policy to push term premiums far down into negative territory, one should be prepared to accept that this approach may bring with it an elevated conditional volatility of rates and spreads. when we talk about the interplay of monetary policy and financial stability, i think that this kind of tradeoff is an important part of what we should be bearing in mind. indeed, maybe the term “ financial stability ” is a bit misleading, because the risk scenario that i am describing – and that may be among the most relevant when thinking about the costs and benefits of our current highly accommodative policies – need not be one that is so dramatic as to call into question the viability of any large financial firm or threaten an important part of the market ’ s infrastructure. rather, one scenario to be worried about may simply be a sharp increase in marketwide rates and spreads at an inopportune time, such that it becomes harder for us to achieve our dual - mandate objectives. having said all of this, i believe we are currently in a pretty good place with respect to the pricing of interest rate risk. the movement in treasury rates that we have seen since early may has led to somewhat tighter financial conditions in certain sectors – most notably the mortgage market – but has also brought term premiums closer into line with historical norms, and thereby has arguably reduced the risk of a more damaging upward spike at some future date. on net, i believe the adjustment has been a healthy one. finally, let me say a few words about last week ’ s fomc meeting. i voted with the majority of the committee to continue our asset purchase program at its current flow rate of $ 85 billion per month. it was a close call for me, but i did so because i continue to support our efforts to create a highly accommodative monetary environment so as to help the recovery along by using both asset purchases and our threshold - based approach to forward guidance. how should the pace of purchases evolve going forward? the chairman laid out a framework for winding down purchases in his june press conference. 9 within that framework, i would have been comfortable with the fomc ’ s beginning to taper its asset purchases at the september meeting. but whether we start in september or a bit later is not in itself the key issue – the difference in the overall amount of securities we buy will be modest. what is much more important is doing everything we can to ensure that this difficult transition is information on the chairman

jeremy c stein : research on the monetary transmission mechanism speech by mr jeremy c stein, member of the board of governors of the federal reserve system, at the “ banking, liquidity and monetary policy ”, a symposium sponsored by the center for financial studies, frankfurt am main, 26 september 2013. * * * let me start by thanking the organizers for including me in this event. it ’ s a great pleasure to be here with other old friends and colleagues to pay tribute to raghu, and to congratulate him not only on winning the deutsche bank prize for financial economics, but also on his new job as governor of the reserve bank of india. it ’ s an understatement to say that raghu has a few challenges on his hands in this new role, but having known him for more than 20 years, i can ’ t imagine anybody being better equipped – in terms of intellect, judgment, and strength of character – to handle these challenges. i would like to talk briefly about some recent research of mine, done jointly with sam hanson of harvard business school, on the monetary transmission mechanism. 1 as will become clear, our work is heavily influenced by some of raghu ’ s earlier writing, and in particular his famous 2005 jackson hole paper. 2 after describing what we find, i will try to draw some connections to the current monetary policy environment as well as some lessons about the interplay of monetary policy and financial stability. as always, i am speaking for myself, and my views are not necessarily shared by other members of the federal open market committee ( fomc ). in our paper, sam and i begin by documenting the following fact about the working of conventional monetary policy : changes in the stance of policy have surprisingly strong effects on very distant forward real interest rates. concretely, over a sample period from 1999 to 2012, a 100 basis point increase in the 2 - year nominal yield on fomc announcement day – which we take as a proxy for a change in the expected path of the federal funds rate over the following several quarters – is associated with a 42 basis point increase in the 10 - year forward overnight real rate, extracted from the yield curve for treasury inflation - protected securities ( tips ). 3 on the one hand, this finding is at odds with standard new keynesian macro models, in which the central bank ’ s ability to influence real variables stems from goods prices that are sticky in nominal terms. in such models, a change in monetary policy should have