large size of the federal reserve's balance sheet, the fomc is employing new tools to implement monetary policy. in particular, to raise the federal funds rate we increased the interest rate we pay on reserve balances that depository institutions hold at the federal reserve. we also employed an overnight reverse repurchase facility, through which we interact with a broad range of firms to help provide a soft floor for the federal funds rate consistent with our target range. 2 these new tools have worked well, and the federal funds rate and other short - term interest rates have increased slightly, as expected. we will continue to monitor financial market developments closely, and we can make adjustments to our tools if necessary to maintain control over money market rates. at our meeting last week, we left our target for the federal funds rate unchanged. economic data over the intermeeting period suggested that improvement in labor market conditions continued even as economic growth slowed late last year. but further declines in oil prices and increases in the foreign exchange value of the dollar suggested that inflation would likely see board of governors of the federal reserve ( 2015 ), " federal reserve issues fomc statement, " press release, december 16, www. federalreserve. gov / newsevents / press / monetary / 20151216a. htm. the committee's policy normalization principles and www. federalreserve. gov / newsevents / press / monetary / 20140917c. htm. bis central bankers ’ speeches plans are available at remain low for somewhat longer than had been previously expected before moving back to 2 percent. in addition, increased concern about the global outlook, particularly the ongoing structural adjustments in china and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. at this point, it is difficult to judge the likely implications of this volatility. if these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the united states. but we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy. as the fomc said in its statement last week, we are closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook. 3 now, i expect that in a

at our largest banks in 1974, for example. that is, the safety net weakens the connection between portfolio and leverage risks, on the one hand, and depositor and other liability costs on the other. insured depositors are simply indifferent, and other creditors too often less sensitive than they would be at other entities, to the risk taken by the bank because of both the reality and the perception of their own protection by the government. part of this sense of assurance comes from the enhanced prudential supervision of banking organizations required both to protect the government's interest as insurer and to replace the market discipline that bank management and depositors themselves used to provide but feel they no longer need, given the perceived guarantees of the safety net and supervision. a kind of vicious circle of government replacement of market oversight has been clearly set in motion. the result is a distortion in real resource allocation in our economy. the safety net enables banks to accumulate larger, riskier asset portfolios than would be possible in an intermediation process driven solely by market forces. in the absence of the safety net, these higher lending risks would have to be reflected in some combination of higher deposit costs, more liquid asset holdings, or a larger capital base. or, conversely, these adjustments would have constrained the risk - taking by banks. but, with the safety net, lower interest rates and higher credit availability are accorded riskier borrowers, benefiting speculative and riskier ventures at the expense of sounder ones. indeed, the safety net, other things being equal, as i noted earlier, facilitates the ability of riskier borrowers to translate their potential credit demands to effective control over resources, crowding out projects with higher prospective risk - adjusted returns. to be sure, the regulatory authorities, in an effort both to protect the taxpayer's interest and to avoid financial market disruptions, seek to discourage excessive risk taking. but rules, regulations, and supervision cannot substitute for market signals ; they can attempt only to filter out – and not always successfully – the worst cases of uneconomic risk taking. and, enhanced efforts to do so intensify the perception of private parties that their responsibility for self - protecting diligence is reduced. moreover, they add to misallocation of resources because of the necessary inflexibility and bluntness that accompanies governmental action. what options then are available to society to reduce the downsides of the safety net? to be sure, the safety net as