general context ; mankiw and reis ( 2003 ) present related results. bodenstein, erceg, and guerrieri ( 2007 ) apply this reasoning to oil price shocks. see taylor ( 1979 ). ball ( 1994 ) presents estimates of the costs of disinflation for a variety of countries, including the united states. kiley ( 2008 ) provides evidence on how survey measures of inflation expectations in the united states have responded to economic developments and presents a model that attempts to explain the patterns in the data. which any deviations of inflation from long - run objectives are tolerated to allow the efficient relative price adjustments that i have described needs to be tempered so as to ensure that longer - term inflation expectations are not affected to a significant extent. global demand, trending commodity prices, and monetary policy my remarks so far have concentrated on the factors guiding the monetary policy response to a shock in the prices of commodities like oil that stems from a shifting balance of supply and demand in the specific market for these commodities. some might think that this focus misses the point in the current context, for at least two reasons. first, it has been suggested that the run - up in the prices of a broad range of commodity prices reflects, in part, global excess demand rather than sector - specific forces. and second, some have suggested that important commodity prices, like that of oil, may be on a more significant upward trend than is currently embedded in futures prices. it seems highly likely that, over the period since 2003, the rise in commodity prices has reflected strong global economic growth as well as some sector - specific factors, such as geopolitical tensions and other disruptions to the supply of oil. 12 in this regard, i share the views expressed by chairman bernanke at this conference two days ago in which he discussed a range of factors that have likely influenced relative commodity prices. 13 however, the fact that rising relative commodity prices have likely reflected many factors does not, by itself, change the analytical framework that i used to frame policy deliberations. as i highlighted at the beginning of my remarks, the most important drivers of inflation in the model of inflation dynamics i use are relative price shocks, inflation expectations, and the balance between aggregate demand and supply in the united states, as measured by some notion of resource utilization. if a shift in global demand affects both commodity prices and the demand for u. s. goods, the model i have in mind accounts for these influences on

tend to follow. many of you can recall the time and attention management devoted to section 112 of fdicia, which first required management reports and auditor attestations in the early 1990s. then the process became routine, delegated to lower levels of management, and stale to the changes in the way the business was being run. that is when the breaks in internal controls occur. unfortunately, trying to change the culture again is taking an exceptional amount of senior management and directors ’ time time taken away from building the business. the challenge, therefore, is to ensure that the corporate governance at community banks keeps pace with the changing risks that you will face in the coming years. another consequence of so much public attention on the breakdowns in controls at a few organizations is difficulty in finding good directors. one common theme we have heard during our examinations is the challenge facing banks of all sizes to retain, or attract, board members with the appropriate depth of understanding and commitment to sound corporate governance practices. many potential directors who have the experience needed are cautious about the potential liability they face. they also would rather join a board on which they are able to balance their time among all of the areas of oversight - strategy, marketing, financial performance, human resource development, community involvement, and so on - and not just governance, compliance, audits, and internal controls. this is another result of inconsistent attention over time to good governance practices. operational risk the federal reserve system is also conducting selected reviews for operational risk at community banks. by operational risk, i mean “ the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events, ” which is the definition used by the basel committee on banking supervision. at the federal reserve, we are placing an increasing focus on operational risk. in part, this is due to the significant improvements we have seen in the last two decades in interest rate and credit risk management. thus, weaknesses in governance and internal controls and operational risks become more apparent. for example, at one of our reserve banks we are conducting a pilot program specifically geared toward the operational risk activities of smaller community banks, those with less than $ 500 million in assets. one of the objectives of the program is to identify and test the key internal controls used by banks to mitigate operational risk exposures. the reviews focus on specific business processes with high operational risk - for example, the wire transfer and loan administration areas. based on the results of these reviews, the bankers involved