. By stretching its monetary policy operations to meet three goals simultaneously, the Fed has created an impossible trilemma. To achieve financial stability and full employment, it tends to maintain easy credit conditions for longer than optimal, making eventual inflationary pressures more likely. To test these theoretical priors, this article conducts a plausibility probe of the 2023 regional banking crises, finding that political constraints reduced the feasibility of more traditional banking supervisory powers, placing the financial stability onus on monetary policy.