Recent Monetary Policy Actions As you all know, in response to the unusual economic circumstances generated by the financial crisis and the Great Recession, the FOMC lowered our traditional policy tool – the target federal funds rate – to near-zero levels in December 2008 and has kept it there since. With the fed funds rate constrained at this lower bound, and economic conditions requiring additional policy accommodation, the Committee also deployed nontraditional policy tools to stimulate activity. We embarked upon large-scale purchases of long-term Treasury securities and agency mortgage-backed securities. We also used new communications tools to provide forward guidance about how long short-term interest rates will essentially remain at their lower bound of zero. While large-scale asset purchases and forward guidance are unconventional tools, their effect on interest rates and real economic activity is quite conventional. Both tools are aimed at stimulating economic activity through lower long-term interest rates. Through arbitrage and portfolio rebalancing, lower rates in one market are transmitted to other interest rates faced by investors, nonfinancial firms and consumers. Lower rates are also transmitted across the asset and maturity spectrum. There is significant evidence that the FOMC’s policies have been helpful in reducing financing costs rates paid by firms and consumers and, more generally, in supporting aggregate demand in the face of substantial economic headwinds over the past six years. It should be noted that economic activity picked up momentum in the second half of 2013.

Another is the augmentation of traditional microprudential supervisory work that analyzes individual institutions with efforts that take a wide-angle view of the banking industry. Supervisors look to identify common trends across institutions and emerging concentrations of risks that might pose systemic threats to the financial system. This broad view also allows supervisors to better identify sound practices among firms and incorporate them into supervisory reviews and the feedback provided in them. The Federal Reserve also has greatly expanded its surveillance efforts to financial markets outside of the traditional banking sector, such as the insurance industry and financial market utilities. These efforts are not confined to financial institutions per se, and reach a range of activities that might pose a potential threat to financial stability. For instance, staff members from the Chicago Fed are actively engaged in assessing the role of high-frequency computerized trading in securities and derivatives markets and associated risks that might arise with it. These are just a few examples of regulatory tools available to monitor and promote financial stability. And there are a host of other instruments in our toolkit, such as resolution plans, liquidity requirements and single counterparty credit limits. All are examples of improvements in supervisory practices aimed at reducing the likelihood of systemic disruptions and containing the impact should such disruptions occur. Conclusion To reiterate, I currently expect that low inflation and still-high unemployment will mean that the short-term policy rate will remain near zero well into 2015.