should such action be deemed necessary. in november, the fomc judged that additional monetary policy stimulus was needed to support the economic recovery and help ensure that inflation, over time, returned to desired levels. bis central bankers ’ speeches to implement that stimulus, the committee decided to expand its holdings of securities by purchasing an additional $ 600 billion in longer - term treasury securities by the end of the second quarter of 2011. after considering the costs and benefits of the action and recognizing that taking no action would have its own risks, i believe that the expansion of securities holdings was worth implementing to support the economy and make the recovery more durable. i don ’ t want to overpromise. this action is not a panacea. while it is still premature to judge the overall efficacy of the program, i believe that by exerting downward pressure on longer - term interest rates, it has provided and will continue to provide support for a vulnerable recovery. at the same time, i believe the risks associated with this action are manageable, that we have the safeguards in place to monitor evolving conditions, and, most importantly, that we have the conviction to act when necessary. based on our own research and that of others, evidence is accumulating that purchases of longer - term assets have been successful in exerting downward pressure on longer - term rates. 1 consistent with research on the effects of asset purchases, between august, when chairman bernanke in a speech first publicly suggested the federal reserve might take additional action, and november, when the action was taken, longer - term treasury rates fell as market participants priced in additional fed purchases. 2 however, since the announcement of the decision to purchase longer - term treasury securities, longer - term rates have actually increased. it might seem that the recent increase in rates contradicts the view that fed asset purchases put downward pressure on rates. however, the logic behind this view works in both directions. if the market expects the fed to respond to weak economic conditions by buying more assets, investors bid up the assets and rates fall. conversely, if the market expects the economy to strengthen, investors ratchet back expectations for fed purchases and reduce their bid for the assets, and rates rise. i believe that the current rise in rates is due to exactly this latter circumstance – a strengthening in market participants ’ outlook for the economy and a corresponding decrease in the market ’ s expectation for future accommodation. one concern that has been raised about asset purchases is the resulting expansion of

, deregulation, financial innovation, and other factors have led to recurrent instability in the relationships between various monetary aggregates and other nominal variables. ” 3 still, my colleagues and i will be monitoring a wide range of financial and economic developments very closely – including the growth of the money supply, inflation, and many other financial and nonfinancial variables – and, based on a full assessment of those developments, the fomc will withdraw monetary accommodation at the appropriate time. my view is that the elevated reserve balances would be inflationary only if they prevented the fomc from effectively removing monetary accommodation by raising interest rates when the time comes to remove such accommodation, and i am convinced that that will not be the case. the fomc has a number of tools at its disposal for raising interest rates. when appropriate, the federal reserve can put upward pressure on interest rates by raising the rate it pays on see ben s. bernanke ( 2006 ), “ monetary aggregates and monetary policy at the federal reserve : a historical perspective, ” speech delivered at the fourth ecb central banking conference, frankfurt, germany, november 10, www. federalreserve. gov / newsevents / speech / bernanke20061110a. htm. bis central bankers ’ speeches reserve balances. moreover, we have developed new tools that will allow us to drain reserves if necessary. in particular, we can drain large volumes of reserves by replacing them with repurchase agreements and term deposits. finally, we can always sell the securities we purchased. such sales would not only drain reserves but would also put direct upward pressure on longer - term rates. conclusion overall, the recovery in economic activity to date has been uneven and has not been sufficient to reduce unemployment noticeably. but i am encouraged by signs that the recovery may have gained traction recently. and i believe that sustained gains in consumer spending and business investment and a further easing of credit conditions will reinforce each other, leading to greater confidence and improving the prospects for an extended expansion that, over time, will reduce unemployment to a level consistent with full employment. at the same time, i anticipate that inflation will remain subdued. finally, i believe that the actions taken by the fomc to support the economic recovery are appropriate, and i am confident in our commitment to monitor economic conditions and take action as needed. bis central bankers ’ speeches