Policy that’s right today may not be right later on
Financial vulnerabilities are particularly tricky for a central bank. For one thing, they can change the impact of interest rates on the economy over time. Lowering interest rates can boost the economy in the short term. But it can also encourage people to take on more and more debt. And this vulnerability can become a drag on the economy later on. Put another way, vulnerabilities can lead to a trade-off that central bankers need to think about.