The FOMC should not simply set its policy instruments by mechanically aligning them with historical norms if those norms are not currently relevant for the conditions needed to attain both of our dual mandate goals. Rather, our policy instruments should be set to achieve our ultimate goals as efficaciously as  2  4  See, for example, Kocherlakota (2013). BIS central bankers’ speeches  possible given current and prospective economic conditions, all the while with an eye on managing against important risks to the outlook. I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions. In this scenario, the FOMC could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. If we were to presume prematurely that the U.S. economy has returned to a more business-as-usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment. Such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives. This risk consideration means that the decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return to a sustainable 2 percent rate. We should also proceed cautiously and keep the path of rate increases relatively shallow for some time after we begin to raise rates.

Many community bankers are taking a proactive, forward-leaning approach to these new technologies with a focus on how they can be leveraged to improve their business and benefit their customers. Among the opportunities community bankers have highlighted during our discussions are: technological solutions that reduce back office costs; more efficient loan processing; and an improved customer experience through smartphone applications and other mobile technology. This proactive perspective leverages innovation as a strategic differentiator and competitive advantage, rather than just a means to enhance efficiency. The speed and magnitude of these changes also have implications for us as supervisors. We must keep pace and understand the risks associated with innovation so that we can appropriately focus our supervisory efforts on new operational, compliance, and reputational risks. For example, Supervisory and Regulatory Letter 13–19, “Guidance on Managing Outsourcing Risk,” provides supervisory expectations on partnering with outside vendors. While supervisors can provide some focus on emerging risks, it is ultimately the responsibility of each firm and its board to identify the relevant risks associated with new technologies and make appropriate and prudent business decisions for their institutions and customers. Cybersecurity The potential benefits associated with these new technologies are accompanied by the risks posed by cybersecurity. Cybersecurity risks, the third topic on my list, continue to raise challenges for all types of firms in the financial system, ranging from supervised banks to financial utilities to non-bank financial firms to government agencies.