##ide risks to the macroeconomy. however, it is important to recognize that financial markets can also turn around quickly, thereby reducing the drag on the economy as well as the degree of tail risk. therefore, the central bank needs to monitor credit spreads and other incoming data for signs of financial market recovery and, if necessary, take back some of the insurance ; thus, at each stage of the episode, the appropriate monetary policy may exhibit much less smoothing than would be typical in other circumstances. of course, while policymakers may need to react aggressively to financial market information that indicates a significant shift in macroeconomic risks, monetary policy would typically move back toward a more incremental approach once the risks to the macroeconomy have returned to more usual levels. risk management and the anchoring of inflation expectations an important proviso to my discussion thus far involves the other part of the dual mandate, price stability. a central bank must always be concerned with inflation as well as growth. as i have emphasized in an earlier speech about inflation dynamics, the behavior of inflation is significantly influenced by the public ’ s expectations about where inflation is likely to head in the long run ( mishkin, 2007a ). therefore, preemptive actions of the sort i have described here would be counterproductive if these actions caused an increase in inflation expectations and the underlying rate of inflation ; in other words, the flexibility to act preemptively against a financial disruption presumes that inflation expectations are well anchored and unlikely to rise during a period of temporary monetary easing. indeed, as i have argued elsewhere, a commitment to a strong nominal anchor is crucial for both aspects of the dual mandate, that is, for achieving maximum employment as well as for keeping inflation under control ( mishkin, 2007b ). how can a central bank keep inflation expectations solidly anchored so it can respond preemptively to financial disruptions? the central bank has to have earned credibility with financial markets and the public through a record of previous actions to maintain low and stable inflation. furthermore, the central bank needs to clearly indicate the rationale for its policy actions. policymakers also need to monitor information about underlying inflation and longer - run inflation expectations, and if the evidence indicates that these inflation expectations have begun rising significantly, the central bank should be prepared to hold steady or even raise the policy rate. the federal reserve ’ s recent monetary policy decisions the framework i have outlined here can be useful in understanding the rational

holding companies, ” notice of proposed rulemaking ( docket no. r - 1523 ), federal register, vol. 80 ( november 30 ), pp. 74931 – 32. the gsib has to satisfy both constraints. tlac encompasses both equity capital and eligible long - term debt. see board of governors of the federal reserve system ( 2016 ), “ federal reserve board proposes rule to support u. s. financial stability by enhancing the resolvability of very large and complex financial firms, ” press release, may 3. see board of governors of the federal reserve system and federal deposit insurance corporation ( 2016 ), “ agencies announce determinations and provide feedback on resolution plans of eight systemically important, domestic banking institutions, “ joint press release, april 13. bis central bankers ’ speeches the agencies found that five of the gsibs ’ plans fell short of the dodd - frank act ’ s standard and required those firms to fix the deficiencies in their plans by october of this year or potentially face more stringent prudential requirements. the agencies also identified lesssevere shortcomings in the plans of all eight gsibs, which the gsibs are expected to address in their next round of resolution plan submissions, due in july 2017. the deficiencies and shortcomings identified by the agencies touched on most of the categories i have just listed, especially liquidity, governance mechanisms, operational capabilities, and legal entity rationalization. i want to end by briefly addressing several criticisms that have been made of the dodd - frank act ’ s orderly liquidation authority and the board ’ s tlac proposal. one criticism is that there is no need for the backup orderly liquidation authority because the bankruptcy code provides an adequate framework for the resolution of any financial company. as title ii of the doddfrank act recognizes, however, the bankruptcy code may not be adequate to minimize the systemic impact of the resolution of a systemically important financial firm. the bankruptcy code does not direct the judge to take financial stability into account in making decisions, and it does not provide other important stabilizing features of the orderly liquidation authority, such as government liquidity support and stay - and - transfer treatment for qualified financial contracts. a related line of criticism holds that the orderly liquidation authority enshrines “ too big to fail ” and provides for taxpayer bailouts of systemically important firms through the orderly liquidation fund. however, under the board ’ s proposed tlac rule, a