Changes in the nature of financial intermediation have also played a role in improving the overall resilience and performance of the U.S. financial system that was evident in this latest period of economic recession and financial stress. Four different types of changes are particularly important. •  Innovation in financial technology continues to expand the opportunities for financial institutions to separate and distribute, and to manage and hedge, different types of risk. •  The increasingly greater role played by the capital markets in the financial intermediation process relative to banks - both relative to the past and compared with most other major economies - has improved the capacity of our system to handle stress. Loans and securities held by commercial banks today account for less than 20 percent of overall U.S. credit market debt, roughly two--thirds of their 1975 levels. •  The increases in the sophistication of risk management techniques and enhancements to risk management processes have delivered substantial improvements in how banks and other financial institutions actually manage risk in practice. Banks, for example, have aligned their pricing of credit products much more closely with credit risk. •  The increased scale of cross-border financial intermediation, the growing role of securitized financial instruments in those overall flows, and the growth in the size and breadth of financial institutions with global operations may also mean that, as shocks are transmitted more rapidly, they are diffused more broadly. These are positive developments, and they are likely to be enduring.

The rate of economic growth outside the United States is also looking better. Although there are pockets of weakness and potential sources of vulnerability, the overall rate of global growth has accelerated significantly and looks as if it’s now running at the strongest levels in four years. The broad measures of U.S. consumer price inflation are very low. Inflation expectations as reflected in surveys and in the Treasury inflation-protected securities, although higher than current rates, still suggest an outlook of very modest future price increases. Deflation risks worldwide appear to have diminished, and there are some signs of accelerating price increases in some economies. Overall, however, despite the sharp increases in energy and commodity prices, the inflation outlook globally appears quite benign. At the core of the U.S. economic experience of the past decade is a significant and sustained acceleration in productivity growth. This offers the prospect of more rapid growth in income over time, both for the United States and for the rest of the world. In the economics profession, there is a debate about whether we are in the midst of a secular trend characterized by lower GDP volatility and general price stability, which some have called the “great moderation.” As important as the question of the extent of this moderation in macroeconomic volatility is the debate over its source. It’s undoubtedly the result of a combination of factors, including better economic policy, innovation and globalization, plus simple good fortune in the form of smaller shocks.