“In the early 1990s, central bankers in Ottawa had a communications problem on their hands: Sometimes-volatile capital flows in international financial markets were leading to swings in the Canadian dollar. Those were obstructing the economic goals they were trying to achieve via their traditional policy tool, the short-term interest rate, according to Charles Freedman, deputy governor of the Bank of Canada from 1988 to 2003.…

“‘To get that point across, we developed a ‘monetary conditions index’ which basically put the two channels together,’ said Freedman, who is now an economics professor at Carleton University in Ottawa.…

“Dudley cited a suite of monetary conditions indexes developed by Goldman economists which he said owed ‘a big debt to the path-breaking work of the Bank of Canada, in general, and Chuck Freedman, in particular.’…

“Ultimately, the Fed’s response to easier financial conditions should hinge on whether or not that boost in business sentiment translates to an actual acceleration in consumption, said Freedman.

“‘Stock markets go up. That in itself is not relevant,’ he said. ‘What is relevant is its effect on people’s willingness to spend.’”

(Matthew Boesler, “How the Yellen Fed Got Religion Over the Stock Market and Policy,” Bloomberg at bloomberg.com)

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