For example, a central bank with a dual mandate to maintain price stability and support employment faces a particular dilemma in the context of a so-called “jobless recovery”. Its ability to act in a timely manner to contain emerging inflationary risks may be curtailed by its obligation to support employment. Moreover, since labour market developments are lagging indicators of the cycle, a central bank assigned an explicit employment objective may systematically tighten monetary policy later and more cautiously than necessary to maintain price stability. Such behaviour could impart an “inflation bias” to the economy. These factors run counter to recent proposals to assign monetary policy additional financial stability objectives. 7 Rather, maintaining price stability over the medium term – an important addendum, to which I will return – is the appropriate objective of monetary policy. Given its neutrality over the longer run, monetary policy’s ability to pursue other objectives at that horizon is heavily circumscribed. And by maintaining price stability, monetary policy creates an environment conducive to financial stability, economic growth and employment creation. If price stability is the appropriate objective of monetary policy, how should it be quantified? At the ECB, we have defined price stability as annual consumer price inflation of “below, but close to, 2%”. Whether explicit or implicit, similar targets have been established by central banks throughout the world. Recently, proposals have been made to raise inflation objectives substantially – more than doubling them in the euro area case. 8 Frankly, these proposals are foolhardy.

If refinancing activity declines, leading to a decrease in gross issuance, our purchases could exceed these levels. Of course, the pace of asset purchases is not strictly limited by the amount of new mortgage origination, as market participants can also deliver older securities into TBA contracts. As the pace of MBS issuance evolves, the Desk will continue to watch the market functioning indicators discussed above, with a particular emphasis on the market’s ability to settle further purchases. Conclusion Overall, I believe the Desk has effectively and efficiently carried out the FOMC’s directive to purchase additional Treasury securities and agency MBS in a transparent fashion that achieves the FOMC’s policy objectives, supports orderly market functioning, and obtains competitive market prices. I also believe that the Federal Reserve’s balance sheet policies have been effective in easing financial conditions, particularly with respect to making historically low borrowing costs available to existing and prospective American homeowners, as well as lowering interest rates to spur business investment and household spending. To achieve our policy mandate, we rely on your continued ongoing and active participation in our operations both for your own accounts and for the accounts of your customers, consistent with your role as primary dealers. We will continue to implement the FOMC’s  12  The Desk also purchases dollar roll contracts when implied financing rates are sufficiently positive. Such operations occurred in December 2011. 13  See TMPG Best Practices.