Stresses in liquidity and market functioning could also be temporary, as the market learns to adapt to the Desk’s presence in the markets. So far, though, there seems to be little evidence that the current pace of purchases is prompting deterioration in market liquidity or straining the market’s ability to deliver securities. 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 helping make historically low borrowing costs available to existing and prospective American homeowners, as well as lowering interest rates to spur business investment and household spending. Thank you for listening to me today. I would be happy to take a few questions. References Brainard, William and James Tobin. 1968. “Pitfalls in Financial Model Building.” American Economic Review, Vol. LVIII, no. 2 (May). Fleming, Michael. 2000. “The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives.” Federal Reserve Bank of New York Economic Policy Review, Vol. 6, no. 1 (April): 129–45. Fleming, Michael. 2002. “Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings.” Federal Reserve Bank of New York Staff Reports, no. 145, March. 21  The Desk also purchases dollar roll contracts when implied financing rates are sufficiently positive. Such operations occurred in December 2011.

The faster this acceptance can be achieved, the greater will be the euro’s strength as a currency in the medium and longer term. Unfortunately, we cannot say this has already happened. Its depreciation against the US dollar has not promoted increased confidence in the euro. This is probably a good moment to describe how the fluctuations in the euro/dollar exchange rate have affected the Turkish economy. A low valuation of the euro would affect our economy through two channels: first, through the euro’s role in our new exchange rate system; and second, through the large share of EU countries in our foreign trade. At the beginning of the year 2000, Turkey launched a comprehensive disinflation program based on a preannounced path of the Turkish lira against a currency basket consisting of “1 US dollar plus 0.77 Euros.” Mainly by taking advantage of the remarkable pass-through of the exchange rate to price levels, this program has brought about a considerable lowering of the inflation rate. Unfortunately, the rapid appreciation of the US dollar against the euro in the international markets has somewhat weakened the effect of the exchange rate basket on inflation. During the first ten months of this year, the Turkish lira depreciated by an average 26.5% against the US dollar, but by an average 6.5% against the euro. The operation of the pass-through mechanism to price indices in Turkey is much stronger for the dollar than it is for the euro, or previously was for the deutsche mark.