accounting standards and public disclosure - - complement these supervisory efforts by fostering healthy financial institutions and efficient capital markets. in the course of supervising financial institutions, the federal reserve has developed considerable familiarity with financial instruments, both derivative and non - derivative, that are characterized by a wide range of complexity and risk. we have learned that in supervising trading and derivatives activities it is the underlying characteristics of a financial instrument - - and how it contributes to the overall risk profile of the firm - - that are important, not the instrument ’ s name. two instruments that differ in name only may have entirely different treatment under existing legal and accounting frameworks, even though the economic risks ( including market, credit, liquidity, operational, and reputational risks ) they embody are identical. financial engineering can certainly create derivative instruments that combine risks in complex ways. but the same engineers can create cash instruments that appear simple and traditional, but may have greater risk than many instruments labeled “ derivative. ” indeed, placing financial instruments in regulatory or accounting pigeonholes without regard to their true risks and economic functions can create disincentives for prudent risk management. the federal reserve is increasingly emphasizing the need for institutions to manage the aggregate or portfolio risks of banking and de - emphasizing a focus on specific instruments. risk should be measured and managed comprehensively. that is, an institution should manage the dynamics of its portfolio rather than manage specific instruments. a focus on individual transactions can ignore the interaction of the specified instrument with other instruments. although portfolio theory is widely appreciated by bankers and regulators, putting its principles into practice in banking has not been easy. for example, past banking crises have, in part, reflected a failure by some institutions to recognize and limit concentrations of risk within their portfolios. the federal reserve is increasingly recognizing the need for supervisory and regulatory policies to be more “ incentive - compatible, ” in that they encourage sound risk management within an institution. furthermore, supervisory and regulatory policies are placing increasing emphasis on minimizing burden by using internal risk measurement systems, and by reinforcing supervisory objectives through market forces. we believe that market discipline - - supported by appropriate accounting standards and public disclosure - - complements our supervisory efforts by fostering strong financial institutions and efficient capital markets. we believe this approach is more constructive than rote adherence to rules and regulations that may not be consistent with the firm ’ s own risk management systems. consistent with these policies, the federal reserve and other banking supervisors have explored regulatory approaches that encourage more

ben s bernanke : implementing monetary policy remarks by mr ben s bernanke, member of the board of governors of the us federal reserve system, at the redefining investment strategy education symposium, dayton, ohio, 30 march 2005. the references for the speech can be found on the board of governors of the federal reserve system ’ s website. * * * among the most important of my duties at the federal reserve is serving on the federal open market committee ( fomc ), the body that makes u. s. monetary policy. nineteen men and women - the seven members of the board of governors and the presidents of the twelve reserve banks - gather in washington eight times each year to participate in fomc deliberations on the course of monetary policy. 1 if necessary, the fomc can also convene by conference call between regularly scheduled meetings. the fomc's decisions are guided by the dual mandate given to the federal reserve by the congress, which enjoins the committee to use its powers to pursue both price stability and maximum sustainable employment. to achieve its mandated objectives, the fomc must influence the course of the u. s. economy, helping it to grow rapidly enough to make full use of available resources but not so rapidly as to stoke inflation. how, specifically, does the committee exert this influence? the person in the street might tell you that the fed " controls interest rates. " that statement is not literally accurate. in fact, the fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on treasury securities. instead, the fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly. since many of you plan to work in the financial markets, i thought that you might find it interesting to hear some of the details of how u. s. monetary policy is actually implemented and how policy decisions affect asset prices and yields. i will begin by discussing how the federal reserve influences the federal funds rate, the one market interest rate over which it has fairly direct control. i will then discuss the effects of changes in the federal funds rate on the asset prices and yields that matter the most for economic activity and inflation. 2 monetary policy and the federal funds rate broadly speaking, the federal open market committee's principal task is to determine the degree of financial stimulus needed to steer the economy onto a desirable