Federal Reserve officials often behave as if they have a mandateto take financial stability into account when they makeinterest-rate decisions, according to a research paper co-authoredby Boston Fed President Eric Rosengren.

“Frequent mentions of financial instability terms at the FOMC,particularly during bust periods, result in a statisticallysignificant reduction in the funds rate,” the paper said. “When itcomes to financial instability concerns, not only do FOMC meetingparticipants talk the talk, but they also walk the walk,” it added,referring to the policy-setting Federal Open Market Committee.

Rosengren, along with co-authors Joe Peek and Geoffrey Tootell,economists at the Boston Fed, are scheduled to present the paper,titled “Should U.S. Monetary Policy Have a Ternary Mandate?,”Friday at the start of a two-day conference hosted by the bank onmacro-prudential monetary policy. Fed Vice Chairman Stanley Fischerwill speak on the same topic at lunchtime Friday.

The FOMC decided Sept. 17 to hold rates near zero, citingconcerns over global economic and financial developments that mightcool U.S. growth and inflation. Financial markets were roiled inAugust after China unexpectedly devalued its currency.

The Fed is charged by Congress to pursue two mandates: maximumemployment and price stability, which the Fed defines as 2 percentinflation target over the medium term. The results of the paper“are strongly suggestive that the FOMC often behaves as if monetarypolicy has a third mandate” to respond to financial instability,the authors wrote.

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