Because of our experiences during the Global Financial Crisis, we knew that facilities themselves and their risks had a lifecycle from design, to standup, to steady state operation, and finally to wind down and closure. So, this helped us better anticipate and manage the risks of the pandemic crisis facilities. Vendor risk was a key area of focus for us, because vendors had critical roles in the operation of the crisis facilities including investment management and securities settlement. We had to create a fast and rigorous vendor onboarding and monitoring process, while at the same time recognizing new risks the vendors themselves faced across continuity, people, process, and technology. We made significant changes to our vendor management approach, many of which are serving us well today. During the pandemic, we've adapted to a fast-changing, uncertain environment. We've seen how risk management has helped us respond effectively, used lessons learned to improve our approaches, and identified areas where we want to further develop our capabilities. Building and Strengthening Organizational Resilience Since then, we have continued to focus on how risk management can help us strengthen operational resilience, which "is the ability to deliver operations, including critical operations and core business lines, through a disruption from any hazard. It is the outcome of effective operational risk management combined with sufficient financial and operational resources to prepare, adapt, withstand, and recover from disruptions." 14 A foundational component of resilience is that an organization can operate as a coordinated system in order to successfully adapt to changes in the environment.

But, as we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur, reflecting the inherent uncertainty in measuring r-star. 4 More than that, r-star is just one factor affecting our decisions, alongside economic and labor market indicators, wage and price inflation, global developments, financial conditions, the risks to the outlook… the list goes on and on. I’ve talked a lot about normalizing our policy around interest rates. In addition, about a year ago we started the process of gradually reducing the Fed’s balance sheet as we work to unwind the 2/4  BIS central bankers' speeches  asset purchase policies put in place during the crisis. In the now-standard Fed practice of communicate, communicate, and communicate, we published detailed plans well in advance on how we would gradually and predictably reduce the balance sheet.5 This process has proceeded smoothly without creating undue market disruption or volatility.6 With balance sheet normalization well underway, the Fed is studying the question of what exactly the new normal looks like. We have indicated that we plan to shrink the balance sheet to the smallest size consistent with the efficient and effective conduct of monetary policy—and that, in the long run, the asset side of the balance sheet will consist primarily of Treasury securities. 7 That’s our strategy, but its execution will depend on the operating framework of monetary policy, among other factors. Here, the Fed basically has two choices.