janet l yellen : panel discussion on “ monetary policy – many targets, many instruments. where do we stand? ” speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the “ rethinking macro policy ii, ” a conference sponsored by the international monetary fund, washington dc, 16 april 2013. * * * the views i express here are my own and not necessarily those of my colleagues in the federal reserve system. thank you to the international monetary fund for allowing me to take part in what i expect will be a very lively discussion. only five or six years ago, there wouldn ’ t have been a panel on the “ many instruments ” and “ many targets ” of monetary policy. before the financial crisis, the focus was on one policy instrument : the short - term policy interest rate. while central banks did not uniformly rely on a single policy target, many had adopted an “ inflation targeting ” framework that, as the name implies, gives a certain preeminence to that one objective. of course, the federal reserve has long been a bit of an outlier in this regard, with its explicit dual mandate of price stability and maximum employment. still, the discussion might not have gone much beyond “ one instrument and two targets ” if not for the financial crisis and its aftermath, which have presented central banks with great challenges and transformed how we look at this topic. let me start with a few general observations to get the ball rolling. in terms of the targets, or, more generally, the objectives of policy, i see continuity in the abiding importance of a framework of flexible inflation targeting. by one authoritative account, about 27 countries now operate full - fledged inflation - targeting regimes. 1 the united states is not on this list, but the federal reserve has embraced most of the key features of flexible inflation targeting : a commitment to promote low and stable inflation over a longer - term horizon, a predictable monetary policy, and clear and transparent communication. the federal open market committee ( fomc ) struggled for years to formulate an inflation goal that would not seem to give preference to price stability over maximum employment. in january 2012, the committee adopted a “ statement on longer - run goals and monetary policy strategy, ” which includes a 2 percent longer - run inflation goal along with numerical estimates of what the committee views as the longer - run normal rate of unemployment. the statement also makes clear that the fomc will take

##bfcs, as they found raising fresh liabilities or rolling over of the maturing liabilities very difficult. drying up of these sources of funds along with the fact that banks were increasingly becoming risk averse, heightened their funding problems, exacerbating the liquidity tightness. measures taken by rbi to enhance availability of liquidity to nbfcs rbi undertook many measures, both conventional as well as un conventional, to enhance availability of liquidity to nbfcs such as allowing augmentation of capital funds of nbfcs - nd - si through issue of perpetual debt instruments ( pdis ), enabling, as a temporary measure, access to short term foreign currency borrowings under the approval route, providing liquidity support under liquidity adjustment facility ( laf ) to commercial banks to meet the funding requirements of nbfcs, housing finance companies ( hfcs ) and mutual funds, and relaxing of restrictions on lending and buy - back in respect of the certificates of deposit ( cds ) held by mutual funds. 31. in addition to these measures, a stressed asset stabilisation fund viz., idbi sasf, was set up to provide liquidity to nbfcs through purchase of securities of nbfcs which would in turn be refinanced by rbi through purchase of govt. guaranteed securities issued by the sasf. notwithstanding the market reports, the actual condition of nbfcs was not so alarming inasmuch as only one nbfc availed refinance from the sasf and no nbfcs went under. however, this dichotomy between perception and reality serves to show how susceptible the sector could be to reputational risk. thus, the significance of the above measures lies also in their ability to create confidence in the sector. the crisis did, however, highlight some regulatory issues concerning the non - banking financial sector, particularly risks arising from regulatory gaps, arbitrage and systemic inter - connectedness. a need was, therefore, felt to reflect on the broad principles that underpin the regulatory architecture for nbfcs keeping in view the economic role and heterogeneity of this sector and the recent international experience. it was felt necessary to examine in depth, the risks in the nbfc sector in the changed scenario and recommend appropriate regulatory and supervisory measures to address these risks with the aim of creating a strong and resilient financial sector which is vital for all round economic growth of the country. accordingly a working group