Economic policymakers must stand ready to take timely and decisive actions when incoming information suggests that the economy is most likely to significantly deviate from the targeted course for a sustained period. And in the uncertain world in which we live, they have to deal with both upside and downside risks to the economy. In the current setting, downside risks are far greater than upside risks.
In the United States, household balance sheets have become stretched. Companies remain more generously valued relative to earnings than they were before the mid-1990s. Further falls in stock prices on top of the sustained corrections that have taken place could produce adverse wealth and confidence effects on spending by the household sector.
A major force of the current economic slowdown in the U.S. is stock adjustment in the information and communications technology sector. There are uncertainties about how long the adjustment process will continue and about the magnitude and speed of the response of this sector and the household sector to an easing of monetary policy.