the powerful interactions between financial and economic conditions. for example, monetary policy actions that improve the economic outlook also tend to improve the conditions of financial firms ; likewise, actions to support the normal functioning of financial institutions and markets can help achieve the central bank ’ s monetary policy objectives by improving credit flows and enhancing monetary policy transmission. still, the debate about whether it is possible to dedicate specific policy tools to the macroeconomic and financial stability objectives is a useful one that raises some important practical questions. a leading example is the question of whether monetary policy should “ lean against ” movements in asset prices or credit aggregates in an effort to promote financial stability. in my view, the issue is not whether central bankers should ignore possible financial imbalances – they should not – but, rather, what “ the right tool for the job ” is to respond to such imbalances. 8 the evolving consensus, which is by no means settled, is that monetary policy is too blunt a tool to be routinely used to address possible financial imbalances ; instead, monetary policy should remain focused on macroeconomic objectives, while more - targeted microprudential and macroprudential tools should be used to address developing risks to financial stability, such as excessive credit growth. prudential tools can be structural or cyclical in nature. examples of structural prudential tools are measures to ensure adequate levels of capital and liquidity in the banking sector or to increase the resiliency of the financial infrastructure. examples of cyclical prudential tools include varying caps on loan - to - value ratios on mortgages, as korea and hong kong have done ; dynamic provisioning for losses by banks, as employed in spain ; time - varying margin and haircut rules ; and countercyclical capital requirements, as have been set out in basel iii. in principle, structural and cyclical prudential tools could both damp the buildup of imbalances and bolster the resilience of the financial sector to a decline in asset prices by increasing its capacity to absorb losses. the diverse tools of financial regulation and supervision, together with appropriate monitoring of the financial system, should be, i believe, the first line of defense against the threat of financial instability. however, the effectiveness of such targeted policies in practice is not yet proven, so the possibility that monetary policy could be used directly to support financial stability goals, at least on the margin, should not be ruled out. conclusion the financial crisis of 2008 and 2009 will

ben s bernanke : the economic outlook testimony of mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the joint economic committee, us congress, washington dc, 28 march 2007. * * * chairman schumer, vice chairman maloney, representative saxton, and other members of the committee, thank you for inviting me here this morning to present an update on the outlook for the u. s. economy. i will begin with a discussion of real economic activity and then turn to inflation. economic growth in the united states has slowed in recent quarters, reflecting in part the economy ’ s transition from the rapid rate of expansion experienced over the preceding years to a more sustainable pace of growth. real gross domestic product ( gdp ) rose at an annual rate of roughly 2 percent in the second half of 2006 and appears to be expanding at a similar rate early this year. the principal source of the slowdown in economic growth that began last spring has been the substantial correction in the housing market. following an extended boom in housing, the demand for homes began to weaken in mid - 2005. by the middle of 2006, sales of both new and existing homes had fallen about 15 percent below their peak levels. homebuilders responded to the fall in demand by sharply curtailing construction. even so, the inventory of unsold homes has risen to levels well above recent historical norms. because of the decline in housing demand, the pace of house - price appreciation has slowed markedly, with some markets experiencing outright price declines. the near - term prospects for the housing market remain uncertain. sales of new and existing homes were about flat, on balance, during the second half of last year. so far this year, sales of existing homes have held up, as have other indicators of demand such as mortgage applications for home purchase, and mortgage rates remain relatively low. however, sales of new homes have fallen, and continuing declines in starts have not yet led to meaningful reductions in the inventory of homes for sale. even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels. developments in subprime mortgage markets raise some additional questions about the housing sector. delinquency rates on variable - interest - rate loans to subprime borrowers, which account for a bit less than 10 percent