ABSTRACT
The Federal Reserve developed a new tool, quantitative easing, to help stimulate the economy following the 2008‒09 global financial crisis. In a deregulatory environment, however, it also endowed the Fed with an implicit financial stability mandate rather than bolstering its more traditional supervisory and regulatory powers. This chapter 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 achieve 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 chapter conducts a plausibility probe of the 2023 Silicon Valley Bank crises, counterfactually arguing that greater banking supervision and regulation would have better contained financial sector excesses than placing the financial stability onus on the Federal Reserve.
