the rules are written, and how well they are interpreted and enforced. the legislation also sets up a new consumer bureau to address the gaps in unregulated and under - regulated financial firms, including mortgage finance companies, payday lenders and credit card issuers. its success will depend on whether it can appropriately identify those institutions exploiting those gaps and bring them into accepted standards of behavior. if the new bureau merely directs its resources to the already heavily regulated community banks, its beneficial effects will be minor. a targeted implementation program is critical if the consumer is to experience the hoped - for benefits. the legislation primarily hoped to address the public ’ s concerns about too - big - to - fail institutions – that is, those that are so large and interconnected that they will be bailed out by taxpayers no matter what risks and bad decisions they make because they are too “ systemically important ” to be allowed to fail. whether or not too - big - to - fail is addressed by this legislation depends on the leadership at the regulatory agencies when the next crisis occurs. the law now requires that the fdic take into receivership an institution that is designated as “ in default or danger of default ” for which the regular bankruptcy process would have systemic consequences. the process for taking this action is complex, requiring multiple regulatory parties to agree, the treasury secretary making the final determination with the president ’ s concurrence, and a court ruling that the action isn ’ t arbitrary and capricious. this will be an incredible challenge for the regulatory agencies. recent experience tells us that time is of the essence in a national liquidity crisis. it will be extremely difficult in practice to designate the largest institutions as insolvent, take them over and liquidate. the simple truth is “ too - big - to - fail ” will not go away easily. our largest institutions, even after their poor performance during this last crisis, remain financially and politically powerful institutions. it gives me pause, for example, that after the recent devastating experience of the global banking crisis, regulatory authorities are already backing off initial attempts to strengthen international capital requirements for these largest banks and financial firms. the basel committee just announced an agreement to establish for our largest global banks a tier 1 capital - to - asset ratio of 3 percent. this is a 33 - to - 1 leverage ratio. bear stearns entered this crisis and failed with a 34 - to - 1 leverage ratio. it leaves a small cushion for error and is a level

six months, and if history is any guide, we should see these increases accelerate over the course of the year. i would also note that our manufacturing survey points to expected gains in production and capital spending, which will contribute to improving job growth. even so, with the number of people out of work and the growing numbers of new job entrants, it will be some time before we see the unemployment rate well below 9 percent. given the immediate levels of slack in the economy, core inflation will remain modest in the near term. however, given the degree of monetary and fiscal stimulus in place in the economy currently, inflation should move higher over the medium and longer term, depending on what further steps are taken in these policy areas. also, the risk of further disinflation or outright deflation is small and, with an improving economy, should only decline further in the coming months. it is also noteworthy that long - run inflation expectations even now remain above 2 percent and should exert upward pressure on inflation during the course of the recovery. there are, of course, risks to the outlook. first, i am concerned about what might happen to the economy if we fail to deal successfully with our long - run fiscal challenges. the budget deficit is the largest we have seen, as a share of gdp, since world war ii. with these large budget deficits, total federal debt outstanding is almost $ 14 trillion, or about 94 percent of gdp. moreover, projections of deficits and debt show the federal debt will continue to increase, suggesting that fiscal policy is unsustainable and must be changed soon. as we have seen elsewhere, the reaction of interest rates and exchange rates to unsustainable fiscal policy can be sharp and disruptive. while specific recommendations on fiscal policy are not the purview of the federal reserve, i would urge serious consideration of proposals that have been offered by several groups, including the simpson - bowles deficit reduction plan. these are reasonable starting points for addressing the intractable problem that may have very serious ramifications for future monetary policy. a second concern i have is the consequences that will follow when we combine our current fiscal projections with a highly accommodative monetary policy. in essence, the federal open market committee ( fomc ) has maintained an emergency monetary policy stance in a recovering economy and has continued to ease into the recovery. i believe these actions risk creating a new set of imbalances, or bubbles. importantly, such