Last week, in her most important speech since becoming Fed Chair in February, Janet Yellen articulated the emerging policy consensus about the relationship between monetary policy and financial stability. What is that consensus? How confident should we be about its precepts? How will it influence Fed monetary policy over the medium term?

Three principles form the basis of the consensus: (1) the primary policy tools for addressing systemic risks are regulatory (now called macroprudential tools); (2) interest rate policy has only limited effects on systemic risks and comes with potentially costly side effects; and (3) policymakers may wish to use interest rates to address systemic risks, but only when the primary tools are not working.

The first two principles pre-date the emerging consensus and remain undisputed. Regulatory tools – ranging from capital and liquidity requirements for intermediaries to margin and collateral requirements for systemic financial markets – can be tailored to address systemic risk. In contrast, interest rate policy affects many aspects of economic behavior beyond the financial system. So, adjusting interest rates to secure financial stability can put at risk the central bank’s conventional goals of price stability and stable economic growth. [Indeed, one recent simulation by Fed staffers showed that the economic costs of using interest rate policy to prevent a crisis can exceed the benefits.]

Prior to the financial crisis, policymakers treated these first two principles as sufficient to warrant a complete separation between monetary policy (setting interest rates) and regulatory policy. The former would be used exclusively for conventional stabilization, the latter exclusively for financial stability. And never the twain shall meet.

As Chair Yellen’s speech highlights, that separation principle is dead. The key challenges for policymakers today are: (1) to identify the circumstances when the high hurdle for using monetary policy to address systemic risks should be crossed; and (2) to explain publicly the financial stability factors that can influence interest-rate setting today and in the future.

Ideally, there would be no surprises: we could all anticipate how interest-rate policy would react to different kinds of systemic threats, in addition to changes in inflation and economic growth. Yet, as Chair Yellen emphasized, “there is no simple rule than can prescribe, even in a general sense, how monetary policy should adjust in response to shifts in the outlook for financial stability.” Put differently, there is no Taylor rule for systemic risk.

So, how will Chair Yellen address the two big challenges? When might it be appropriate to use monetary policy to “get in the cracks” (the phrase comes from a 2013 speech by former Federal Reserve Governor Jeremy Stein) left by the regulatory framework?

In her speech, the Chair focused on private balance sheets and the well-being of intermediaries, noting that: (1) financial conditions have “contributed to balance sheet repair” while “nonfinancial credit growth remains moderate”; (2) “leverage in the financial system … is much reduced”; and (3) “short-term wholesale funding is also significantly lower than immediately before the crisis.” In short, there is no present need for “monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

We also doubt that monetary policy should deviate now from its primary focus. The single biggest source of risk in the financial system ahead of the crisis – the bloated level of house prices – has corrected sharply (see figure). In addition, the ratio of household debt to GDP has declined since the crisis, despite sluggish growth; and, with interest rates so low, debt-service to income ratios are back to their 1995-2007 average.

United States: Real House Prices (1991=100) and the Ratio of Private Debt to GDP