In fact, such communication might be particularly important in the current circumstances, because financial market participants have no history from which to judge the FOMC’s approach and anticipate its actions. 6  BIS Review 128/2010  Fifth, how much flexibility should the FOMC retain to change its policy approach? The original asset purchase programs specified the amount and distribution of purchases well in advance. 9 However, the FOMC would be learning about the costs and benefits of its balance sheet changes as it implemented a new program. This might call for some flexibility to be incorporated into the program, providing some discretion to change course as market conditions evolve and as more is learned about the instrument. Conclusion I hope that my remarks today have offered some insight into the recent balance sheet programs undertaken by the Federal Reserve. Adjustments to the size of the Federal Reserve’s securities holdings are a new policy instrument for the FOMC. That presents challenges, both to policymakers in terms of determining how to use the instrument and to market participants in terms of anticipating that usage and understanding its effects. Given these challenges, I believe it is important for the Federal Reserve to communicate effectively about the factors affecting its balance sheet decisions and the implementation of those decisions. In my view, the evidence suggests that the expansion of the securities portfolio to date has helped to foster more accommodative financial conditions, and further expansion would likely provide additional accommodation.

The firm, concerted response by the monetary authorities in the main economic areas softened the initial impact on financial markets and meant that the effects on the world economy were relatively short-lived, though sharp, and confined to specific sectors. Broadly, the design of the euro area members' fiscal policies in 2001 prevented expansionary discretionary measures being adopted. Such measures would have jeopardised the sustainability of recent fiscal consolidation achievements and, given the lag with which such measures operate, they could have had a counter-productive effect on the cyclical stability of the economies in the area. However, the available estimates of the structural budget balance show that, at the aggregate level, there was a slight deterioration last year as a result of the tax cuts applied in certain countries before the cyclical weakening had become apparent. Further, fiscal results have shown that, in certain countries, not enough room for manoeuvre was available to absorb the budgetary effects of the slowdown without drawing too close to the limits set in the Stability and Growth Pact. Clearly, in such cases the consolidation drive made has not been sufficient to attain a balanced budgetary position. In this respect, it is of paramount importance that EMU members maintain the commitments entered into under the Pact and do so symmetrically, as reflected in the conclusions of the Barcelona Summit. The appropriate response by economic policies to the slowdown in 2001 has therefore contributed to the recovery of the European economy apparently under way since the beginning of the current year.