that there were no adequate procedures in place for liquidating the assets of systemically important financial institutions in an orderly fashion. in 2010, the u. s. congress passed an act that provides these procedures. simultaneously – and correctly – the congress removes the fed ’ s ability to engage in institution - specific assistance. the act does leave in place the fed ’ s ability to engage in broad - based market interventions of the kind that i ’ ve described, albeit with more congressional and white house oversight. this ability of the fed could be useful in the event that financial market turmoil in other parts of the world ever threatens to spread to u. s. credit and capital markets. cutting interest rates i ’ ve talked about how the fall in land prices generated a sharp increase in risk perceptions in financial markets and how that in turn led to a financial crisis. i now want to turn to what i see as the second key effect of the fall in land prices. this fall reduced the net worth of many households and firms. according to fed calculations, household net worth fell by over 25 percent from the second quarter of 2007 to the first quarter of 2009. households responded to this change in their balance sheets by forgoing consumption, which led in turn to a fall in output and employment, 3 and put downward pressure on the price level. the fomc reacted by lowering its target interest rate from 5. 25 percent in august 2007 to a range of 0 to 0. 25 percent in december 2008 ; it now remains at this lower bound. since inflation expectations remained stable, the fomc ’ s action has had the effect of lowering the real interest rate facing households. households, of course, typically respond to lower rates by saving less and demanding more consumption. similarly, firms undertake more investment projects. in this way, the fomc can and has partially offset the impact on the economy of the loss of net worth. indeed, the fomc would probably have liked to respond by cutting its target interest rate still further. the problem is that this target interest rate cannot go below zero. instead, the fomc has engaged in large - scale purchases of long - term assets issued or backed by the government. the goal of these transactions is to lower long - term real interest rates and again offset the impact on the economy of the net worth shock. so, to sum up, the fall in land prices triggered an increase in risk perceptions and a decrease in household net worth. the increase in risk led to

. the committee should provide a public contingency plan – that is, provide clear guidance on how it will respond to a variety of relevant scenarios. for example, the committee recently projected that in 2011, core inflation will be 1. 9 percent and that it will fall back in 2012 and 2013 to around 1. 7 percent. suppose hypothetically that core inflation, and the outlook for core inflation, has risen to 3 percent by the end of 2013, while unemployment has fallen to between 8 percent and 8. 5 percent. a public contingency plan would allow the public to know what the committee intends to do in that eventuality. i believe that public contingency planning will have many benefits. let me mention two. first, in recent statements and speeches, i have described why the fomc actions in august and september seemed inconsistent with the evolution of the macroeconomic data in 2011. this kind of inconsistency is much less likely to occur once the fomc has formulated an explicit public contingency plan. second, i ’ ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest. similarly, i ’ ve heard from consumers that policy bis central bankers ’ speeches uncertainty is curbing their incentive to spend. a public fomc contingency plan can help reduce the level of policy uncertainty being created by the fed. no contingency plan can ever be definitive. inevitably, the fomc will learn things that it did not expect to learn. and so there may be conditions that force the fomc to deviate from a chosen plan. however, having a public plan, and couching its decisions against the backdrop of that plan, will enhance federal reserve transparency, credibility, accountability and consistency. thank you for listening. i ’ d be happy to take your questions. references kocherlakota, narayana r. 2010. “ two models of land overvaluation and their implications ”. presented at “ a return to jekyll island : the origins, history, and future of the federal reserve ”, jekyll island, ga. willardson, niel. 2008. “ actions to restore financial stability ”. the region ( december ), federal reserve bank of minneapolis. willardson, niel, and luanne pederson. 2010. “ federal reserve liquidity programs : an update ”. the region ( june ), federal reserve bank of minneapolis. bis central bankers ’ speeches