I would be much more concerned about asset valuations if financial market performance were disconnected from the economy’s performance—for example, if market volatility were very low and asset valuations elevated at a time when the economy was performing poorly and the outlook was highly uncertain. Stretched valuations would also be of greater concern if credit growth were unusually strong and financial institutions were becoming more leveraged and dependent on wholesale funding. The good news is that the substantially higher capital and liquidity requirements enacted in response to the financial crisis have helped to reduce the risks to financial stability. Relatedly, some critics have argued that our asset purchases have unduly distorted financial asset prices. My response to this critique is that monetary policy—including large-scale asset purchase programs—works through its influence on financial conditions. We turned to asset purchases to provide additional monetary policy stimulus when the federal funds rate was constrained by the effective zero lower bound. In buying longer-maturity Treasuries and agency MBS, we sought to reduce risk premia to provide additional support to economic growth at a time when the economy was operating far from full employment. The argument that monetary policy should avoid affecting asset prices—that it be somehow “neutral”—is not one that I find compelling. Such an argument essentially implies that monetary policy should not be utilized to achieve the Fed’s dual mandate objectives. Another recent critique is that the Fed has contributed to the low volatility of financial markets by making monetary policy too predictable.

While the future path  BIS central bankers’ speeches  5  of policy is not on a pre-set course and must remain data dependent, we will strive to be similarly effective in our communications going forward. As you know, we’ve taken a number of steps in recent years to increase transparency and improve our communications. This includes regular press conferences by the Fed chair following FOMC meetings; the publishing of growth, inflation, unemployment and federal funds rate projections by FOMC participants; a concerted attempt to lay out the guideposts that the FOMC will look at to assess progress toward our mandate; and an equally concerted attempt to lay out how our various policy tools―such as interest on reserves, overnight reverse repurchase (ON RRP) operations and reinvestment of principal payments from our asset holdings – will be used to pursue our objectives. We are also working to be better stewards in safeguarding financial stability. Simply put, we failed to act early enough and decisively enough to stem the credit excesses that spawned the financial crisis and Great Recession. The U.S. was not alone in this shortcoming, but, given our position in the global financial system, we should have done better. We’ve taken important steps through new legislative mandates and a broader effort to rethink our regulatory and supervisory framework. In particular, systemically important banking organizations must now hold capital and liquidity buffers that are better aligned with their risk profiles.