A likely explanation for this favorable record is that Fed tightening generally occurs during periods of strong U.S. economic performance. Recent research from the IMF bears out this hypothesis, finding that higher U.S. interest rates associated with stronger U.S. growth represent a net positive for EMEs. 2 Financial performance of EMEs has been more diverse across Fed policy cycles. The strongest contrast is between the tightening cycle that began in 2004, and the one beginning  1  See January 27–28, 2015 Federal Open Market Committee statement. 2  See “Spillovers from Unwinding Monetary Support in Advanced Economies,” 2014 Spillover Report, Chapter 2. See also, “On the Receiving End: External Financial Conditions and Emerging Market Growth Before, During and After the Global Financial Crisis,” World Economic Outlook, April 2013, Chapter 4. 2  BIS central bankers’ speeches  a decade earlier, in 1994. EME asset prices strengthened considerably during the 2004 cycle, but weakened considerably during the earlier cycle. Notably, the 1994 cycle was associated with a large increase in U.S. long-term bond yields, and appears to represent a case in which there was some distance between Fed policy and market expectations. Other IMF research suggests that anticipated Fed tightening moves have historically been followed by only a minor pullback in private capital inflows, while unanticipated tightening has typically been followed by a pullback in private flows some four times as large. 3 This evidence highlights the importance of transparency and clear messaging in how the Fed is evaluating the evolving economic landscape.

The most significant requirements are expected to fall on the largest FBOs from advanced economies – some of which have also adopted tighter local requirements for foreign banks – and should contribute importantly to a safer and sounder U.S. and international financial system. Correspondent banking relationships have also received heightened attention in the context of serious violations of anti-money laundering and know-your-customer standards by some banks, and substantial fines. It is imperative to firmly deal with illegal, unsafe and unsound banking practices, including money laundering and transactions with U.S.-sanctioned countries. It is also important to be on the look-out for potential unintended consequences and externalities, such as widespread de-risking where correspondent bank access is shut off to compliant counter parties and to legal flows, economic costs are excessively increased, or flows migrate to avenues subject to less oversight or transparency. The scope, scale, and impact of de-risking need to be better understood. Dialogue between market participants and the official sector is ongoing, both multilaterally and bilaterally. Let me conclude. The U.S. economy and financial system have strengthened notably in recent years and in a mutually reinforcing way. U.S. monetary and regulatory policy both need to be tailored to domestic conditions. The Fed is also mindful of the international effects of its policies, given the central place of the U.S. in the global financial system, and the potential for spillbacks to the U.S. economy and financial system. Effective communication with market participants and policymakers is important.