Finally, I would like to know about the dynamic properties of the new FCI. Are particularly high (expansive) readings dangerous and should they be taken as suggestive of asset bubbles? Should the Federal Reserve try to prevent such occurrences because loose financial conditions precede episodes of financial instability? In this respect, when financial conditions become unusually expansive, is the fed funds rate the right tool to use to constrain or counteract such expansiveness? Or would it be better to use macroprudential tools such as leverage limits or loan-to-value requirements on residential real estate to keep financial conditions from becoming unusually expansive in the first place? I could imagine circumstances in which macroprudential tools might be used to tighten up the relationship between the fed funds rate and financial conditions. Would the use of such tools be helpful in achieving greater macroeconomic stability? At this stage, there are many more questions than answers. I would strongly encourage the authors and others to continue their work on financial conditions and in exploring how developments in the financial sector influence both the real economy and monetary policy. The financial crisis has demonstrated that financial market developments matter greatly. The paper successfully makes the case that it would be useful to have a good set of summary statistics to serve as benchmarks to keep track of such developments. It also would be useful to have a better understanding of how shifts in financial conditions should be considered in the ongoing conduct of monetary policy.

All of the Federal Reserve Banks have their areas of specialization. In my opinion, the New York Fed has at least four that are worthy of mention today because these affect the work of the New York Fed’s economists. First, we are the operational arm of the Federal Reserve, responsible for the implementation of monetary policy. This means we have a unique set of relationships with the securities dealer community and with respect to monitoring financial markets. It also means that we work very closely with the Board of Governors and the Federal Open Market Committee (FOMC) in implementing monetary policy. Second, we have a unique endowment and responsibility by virtue of our location. New York City is a global financial center, and finance is a very important aspect of the Second District’s economy. Most of the largest global financial institutions have a major presence here. With delegated authority from the Board of Governors, we are responsible for the supervision of most of the major financial institutions headquartered in our district, as well as numerous foreign banking organizations that do business here. Third, we are the fiscal agent for the Treasury and conduct the Treasury debt auctions on their behalf. Additionally, we are responsible for Fedwire, which along with Clearing House Interbank Payments System (CHIPS), is one of the two large-dollar, real-time payment systems in the U.S. Fourth, we have a unique set of international duties. We provide banking services to foreign central banks, including investment of reserves and administration of foreign exchange swap lines.