are likely to warrant exceptionally low levels of the federal funds rate for an extended period. " although it just might be a central banker's rationalized excuse for not knowing, i genuinely believe that more precise timing is unknowable. in my view, if policymakers insist on waiting until the level of real activity has plainly and substantially returned to normal – and the economy has returned to self - sustaining trend growth – they will almost certainly have waited too long. a complication is the large volume of banking system reserves created by the nontraditional policy responses. there is a risk, of much debated magnitude, that the unusually high level of reserves, along with substantial liquid assets of the banking system, could fuel an unanticipated, excessive surge in lending. see kevin warsh ( 2009 ), " defining deviancy, " speech delivered at the institute of international bankers annual meeting, new york, june 16. predicting the conversion of excess reserves into credit is more difficult to judge due to the changes in the credit channel. 7 financial market developments bear especially careful watching. they may impart a more forward - looking sign of growth and inflation prospects than arithmetic readings of stimulusinduced gdp or lagged composite readings of inflation. the rapid, global revaluation of asset prices – in both directions – has served as a hallmark of the past two years. monitoring this trend, and gauging its durability, will demand keen judgment. if asset prices find a new and enduring equilibrium, market participants and policymakers alike may well gain additional comfort that the real economy is poised for sustainable recovery. however, if asset prices retrace their recent gains, the real economy would be adversely affected. understanding risk premiums embedded in asset prices will be critical to this task. in general, risk premiums across asset classes fell significantly in the past six months, but remain elevated, roughly consistent with prior recession periods. some portion of the decline in premiums and the concomitant run - up in equity prices, for example, can be fairly ascribed to the abatement of tail risk that became apparent during the panic. option prices across broad equity market indexes show a substantial markdown in the likelihood of a substantial market correction. but, the broad and continued ascent in equities appears increasingly to reflect a new judgment about the modal outcome for economic growth and corporate earnings. if it turns out that equity risk premiums continue their recent trajectory, real economic performance

se, but rather against “ world economic forums ”. clearly, the risk is that support for restrictions on trade is not dead, only quiescent. in many important respects, the past half century has represented an uneven struggle to repair the close linkages among national economies that existed before the first world war. the hostilities bred of war, the substantial disruptions to established trading patterns associated with that conflict, and the subsequent poor economic performance over the next few decades triggered the erection of trade barriers around the world that have taken even longer to dismantle. to repeat that error would be a tragic act of foolishness and waste. central bankers can make two contributions to ensure an open trading system. for one, we should not hesitate to remind our fellow citizens of the manifest net benefits of free trade in goods, services, and assets, benefits that accrue not only to all trading partners on average but also especially to some of the least fortunate within those trading societies. i would further emphasize that the free market system has proven itself better than all other forms of organization dedicated to harnessing the underlying competitive forces of the division of labor and comparative advantage. for another, we monetary policymakers must keep hold of the anchor provided by price stability so as to support maximum sustainable economic growth over time. by fostering such economic performance, our arguments for free trade and open markets should find a receptive audience.