Managing market expectations about monetary policy implementation takes on even more importance in the challenging environment posed by the zero lower bound. Both in shifting into a regime that uses the balance sheet as an active tool for policy implementation and then shifting away from such use, there is an important interaction that the settings of overnight rates, forward guidance on those rates, and balance sheet configurations have on overall financial conditions. Having clear and credible communications that help market participants understand the central bank’s intended use of these tools can thus affect overall program effectiveness. Indeed, a central bank’s clarity around how it would pursue its goals at the zero lower bound can, in itself, produce a more stable environment with fewer and shorter trips to the zero lower bound.31 And even at the zero lower bound, the speed and accuracy with which market participants understand the central bank’s reaction function could contribute to better macroeconomic outcomes.32 6 / 13  BIS central bankers' speeches  My analysis takes its cue from the framework proposed by Chair Yellen, where unconventional policy tools are deployed to provide additional policy accommodation at the zero lower bound, and a supposition that balance sheet expansion would be introduced if the zero bound is viewed to be more restrictive than can be mitigated by forward guidance alone, just as they were during the financial crisis and subsequent recession. Communications are central to the two primary channels through which balance sheet policies are believed to work.

These horizontal evaluations, which focus on capital adequacy, liquidity resiliency and preparedness for recovery and resolution, examine practices and conditions across a group of firms simultaneously, enabling supervisors to develop peer perspectives about best practices and approaches. These programs involve a consistent and systematic assessment  2  2  Board of Governors of the Federal Reserve System. “Consolidated Supervision Framework for Large Financial Institutions.” Supervision and Regulation Letter 12–17. December 17, 2012. http://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm. BIS central bankers’ speeches  of the financial strength and operational resiliency of the largest and most complex financial institutions, addressing both micro-prudential safety-and-soundness supervisory goals and broader macro-prudential financial stability objectives. Specifically, in the Comprehensive Capital Analysis and Review (CCAR), which applies to firms with at least $ billion in total assets, Federal Reserve supervisors assess whether bank holding companies have sufficient capital to continue operations through times of economic and financial stress, and whether they have robust, forward-looking capitalplanning processes that take into account whatever unique risks they might face. By including forward-looking elements, the CCAR complements the enhanced Basel capital requirements now being implemented in the United States. In addition, the Comprehensive Liquidity Analysis and Review (CLAR), which applies to LISCC firms, reviews the liquidity positions and liquidity risk management of large, complex banking organizations, including internal stress-testing practices. Finally, the Federal Reserve does an annual evaluation of the LISCC firms’ options to support recovery and progress in removing impediments to orderly resolution in the Supervisory Assessment of Recovery and Resolution Preparedness (SRP).