line with fundamentals today, may not be tomorrow. because they cannot rule out the chance that some asset prices might correct more than anticipated, policymakers must consider how the economy might withstand such a correction. corrections in interest rates and asset values may have the most potential for disruption when they impair the financial health of borrowers and lenders and thereby cause them to pull back even further than might be warranted by the change in rates or prices. in that regard, we have some reason to be optimistic that the players are well positioned to absorb these adjustments. we have already discussed the reasons for confidence that household borrowers will be able to meet their obligations. lenders, too, appear well positioned to weather any such adjustments. commercial banks remain highly profitable and well capitalized, and other financial intermediaries show few signs of widespread problems. i am encouraged by the way our financial system came through the very difficult circumstances of the last few years, including the plunge in equity values, the recession, the subsequent period of slow growth, and the spike in credit problems. to be sure, pockets of difficulty emerged, and lenders became more cautious, but, for the most part, credit continued to flow, and problems remained isolated, not systemic. our increasingly sophisticated financial market was able to effectively distribute risk so that lenders were sufficiently diversified to survive some quite stressful developments. in addition, financial markets have important automatic - stabilizer properties. if investors sense that asset - price adjustments are undermining the expansion, interest rates will fall back because investors will anticipate a lower trajectory for the federal funds rate. for its part, the federal reserve will adapt its monetary policy to unexpected developments in an effort to keep the economy on track toward high employment and stable prices. implications for the current policy setting that brings me to what i see as the implications of this analysis for the federal reserve ’ s current monetary policy of keeping the federal funds rate low and being patient in removing policy accommodation. i hope that the discussion has cast some doubt on the argument that this policy is generating substantial imbalances in the economy. i am not disputing the argument that current policy has contributed to higher asset prices, more household indebtedness, and strong activity in interest - sensitive sectors such as housing. but i am questioning the apparently firm conclusion of some that these developments represent distortions or imbalances that are likely to correct in an abrupt and harmful manner. at the very minimum, one cannot reach

similar circumstances will be trying to squeeze through the same door at the same time, in which case prices could adjust sharply. the second consideration is that regulators of financial institutions should strive to ensure that these institutions have risk - management systems in place that help to assess and control vulnerability to potential adjustments in interest rates and asset prices. in doing so, supervisors reinforce market discipline. banking supervisors at the federal reserve, for example, in the course of the ongoing examination process, have been paying close attention to the sorts of vulnerabilities we have reviewed and have been discussing these risks with the commercial banks they oversee. conclusion interest rates are at unsustainable levels, and monetary policy will need to tighten eventually if the economy is to be kept on a path to high employment and price stability. my remarks today were not focused on the medium - term macroeconomic outlook and its implications for policy. instead, i addressed a different and difficult set of issues for policymakers - whether policy adjustment should be made that might make the medium - term outlook less favorable but might at the same time lower the odds on longer - term economic instability stemming from possible imbalances in financial markets. this issue has been the subject of considerable research and discussion in recent years, and i have not had time to touch on all its aspects. in recent months some central banks have cited similar types of financial imbalances when they tightened policy. but the economies in which these central banks operate have been running at higher levels of resource utilization and have experienced faster increases in some asset prices than has the united states. my conclusion is that for the united states at this time, the balance of costs and benefits does not favor policy action to address possible imbalances. in the process, i hope that i have given you a sense of the difficult judgments facing a policymaker in an uncertain world and that you have also gotten a taste of the intellectual interest and excitement of working through such issues. this exercise is very similar to many others you would find in the public sector, and so i also hope you keep these challenges and rewards in mind when considering your career path.