Tighter monetary policy may increase instability in financial markets, an economic letter published by the Federal Reserve Bank of San Francisco says.

Monetary policy cycles and financial stability, by Pascal Paul, looks at two possible ways that a raise in policy rates can increase financial stability.

“A surprise tightening tends to reduce the market value of banks’ equity and raise their market leverage, exacerbating balance sheet fragility in the short run,” the author says. An increase in