Risk Management in Monetary Policy: A Review with Asset Pricing Implications

We review recent research on how the Fed's risk-management approach manifests in the overall Fed's policy stance and how it affects financial market conditions. The evidence shows that policy stance contains a forward-looking conditional component that has long been an integral part of the Fed's policymaking toolkit. Asymmetric forward-looking policy tilts - motivated by risk-management considerations and revealed via the Fed's communication - complement and extend beyond the effects of direct policy actions. Going back at least to the early 1990s, the Fed has relied on tilts to not only steer market expectations, but equally importantly, to stabilize risk premia and maintain easy financial conditions. We discuss evidence on successes and challenges associated with communication via tilts.