raising short - term rates to protect its current earnings, inflation would rise and this would push long - term rates higher. this would just necessitate a bigger rise in short - term interest rates and a greater loss of earnings later. a much more important issue with respect to policy normalization is moderating the risk of a sharp snapback in longer - term yields. but this has less to do with the size of the balance sheet specifically than the challenge of normalizing the current stance of monetary policy in all its dimensions. there is always a risk that market participants will foreshorten the fed ’ s actions. market participants could collapse an extended sequence of steps back to the date of the first move towards normalization resulting in an abrupt tightening of financial conditions. the move to economic thresholds - based guidance for the fed funds rate should help in this regard. while the thresholds are certainly not triggers, they should help market participants adjust expectations about the likely timing of liftoff in a relatively continuous manner and guard against these expectations being pulled further forward in time than is warranted by changes in the economic outlook. nevertheless, we will need to communicate our broader intentions very clearly. even when purchases cease, the enlarged balance sheet will provide substantial ongoing stimulus. it is important to recognize that the fed could remain in this posture with policy “ on hold ” for a significant period. as the threshold framework should make clear, there is no fixed timeframe between completing purchases and raising short term rates. long - term yields rose sharply in 1994 and 2004 when economic recoveries got underway in earnest after sustained periods of unusually low short - term rates. compared to those episodes, the risk of a spike in long - dated yields this time around may be somewhat lower for two reasons. first, this risk is receiving much attention. big market moves are typically associated with surprises. for the market to reprice suddenly, i presume there would need to be some new information that led investors to significantly revise their view of the outlook or the fed's reaction function. second, the fed's expansion of its own balance sheet may be a stabilizing influence. for example, the rise in interest rates during the prior episodes was amplified by convexityrelated hedging generated by the lengthening of expected mortgage duration. this should be a less powerful force this time around because the fed holds a substantial portion of the agency mbs market. however, we should keep up our guard. the regulatory community must continue

to take steps to mitigate the vulnerability of the economy to a sharp rise in long - term rates. this includes monitoring banks ’ exposure to duration risk and the quality of their risk management and capital planning, while also looking outside of the banking system because some risks may reside elsewhere. in this regard, agency mortgage reits and the risk of large outflows from bond mutual funds are issues that deserve ongoing attention. conclusion the fomc is committed to the dual objectives of maximum sustainable employment in the context of price stability. currently we are falling well short of our employment objective and the restrictive stance of federal fiscal policy is a factor. on inflation, we are also falling short, but by a considerably smaller margin. as a consequence, we need to keep monetary policy very accommodative. i do not claim that there are no costs or risks associated with our unconventional monetary policy regime. but i see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery. bis central bankers ’ speeches i remain confident that the benefits of a stronger and earlier economic recovery will trump the costs associated with our unconventional monetary policy measures. thanks for your kind attention. i would be happy to take a few questions. bis central bankers ’ speeches