critical importance to the future role of central banks and to their ability to maintain independence in formulating policy. i would like to explore these questions next in terms of two issues : the appropriate use of the federal safety net and the implications for monetary policy under a broadening mandate. safety net issues and moral hazard concerns the public policy actions directed toward bear stearns, primary dealers, and fannie mae and freddie mac have resulted in a significant expansion of the safety net and the federal reserve ’ s lending practices. now that more financial activities have gravitated outside of the banking system, more financial stability concerns seem destined to arise. our lending to support the takeover of bear stearns and to provide liquidity to primary dealers, for example, has taken the federal reserve well beyond its traditional approach of injecting discount window funds through the commercial banking system. this new financial framework, consequently, leaves us with several distinct choices. some, for instance, have suggested that we should extend more of a bank - like supervisory and regulatory framework over the major players in this broader financial marketplace in return for their having access to the discount window and other possible forms of public assistance. others, though, believe that such oversight and safety net responsibilities could lead to a range of problems and an even more fragile marketplace by compounding moral hazard problems and by reducing the role that market discipline could play in strengthening our financial markets and fostering innovation. in general, most recognize that we must think carefully about permanently extending the financial safety net and the federal reserve ’ s lending responsibilities. using the federal reserve ’ s resources to address breakdowns within a broader financial marketplace will necessarily benefit the assisted institutions, and the particular market segments or financial instruments associated with the problems. also it is important to keep in mind that many other market participants who have made more prudent decisions will be left at a disadvantage by having to compete without such special favors. for the federal reserve and other public authorities, such a role would thus involve a host of difficult decisions during a financial crisis and would potentially put the federal reserve in the position of having to pick the winners and losers from a broad range of financial institutions and investors. moreover, as the bear stearns experience shows, these decisions may have to be made in a hurry and with limited information in many cases, and any actions will likely raise questions about why some segments of the economy are protected while others are not. this is a difficult position to find ourselves in and its consequences must be carefully weighed before we

central banks, for instance, may have more to deal with than a financial crisis. in the current situation, we have experienced a severe financial shock coupled with a surge in global inflation. in the face of accelerating inflation, it is important that we not calibrate policy principally to deal with the financial crisis if it involves compromising to an unreasonable extent our ability to achieve our mandate for price stability. in the united states, core pce inflation has been above most definitions of price stability for the past four years and is poised to move even higher over the near term. the current stance of policy, while understandably calibrated for responding to the immediate financial crisis, will make it difficult to achieve our mandate for price stability over the longer term. finally, how can a central bank implement a financial stability mandate while maintaining the independence needed to actively pursue its other mandates? as i noted earlier, in the midst of a financial crisis, a central bank will likely be encouraged to take actions that are fiscal in nature or that directly affect the allocation of credit by targeting assistance or liquidity to specific institutions, markets or financial instruments. these actions necessarily affect expectations for similar actions in the future and bring forward political pressures that confirm such expectations for the future. in these circumstances, a central bank must be particularly aware of the difficult trade - offs between its financial stability and price stability mandate, especially where, like the united states, the central bank does not have a formal objective for price stability. concluding thoughts let me conclude by emphasizing the broader applicability of the issues that i have discussed today. although i have focused my remarks mainly on the federal reserve, i believe many of the issues raised by this period of financial stress have important implications for other central banks as financial market liberalization and development proceed around the world. maintaining financial stability in a changing financial system is a difficult task and, realistically, financial crises will occur in the future despite our best efforts to prevent them. addressing these issues requires a delicate balance between markets and policy intervention and requires recognition of the important macroeconomic implications for central banks. while there can be little doubt that central banks will continue to have responsibility for financial stability going forward, recent events raise important questions about how this mandate should be implemented. finally, for a market economy to work best, it must to the maximum extent possible find a balance between financial stability and a stable price environment and in doing so must be able to allow individual institutions to fail. the “ too big to fail ”