As stated in a recent Bank for International Settlements report, “Financial regulation aims to influence the behavior of banks and other financial intermediaries to enhance their resilience and support financial stability. Given that those same intermediaries interact with central banks in the context of monetary policy implementation, changes to the regulatory environment are bound to have effects that central banks will need to take into account.”38 Economic and financial stability are closely interconnected; for example, monetary transmission was reliably effective in 2007, but in 2008 became quite impaired as a result of systemic financial stress. In navigating these issues, my colleagues and I are aided by the integration of policy analysis across disciplines at the Federal Reserve System, an arrangement which provides an ongoing breadth and depth of perspective. Thank you for your attention. 1 I would like to thank James Egelhof and Antoine Martin for their assistance in the preparation of these remarks,  Adam Biesenbach for his assistance with the calculation of the dispersion indices presented here, Logan Suba for his assistance with data, and colleagues in the Federal Reserve System for numerous insightful comments and suggestions. 2 See, for example: Bernanke, “Implementing Monetary Policy,” March 30, 2005; Ihrig, Meade and Weinbach  “Rewriting Monetary Policy 101: What's the Fed's Preferred Post-Crisis Approach to Raising Interest Rates?, ” Journal of Economic Perspectives, Fall 2015. 3 Conceptually, the federal funds rate is a measure of what banks pay to take out unsecured overnight loans from  other banks, government-sponsored entities, and certain other entities.

We should get well prepared or would lose the momentum quickly. 3. Exit by the U.S. Fed from its unconventional monetary policies is one of the most important external challenges that the region will face in the next year or two. A timely and orderly normalisation of monetary policy in the US should help to slow credit growth and contain asset price inflation in the region. However, a disorderly normalisation process could lead to significant outflows of capital, abrupt tightening of financial conditions and a severe re-pricing of assets. This can result in financial instability and even a sharp slowdown of economic growth in the region, particularly in those economies with weaker fundamentals and higher reliance on external financing. Yet, there is a lively debate about the size of the labour market slack in the US, which could complicate the judgment about inflation risks and the conduct of monetary policy. Indeed, the path of exit is not necessarily smooth, and interest rate volatility could be higher than currently anticipated. 4. While monetary policy normalisation may reflect a pick-up in the growth momentum in the US which should help support Asia’s exports, the strength of this support is subject to some uncertainty. We also need to be aware that economic integration has increased within the region. As identified by the IMF in the REO, the increase in trade and financial integration have strengthened the propagation of growth shocks between regional partners. 5. So, what are our major policy challenges?