It cannot subordinate its legal mandate of maximum employment and price stability in the United States to alternative international goals. But, given the role of the United States and the U.S. dollar in the global economy and financial system, the Federal Reserve is—and indeed, needs to be—mindful of the international effects of its policy. That is because those consequences can have important potential spillbacks to the U.S. economy and financial markets. The bond market “taper tantrum” of 2013 highlighted that prospective changes in U.S. monetary policy could affect the EMEs—particularly those with existing vulnerabilities—and how those consequences, in turn, could spill back to the United States. This episode underscored the need for clear communication and transparency around U.S. policy so that expectations can adjust smoothly and be appropriately calibrated to what is likely to occur. As you know, the Federal Reserve has become increasingly transparent in recent years, in part to mitigate such risks. Good communication and transparency is always important during periods of conventional policy normalization. But, good communication and transparency may be even more important when one begins to unwind unconventional monetary policy actions, such as balance sheet policies with which we have little prior experience. Moreover, I would surmise that adjustments to balance sheet policies undoubtedly affect asset prices in ways that differ from changes in short-term interest rates. Earlier this month, we announced an addendum to the FOMC’s Policy Normalization Principles and Plans.3 In this addendum, we spelled out how the balance sheet normalization program would work.

William C Dudley: Panel remarks at the Bank for International Settlements' Annual General Meeting Panel remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Bank for International Settlements' Annual General Meeting, Basel, 25 June 2017. * * * John Clark, Gerard Dages, Linda Goldberg, Eric LeSueur, Jonathan McCarthy, and Joseph Tracy assisted in preparing these remarks. Let me start by thanking Jens Weidmann and the Bank for International Settlements for the opportunity to respond and comment on Professor Hélène Rey’s thoughtful remarks and on the issue of international spillovers associated with U.S. monetary policy. As always, what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.1 As is characteristic of her work, what Hélène has to say is well-argued and provocative. It is also very relevant to the conduct of monetary policy and the functioning of the international monetary system. I mostly agree with the major points she makes. First, I wholeheartedly agree with her on the hazards of financial booms. Rapid increases in credit and capital flows, asset prices, and leverage can lead to potentially severe corrections that can impose great stress on financial systems. As we have seen repeatedly, this stress can impair the ability of the financial system to perform well in intermediating credit between savers and borrowers, and in helping households and businesses manage their financial risks.