Notably, commodity prices in general – and that of oil in particular – rose rapidly in the face of strong demand from China as well as from Brazil, Russia and India. Policy-makers who focused on measures of core inflation that excluded energy prices neglected the latter effect. They may have formed an overly benign impression of the consequences of globalisation for price developments, and adopted an overly loose monetary policy as a result. Thus far, my discussion of the conjunctural assessment has focused on indicators motivated by the benchmark New Keynesian framework. But we need to include the financial sector. What indicators were missed by central banks prior to the crisis due to the neglect of financial factors? What additional indicators should be embodied in the conjunctural assessment? Monetary and credit aggregates can – and did – have a role to play. At least in part, the ECB’s oft-maligned monetary analysis was vindicated by the crisis. If central banks had taken the signals coming from strong monetary and credit growth in mid-decade more seriously, monetary policy decisions might have been better calibrated to contain the financial imbalances that ultimately led to the financial crisis. But recent events have also revealed weaknesses in traditional monetary indicators. Experience points to a need to deepen and broaden such analyses to take better account of the fundamental changes observed in the financial sector over recent decades. New aggregates and indicators need to be developed. 23 Work at the ECB is proceeding in this direction.

Market confidence here and abroad in the Federal Reserve would be undermined. Asset prices could quickly build in an added risk premium, which might lead to tighter credit conditions. These unintended consequences would undermine the legislation’s intent. I’m also concerned about those proposals under consideration that would move the regulatory and supervisory functions now held by the Federal Reserve to other agencies, new or existing. At present, the Federal Reserve is the consolidated supervisor for bank holding companies, a group that has expanded recently as investment banks and other companies formerly outside the Federal Reserve’s purview have been brought under Federal Reserve oversight. In my view, further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system. Funneling information streams into diverse institutional silos leads to communication breakdowns and too often to failure to “connect the dots.” In addition, there are clear synergies between the supervisory process and the Federal Reserve’s monetary policy and financial stability missions. The information we collect as part of the supervisory process gives us a front-line, real-time view of the state of the financial industry and broader economy. Monetary policy is more informed as a result. Only with this knowledge can a central bank understand how the monetary policy impulse will be propagated through the financial system and affect the real economy. Similarly, involvement in the supervisory process gives us critical information in fulfilling our lender-of-last-resort responsibilities.