Bank of Korea Governor Shin Hyun-song and US Federal Reserve Chair Kevin Warsh both emphasized prioritizing the real economy over financial market fluctuations in recent policy communications. Shin made the remarks at a press conference following the Monetary Policy Committee meeting on July 16, while Warsh testified before the US Senate on July 15. Both central bankers responded to concerns about stock market volatility by clarifying that asset prices are not primary variables in monetary policy decisions. The statements reflect a traditional central banking framework where policy tools target inflation and employment mandates rather than equity valuations.
Shin Hyun-song Clarifies Stock Market Role in Monetary Policy at July 16 Press Conference
Shin addressed questions about whether expanded stock market volatility could constrain interest rate increases through weakened consumer sentiment or tightened corporate funding. According to the Bank of Korea, Shin stated: "From the standpoint of conducting monetary policy, we must pay the greatest attention to what impact it has on the real economy and what impact it has on the financial system." He added that "stocks, unlike other debt or liquidity-related indicators, do not have many pathways connecting to systemic risk."
When asked whether a tightening shift could trigger stock market corrections, Shin responded: "I don't 100% agree with the assessment that interest rates determine stock prices. There are many other variables." He reiterated that stock market trends are not a priority in interest rate decisions. Shin identified semiconductor prices themselves, rather than semiconductor company stock prices, as the price variable requiring attention going forward.
These remarks align with Shin's statement at a price stability target briefing on June 19: "When conducting monetary policy, central banks never react to market conditions day by day, but look at the important underlying trends."
Kevin Warsh Testifies on Real Economy Focus Before US Senate
Warsh appeared before the US Senate on July 15 and indicated his focus would be on Main Street rather than Wall Street. According to the source, Warsh stated: "During my time as chairman, the Fed's focus will be on what is actually happening in the real economy, because that is most directly related to our dual mandate." He added: "You should not think that the Fed will focus on Wall Street."
The statement carries particular significance given Warsh's background as a Wall Street banker.
Academic Framework on Central Bank Response to Asset Prices
The source references a 2001 paper by former Fed Chair Ben Bernanke (then Princeton professor) and NYU Professor Mark Gertler titled "Should Central Banks Respond to Movements in Asset Prices?" The paper concluded that central banks following inflation targeting need not respond independently to asset prices except when they affect inflation forecasts. The authors determined there is little additional benefit from responding independently to asset price levels.
This connects to the Tinbergen rule, which states that the number of policy instruments should match the number of policy objectives. ECB Executive Board member Isabel Schnabel stated in a May 2023 conference speech that central banks can independently achieve price stability and financial stability using different policy tools.
Yonsei University Economics Professor Emeritus Kim Jung-sik commented: "Because raising interest rates directly impacts the real economy, Chair Warsh believes financial stability can be achieved by lowering asset prices through balance sheet reduction. Governor Shin also considers financial stability important, so he will prefer policies that combine macroprudential supervision."
Shin emphasized at the July 16 press conference that monetary policy and macroprudential policy have complementary aspects, and financial stability can be achieved when both are used together.
FAQ
What did Bank of Korea Governor Shin Hyun-song say about stock prices at the July 16 press conference?
Shin stated that stock prices are not decisive variables in monetary policy decisions. He said stocks do not have many pathways connecting to systemic risk compared to debt or liquidity indicators, and emphasized that monetary policy focuses on impacts to the real economy and financial system rather than equity market movements.
Why did Fed Chair Kevin Warsh emphasize Main Street over Wall Street in his Senate testimony?
Warsh testified on July 15 that the Fed's focus during his chairmanship will be on what is actually happening in the real economy because that is most directly related to the Fed's dual mandate. He explicitly stated that people should not think the Fed will focus on Wall Street, clarifying the central bank's policy priorities.
