, if underplayed, rethink of the bank ’ s approach to supplying liquidity to the banking system. 13 while not quite a change on the scale of the overend and gurney crisis, this allows banks to access the bank ’ s facilities against a much wider range of collateral. the bank ’ s liquidity menu is now crystal clear, from which banks can now themselves choose. third, an entirely - new piece of policy machinery has been introduced – new not just for the uk, but internationally too. in the uk, this is called the financial policy committee or fpc. it was put on earth to do macro - prudential policy, to act as the bridge, to provide the missing link, to monitor the punchbowl before it is emptied and before aspirin needs administering. a year on, the fpc is doing just that. most recently the fpc has been navigating a particularly hazardous course. the financial system and economy are suffering the hangover from hell. the fpc ’ s task is to keep the system safe in the face of heightened risks of a relapse, while at the same time keeping the banks ’ credit arteries open to support the economy. both objectives are steeped in the bank ’ s history – and both objectives are embodied in the fpc ’ s remit. the fpc has a remit, too, to strengthen the structural fabric of the financial system, including through improved financial infrastructure. that objective has a place deep in the bank of england ’ s heart – from lancashire cotton mills of the 1930s, to 3i of the post - war years, to chaps of the 1980s, to vickers of the past few years. supporting and executing these new responsibilities will be a massive task. first and foremost, it will require the bank to have a rich and diverse set of skills. historically at least, the bank has been skills - rich but diversity - poor. but i am pleased to say that, too, has been changing for the better. this year ’ s graduate intake has close to a 50 / 50 gender split. one in seven of the intake is drawn from ethnic minorities. only a fifth come from oxford or cambridge. the pra ’ s arrival next year will broaden further the diversity of the bank ’ s skills and experience – legal, accountancy, banking, insurance. the bank ’ s policy committees, meanwhile, bring diversity of experience and expertise to the decision - making table, from

recession, making the output gap even larger. but it does at least succeed in bringing inflation back to target pretty promptly, well within the two - year point. indeed, inflation then falls somewhat below target thereafter, and interest rates fall back sharply, to a level below where they started. perhaps “ a ” stands for “ austere ”, or ( hyper ) “ activist ”. committee b – “ balanced ”, maybe? – is a little gentler in its approach. recognising that a significant existing output gap will do some of the work in reducing inflation it raises rates only a touch. inflation therefore takes longer to come back to target. but it just about gets there by the two - year point and, in the interim, the real side of the economy suffers less and interest rates are less volatile. finally, just for effect, i ’ ve added a comedy mpc ( committee c ). this lot are a bit more random and one can ’ t say their slightly drunken path for policy does much for the stability of anything in the economy, whether inflation, output or ( most obviously ) interest rates themselves. but it ’ s still sufficient to return inflation to target after two years. how is this possible? fundamentally, it ’ s because monetary policy begins to affect inflation not just at but strictly within two years. the peak impact may take some time to build, in this model, and it also persists for some time beyond two years. but as long as policy has any effect at all on inflation before the two - year point, there ’ s an infinite variety of interest - rate paths that can prospectively get you to any given rate at that date. we could invent policies for committees xerxes, yaphet and zog and still not be done. bis central bankers ’ speeches chart 1 : some policy simulations source : bank calculations. this raises a legitimate question. if you can do something about it before then, and all you care about are deviations of inflation from the target – which in our remit “ applies at all times ” – why not try and eliminate them as soon as possible, like our monotheistic friends on committee a? shouldn ’ t the policy horizon simply be the shortest time delay between changes in interest rates and their impact on consumer prices? well one problem is that one can ’ t be entirely sure about what that delay is. as a famous economist once said, monetary policy seems to operate with “ long and variable ”