rapid effects on commodity and other import prices, but monetary transmission through economic slack appears to affect inflation more slowly. i believe that uncertain times require a risk - management approach to policy - settinglooking not just at the expected outcomes, but also considering the most salient risks in setting the policy stance. in the current situation, with risks to inflation forecasts skewed to the upside, i believe policy judgments must be based on whether and when we see inflation actually falling in the data, rather than just in forecasts. although most forecasts see considerable progress on inflation in coming years, it is important to consider whether inflation dynamics may have changed in a persistent way, making our forecasts even more uncertain. my perspective on monetary policy how do these experiences and the principles of data dependence and risk management influence my views on current monetary policy? in 2019, well before joining the board, i took part in the federal reserve's fed listens event in chicago. a key takeaway from fed listens was the value of a sustained strong labor market that brings people off the sidelines - those who have been on the margins but who have skills that can be developed and the desire to be part of the workforce, if given a chance. just two weeks ago, we held another fed listens event to hear how businesses, families, and communities are adapting to changes in the post - pandemic economy. notably, we heard about the burden that lower - and middle - income families are feeling from high inflation. these events highlighted for me the importance of achieving both our employment and price - stability mandates. in our current economy, with a very strong labor market and inflation far above our goal, i believe a risk - management approach requires a strong focus on taming inflation. inflation poses both a near - and long - term threat. aside from the immediate effect of higher prices on households and businesses, the longer it persists and the more people come to expect it, the greater the risks of elevated inflation becoming entrenched. i think it is critical that we prevent an inflationary psychology from taking hold. this is not simply an abstract concept, but a risk i take seriously based on personal experience. my time doing dissertation research in russia in the mid - 1990s taught me just how disruptive and painful an extremely high - inflation environment can be. reports over the past few months have shown high inflation to be stubbornly persistent, while the labor market has remained strong. being data dependent, i

months in advance and cannot be readily reversed. so the approach will not stem a very fast drainage of liquidity. moreover, as one bank tightens lending conditions to restrict balance sheet growth, other banks facing similar pressure will react to limit any additional diversion of funding pressure onto their own balance sheets. the second is that a retrenchment in lending can have significant implications for the wider economy, as fewer funds are available to companies and households to support long - term investment and consumption. we are seeing some signs of that beginning to occur as highlighted in the most recent bank of england credit conditions survey. these defences suffer from a common shortcoming. while they may work well when one bank is facing funding pressure on its own, when liquidity pressures are widespread every bank will attempt to use them at the same time. the actions of one bank will work to negate those of a competitor in these circumstances as gains and losses of market share will net out. that implies an increase in the economy - wide costs of adjustment, posing increased risks to financial stability during the adjustment process. see, for example, bank of england : financial stability report october 2007. there is, however, one last line of defence left. a bank holding a buffer of reliable high quality liquid assets, such as treasury bills or other government securities, can draw on them immediately and directly in the event of a sudden withdrawal of market liquidity or an unexpected increase in its funding requirement. of course, safe, liquid assets offer lower returns than other types of assets, so there is an opportunity cost in maintaining such a liquidity cushion on the balance sheet. but such assets nevertheless provide the most readily available and reliable provision against a crystallisation of liquidity risk. unfortunately, banks ’ reserves of reliable liquid assets have proved insufficient to meet the recent funding shock. with hindsight, incentives to raise the efficiency of maturity transformation have lowered this safety valve in the system too far. i would like to examine in a little more detail the uk experience in this respect. in the midnineteenth century, uk banks held on average sixty percent of liquid assets as a proportion of total deposits, an extremely high ratio explained by the frequency of liquidity crises around that time. shortly after the 1866 overend and gurney crisis, the bank of england accepted a role as lender of last resort, leading banks to relax their extremely conservative ( and inefficient ) approach to liquidity. the average liquidity ratio dropped to around thirty