The second is the impact of a shrinking supply of Treasury securities on monetary policy, which has already affected yield spreads and the usefulness of some financial market data as indicators for monetary policy. Going forward, this development could also affect how the Fed implements policy. The third issue is the more distant prospect that the spread of e-money could undermine the role of central banks in conducting monetary policy. This prospect could ultimately affect the implementation of monetary policy in a very fundamental way by reducing or even eliminating the demand for central bank money. Despite the low inflation of recent years, some observers have wondered whether rapid gains in U.S. asset prices foreshadow rising inflationary pressures.
Some monetary experts believe so.
In particular, Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, argues that central banks should consider using housing prices, and perhaps, but to a much lesser extent, stock market prices to guide their policy decisions. This measure has the potential to improve macroeconomic performance if asset prices reliably predict future consumer price inflation. Other experts, however, question the ability of housing and stock prices to predict future inflation. And, even if asset prices help predict inflation, a central bank's reactions to such volatile asset prices might not necessarily improve macroeconomic performance. Filardo evaluates the net benefits to the U.S. economy of adopting Goodhart's recommendation.