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Edward Harrison — Minsky’s financial instability hypothesis and the Fed’s reaction function

Summary:
As the Federal Reserve meets today to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new warnings on financial stability. And just this morning, I read a piece from Goldman Sachs Asset Management EMEA division head Andrew Wilson, warning that the risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line. In the past decade on Credit Writedowns, I have had a lot of good commentary from different writers on financial stability. And most of it is based around Hyman Minsky’s Financial Instability Hypothesis. As someone who used to work in debt capital markets and do

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As the Federal Reserve meets today to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. Yesterday, I wrote about the Bank of International Settlements new warnings on financial stability. And just this morning, I read a piece from Goldman Sachs Asset Management EMEA division head Andrew Wilson, warning that the risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line.
In the past decade on Credit Writedowns, I have had a lot of good commentary from different writers on financial stability. And most of it is based around Hyman Minsky’s Financial Instability Hypothesis. As someone who used to work in debt capital markets and do financial models for private equity investing and corporate finance for mergers and acquisition, I find the Minsky analysis a huge benefit in thinking about the macroeconomy that standard macro modelling techniques don’t incorporate. So I want to use this as the prism through which to look at the Fed’s reaction function to predict future yield curve flattening and the resulting economic impact....
Credit Writedowns
Minsky’s financial instability hypothesis and the Fed’s reaction function
Edward Harrison
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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