Instead, monetary policy affects the economy as the current change in short-term interest rates and expectations about future monetary policy changes influence financial market conditions more broadly. Developments in financial market conditions are thus an important element in the transmission mechanism of monetary policy to the economy. Changes in financial market conditions influence economic growth through a number of channels. For example, a stronger equity market raises household wealth and lowers the desired personal saving rate – lifting consumer spending. A stronger equity market also reduces the cost of capital for business, which may help encourage greater investment spending. Lower long-term interest rates push down business financing costs, which also supports investment spending. At the same time, lower mortgage rates support housing demand and reduce household interest outlays. A weaker dollar supports growth by making imports more expensive and by increasing export competitiveness. The combined effect is to increase net exports. If the linkage from the federal funds rate to financial market conditions were stable over time, there would be no need to focus on financial market conditions. In a world in which the linkage was solid and unchanging, adjustments to the short-term interest rate and communication about future policy would have a predictable and reliable effect on financial market conditions. Central bankers, then, could keep their focus narrowly on their policy rate. However, as has been very clear, especially in recent years, this linkage is not stable.

Indeed, monitoring the robustness of the financial system requires the evaluation of various factors that threaten the financial system as a whole and create systemic risks. For this reason, the perspective of the Bank is a macro and risk-focused one, similar to the perspective used in the financial stability reports published by other central banks. The definition of objectives and functions of central banks are different from those of supervisory authorities. Though central banks increasingly tend not to deal directly with the monitoring and supervision of banks in recent times, they continue to monitor developments in the banking sector as well as the basic systemic risks. Today, 38 central banks around the world publish the Financial Stability Report. In a total of twenty countries, fourteen European and six non-European countries, supervisory authority is separate from the central bank. Especially in systems where the power to monitor is granted to autonomous institutions other than the central bank, the function of monitoring and supervising the financial system focuses on the issue of financial soundness and effectiveness of individual institutions. However, the monitoring of the financial system as a whole in terms of financial stability is carried out by central banks. In countries such as England, Australia, Norway, Finland and Sweden, where the supervisory authority is not the central bank, central banks, including that of Turkey, focus on the objective of price stability and carry out operations consistent with monetary policies by monitoring the developments in financial markets.