to this end, banks and other lenders must hold capital and liquidity to cover more of the risks they are taking, and they must have the capability to know what those risks are and to manage them effectively. critically, the financial regulatory structure needs to be modernized to bring oversight and market discipline to bear much more effectively on our rapidly evolving financial system and to give regulators more tools to deal with problems as they arise. at the federal reserve, we are improving our supervision and regulation to incorporate a broader view of emerging risks in the financial system and to become more effective at translating identified risks to supervisory oversight and, if required, remedial actions by the banks. monetary policy the picture i ’ ve drawn today – of a gradually improving economy, bolstered by better functioning financial markets and rising asset prices, but also still held back by the effects of the previous imbalances and corrections – has had important implications for monetary policy. because the economy and financial markets have improved, we have been able to wind down our special liquidity facilities and complete our purchases of long - term assets, like mortgage - backed securities. but because the recovery looks as though it will be gradual, and because it started with the economy in a deep hole, with large margins of underutilized labor and capital resources and low inflation likely to persist well into the future, the federal open market committee has stated that the current exceptionally low level of interest rates is likely to be required for “ an extended period ” to make progress toward our legislative goals of maximum employment and stable prices. the exceptionally low rates help offset the lingering restraining effects on economic activity and prices discussed earlier. in due course, as these restraints abate and the expansion matures, we will need to withdraw monetary stimulus to prevent the development of inflationary pressures. as in past cycles, our decision to begin tightening will be based not on a particular indicator or small set of indicators, but rather on forecasts of economic activity and inflation that take account of all available information. we will want to make sure the economy has enough forward momentum to continue absorbing the unused resources and to limit disinflationary pressure. but we will also want to be sure that we haven ’ t left highly accommodative policy in place so long that economic and financial conditions become conducive to future inflation. given the lags in the effects of monetary policy, that means we will not be able to wait until the unemployment rate is down close to its long -

term level. we will be watching inflation and inflation expectations carefully. inflation expectations have been stable, and i expect them to remain so. still, one risk is that, in line with past behavior, expectations could follow actual inflation down, imparting additional downward momentum to actual inflation. however, another risk is that expectations could increase, perhaps reflecting concerns about the federal reserve ’ s balance sheet or the federal budget deficit. for the moment, the public seems confident that the fed will keep inflation stable over time. we do not take that trust for granted : we monitor inflationary developments closely and stand ready to respond quickly and vigorously should the need arise. although the framework for deciding when and how fast to tighten monetary policy will not differ conceptually from the framework used in the past, our decision this time has some added complexities. in particular, our assets and the corresponding bank reserves are far larger than anything in our experience. we are developing the tools to manage our enlarged balance sheet in support of policy tightening when the time comes, and we will need to deploy them in ways that reinforce our ability to achieve our macroeconomic objectives. that won ’ t be easy since we ’ ve never had so many levers to manipulate before, but the fomc has been giving considerable thought to this issue, and i ’ m confident that we will find the right balance and sequence of actions to support our basic policy decisions. some implications of uncertainty as this last point illustrates, we are still in the midst of a very unusual period in u. s. economic history and therefore in the conduct of monetary policy. policy always operates in an environment of uncertainty. the events of the past three years have highlighted to me yet again our limited knowledge of the dynamics of the financial system, the economy, and the interactions between them. i can be reasonably certain of only one point : my economic forecast is highly likely to be wrong – but i don ’ t know how. one implication of this pervasive uncertainty is that any statement about the future path of monetary policy must be conditional – dependent on the economy following the expected path. although the fomc has stated that the federal funds rate is likely to remain exceptionally low for an extended period, this statement explicitly depends on an economic outlook similar to the one i have given today. we cannot provide a precise timetable for when short - term interest rates will begin to return to normal because that depends on the evolution of actual and projected activity and inflation. another implication of uncertainty is