macroeconomic model. a landmark was reached this year when the bank began publishing its staff ’ s projection for the policy rate path that is compatible with attaining the inflation target within an acceptable timeframe. previous interest rate assumptions had proved unsatisfactory and even misleading. publication of the policy rate path has been welcomed and has facilitated the central bank in exerting the impact that it intends to have on market expectations. international agencies and foreign analysts who monitor economic developments in iceland have praised the central bank ’ s monetary policy implementation, transparency and professionalism. it is interesting to note that these assessments are at odds with widespread attitudes in iceland at the moment. in the climate that has prevailed recently, the central bank ’ s policy rate hikes have admittedly affected the exchange rate of the krona first, then demand much later. among the explanations is that policy rate hikes have not had what should have been their normal effect. this has complicated the bank in its efforts to constrain inflation in recent times. one factor has been the changes that took place in the mortgage loan market in autumn 2004 when the commercial and savings banks began competing with the housing financing fund ( hff ). the central bank ’ s policy rate hikes impact the interest rates of non - indexed lending by commercial banks and savings banks and the non - indexed end of the domestic bond market. however, for a long time they had little impact on long - term interest rates. some critics cite this as proof that the central bank of iceland ’ s measures do not have the same effect as those of other central banks. yet the development in iceland is by no means an isolated occurrence. the us experience offers an immediate example. the federal reserve began raising its federal funds rate early in 2005 in progressive steps until early this year, from 1 % to 5. 25 %. these hikes had no effect on long - term interest rates in the us, which have been broadly steady since 2005 apart with only minor fluctuations in either direction. us monetary authorities were puzzled by this development. i cite this example because it has been claimed that, unlike the central bank of iceland ’ s decisions, the impact of changes in the federal reserve ’ s rates is immediately transmitted in full to long - term interest rates. one reason for iceland ’ s limited success in keeping inflation in check has been precisely that the impact of the central bank ’ s policy rate hikes has not been transmitted in full to the mortgage loan market. in particular this is because one

, financial markets process new information efficiently : if some unexpected news arrives, markets adjust, sometimes even sharply, and they should. these types of movements are healthy, even necessary. they serve to quickly bring prices in line with underlying fundamentals. and markets that move quickly and adroitly do not necessarily produce unstable financial conditions. nor should those who take up the cause of ensuring financial stability protect individual investors or financial institutions from substantial losses or insolvency. to the contrary, a healthy and well - functioning financial system will tend to reward well - managed risk - taking and punish imprudence. i am inclined to interpret the federal reserve's interest in promoting financial stability as a desire to foster conditions that favor sustainable growth and stable prices. in this sense, financial stability concerns may rightly shape policymakers'views about the modal outlook for the federal reserve is by no means the only institution in the united states that is concerned with the stability and functioning of the financial system. indeed, the federal reserve works closely with a number of other u. s. government agencies on both a bilateral basis and jointly through the president's working group on financial markets to enhance the integrity, efficiency, orderliness, and competitiveness of financial markets and to maintain investor confidence. in addition, the federal reserve participates in a number of important international groups, such as the financial stability forum, the basel committee on banking supervision, the committee on the global financial system, and the committee on payments and settlement systems, to name just a few. indeed, in today's tightly integrated international financial markets, fostering financial stability requires a global perspective. the first bank of the united states was created in 1791 and lasted until 1811. the second bank of the united states operated from 1816 to 1836. originally, the preamble to the federal reserve act of 1913 stated that the federal reserve system was created " [ t ] o furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the united states, and for other purposes. " macroeconomic objectives were explicitly introduced later, with the 1977 amendment of the federal reserve act, which stated, " the board of governors of the federal reserve system and the federal open market committee shall maintain long - run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and