borrowing costs for households rose. furthermore, a rise in long - term rates would have effects beyond just households — it also would dampen business investment in capital goods through a higher cost of capital. how manageable would this scenario be? like the wealth effect, these added interest - rate effects operate with a lag, so, again, there probably would be time for monetary policy to respond by lowering short - term interest rates. this obviously would not be a “ slam dunk, ” but in many circumstances it would seem manageable. a matter of more concern is whether this scenario would lead to financial disruptions that could cause spending to slow sharply and quickly. one issue that receives a lot of attention is the increasing use of potentially riskier types of loans, like variable rate and interest - only loans that may make borrowers and lenders vulnerable to a fall in house prices or increase in interest rates. i believe that the odds of widespread financial disruption on this count are fairly slim, although, clearly, some borrowers are vulnerable. first, the shift to these new instruments appears relatively modest overall. second, the equity cushions available to both borrowers and lenders still seem, on average, to be pretty substantial. this is evident in looking at loan - to - value ratios, which have fallen, on average, as home valuations have risen faster than mortgage debt. in addition, most financial institutions enjoy comfortable capital positions, so they ’ re better able to weather any problems with their mortgage portfolios. finally, some of the risk associated with mortgages has been transferred from banks to investors, as banks have sold off securitized bundles of mortgage debt. these investors may be in a better position to handle the associated risk. so, while there undoubtedly would be some fallout from a substantial drop in house prices, the financial system and consumers appear to be in reasonably good shape to handle the situation. monetary policy i ’ d like to close my remarks by taking a step back from the home price story and putting it in the broader context of the economy ’ s overall performance — which, after all, is the chief concern of monetary policymakers. as i ’ ve emphasized, economic activity has been burdened by some major drags over the past several years. as a result, the fed has had to keep interest rates exceptionally low for a long time just to get respectable economic growth. in fact, respectable growth is all we have gotten — even with exceptionally low long - term yields and unexpectedly

robert t parry : monetary policy in a new environment - the us experience speech by mr robert t parry, president and chief executive officer of the federal reserve bank of san francisco, at the joint bundesbank / bis conference on “ recent developments in financial systems and the challenges for economic policy ”, held in frankfurt, 28 - 29 september 2000. * * * it ’ s a pleasure to have this opportunity to give you a us perspective on the challenges of conducting monetary policy in an environment of structural change. in the us, there is, of course, no modern - day parallel to the historic events in the financial sector here in europe. the formation of a monetary union and a multinational central bank poses precedent - setting challenges for policy. at the same time, the us has seen massive and rapid changes in its financial sector. i ’ ll argue, however, that while these changes in the us financial sector have posed challenges, they have not posed significant problems for the fed ’ s conduct of monetary policy for quite some time. of course, financial change was a major issue in policy 20 years ago. at that time, financial deregulation and innovation undermined the stability of the monetary aggregates, which were a central part of fed policymaking. since that history is probably familiar territory to you, i plan to review it only briefly. the bottom line is that by the mid - 1980s, we had relegated the monetary aggregates to a minor role. since then, the fed has been able to accommodate ongoing deregulation and respond to shocks in the financial sector by focusing on adjustments in the federal funds rate. more recently, the challenges for the fed have been on the real side of the economy - and here i ’ m referring especially to a technology shock. while a technology shock that boosts productivity is a wonderful thing, it also has created uncertainty about the proper course for policy. as i understand it, productivity growth rates have not yet begun to accelerate in europe. however, it would seem to be only a matter of time before the ecb will face the challenge of responding to a comparable technology shock. in any event, i ’ d say that our recent experience makes a good case study in conducting monetary policy in the face of great uncertainty - an issue of importance to any central bank. let me start with a brief look at the history of our experience with financial change. in the late 1970s, the buildup of us inflation pushed nominal interest rates up against the legal interest rate ceilings on