IF YOU want to know why the Federal Reserve is undershooting both its inflation target and its maximum employment mandate, cast your eye toward Jeremy Stein. Mr Stein is a Harvard economist and Fed governor. And since assuming his role at the Fed in 2012, he has led the intellectual charge within the Federal Open Market Committee to place more emphasis on financial stability as a monetary policy goal. For a glimpse of Mr Stein's handiwork, have a look at his most recent speech, where he says:

I am going to try to make the case that, all else being equal, monetary policy should be less accommodative--by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level--when estimates of risk premiums in the bond market are abnormally low. These risk premiums include the term premium on Treasury securities, as well as the expected returns to investors from bearing the credit risk on, for example, corporate bonds and asset-backed securities. As an illustration, consider the period in the spring of 2013 when the 10-year Treasury yield was in the neighborhood of 1.60 percent and estimates of the term premium were around negative 80 basis points. Applied to this period, my approach would suggest a lesser willingness to use large-scale asset purchases to push yields down even further, as compared with a scenario in which term premiums were not so low.

Mr Stein is effectively taking ownership of the Fed's move toward tapering. Long-term unemployed Americans should address their letters accordingly.

Why not laud the governor for his efforts? Who could be against financial stability, particularly given disastrous recent experience? Well, financial stability is a fine goal, as far as it goes. But Mr Stein's particular approach to that goal strikes me as deeply flawed and very likely to prove counterproductive.

What do I mean by that? Consider the way Mr Stein opens the speech cited above:

The easier question is, should financial stability concerns, in principle, influence monetary policy decisions? To be specific, are there cases in which one might tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level than one would otherwise, because of a concern that a more accommodative policy might entail a heightened risk of some sort of adverse financial market outcome? This question is about theory, not empirical magnitudes, and, in my view, the theoretical answer is a clear "yes."

Hold on. Mr Stein moves swiftly and surely from asking the broad question—whether financial stability concerns should influence monetary policy—to a narrower question: should central banks tolerate high unemployment for the sake of financial stability. He takes for granted that excess unemployment is the price to be paid for stability rather than excess inflation. Why? Where does that view come from? Naturally, it is assumed:

[T]he argument assumes that there is some variable summarizing financial market vulnerability--I will be abstract for the moment and just call it FMV--which is influenced by monetary policy. That is, easier monetary policy leads to increased vulnerability as measured by FMV. Moreover, when FMV is elevated, there is a greater probability of an adverse event--some kind of financial market shock--that, if it were to occur, would push up the unemployment rate, all else being equal.

Let me be clear about what is happening here. Mr Stein assumes that easy policy raises financial vulnerability and that financial vulnerability raises the risk of an unemployment-increasing shock. Once one assumes that, showing that tighter policy might be justified even when unemployment is above desired levels is mathematically trivial. Everything is built on the assumption that easy policy = financial danger. Incredibly significant consequences flow from that assertion. But is it right?

It's not hard to see how Mr Stein has arrived at this point. Much of his academic work focused on exploring the "lending channel" of monetary policy transmission: tighter policy affects the economy by reducing bank lending, and not just by adjusting the money supply. But there are lots of ways in which monetary policy influences financial markets. Low and stable inflation is effectively a debt subsidy, for instance; the central bank is providing a guarantee against erosion in the value of principal due to unexpectedly high inflation. Low and stable inflation leads to lower and more compressed interest rates which could encourage excessive borrowing or a "reach for yield". Is it entirely a coincidence that both public and private borrowing exploded around the time that central banks tamed inflation in the early 1980s? (And if it is, and the financialisation of the economy that grew out of deregulation is instead to blame, then why isn't that—regulation—the first line of defence against financial excess?) Tight labour markets and higher inflation appear to be associated with a higher labour share of income, and a corresponding squeeze on the returns to capital. What's more, it's not as if there is no empirical workout there assessing the efficacy of "leaning against the wind" monetary policy.

What is most remarkable about all of this is how swiftly and silently the FOMC is moving in Mr Stein's direction. The governor is drawing some hugely significant conclusions from rather tenuous beginnings, and the FOMC is following his lead with scarcely any public debate—and certainly with a bare minimum of public communication about how this particular view of the nature of financial stability is influencing policy. Here is where Janet Yellen explains why the Fed gestured toward tapering last summer:

Well, I think there were quite a number of things happening at that time. I think it's probably true that monetary policy may have played a role in touching off that market reaction, but I think the market reaction was exacerbated by the fact that we had a very significant unwinding of carry trades and other leveraged positions that investors had taken, perhaps thinking that the level of volatility was exceptionally low and perhaps lower than was safe for them to have assumed. But we certainly saw--now, in some ways, the fact that term premium in interest rates have come up somewhat, although it has had a negative effect on the recovery and that's evident in housing, in the slowdown in housing, perhaps it's diminished some financial instability risk that may have been associated with these carry trades and speculative activities that were unwinding during that time. A lesson is that we will try, and we were trying then, but we will continue to try to communicate as clearly as we possibly can about how we will conduct monetary policy and to be as steady and determined and as transparent as we can, to provide as much clarity as is reasonably certain--given that the economic developments in the economy are themselves uncertain--but we will try as hard as we can not to be a source of instability here.

That's corroboration for the idea that the Fed was taking its tapering cues from Mr Stein. But Ms Yellen provides no information on how the Fed decided to risk an economic slowdown for the sake of a shift in the term premium, or whether it judges the trade-off to have been worth it, or under what circumstances it might try something similar, or whether anyone within the FOMC thought to ask whether this makes any sense at all with the unemployment rate at 6.7% and inflation at 1.2%.

That, to some extent, is the most boggling aspect of this whole mess. Whatever the source of an economic shock, one can be certain that its effect on the macroeconomy will be substantially more painful when the central bank's response is limited by the zero lower bound. Mr Stein has himself acknowledged this; in his first speech as a governor he commented that:

If the federal funds rate were at, say, 3 percent, we would have, in my view, an open-and-shut case for reducing it.

Moving to tighten when the federal funds rate is near zero and inflation is well below target is a good way to make sure the Fed's main interest rate never again approaches 3%. I'll put it differently. Mr Stein has been working to take one monetary policy tool after another off the table—by warning against the riskiness of quantitative easing, by fretting over the financial dangers of a prolonged period of low interest rates, and by urging tightening well before the economy is ready for higher rates, all but guaranteeing that the zero lower bound is a constraint when the next recession strikes. He has been doing this, ostensibly, because doing so reduces the risk of a nasty financial shock.

What he doesn't seem to appreciate is that it magnificently raises the economy's vulnerability to shocks generally—including financial instability unwittingly triggered by the decision to lean against the wind. And the most sinister aspect of this shift is that it plays directly into the FOMC's natural bias toward hawkishness. The economy kept refusing to give the Fed a reason to tighten, but thankfully there was Mr Stein, ready to provide. Unfortunately but perhaps unsurprisingly, the FOMC has seized the opportunity to write off millions of American workers.