federal reserve confronts many challenges when trying to extract relevant information from financial market prices - not least because these prices reflect the market's interpretation of our outlook as well as its independent assessments. third, the market's disciplining of private entities is an important complement to the federal reserve's supervisory and regulatory functions, and the fed can enhance market discipline by improving the flow of information from these regulated entities to the markets. i will begin with a discussion of how markets, in my judgment, inform the monetary policy process, and then turn to the role of markets in the supervisory and regulatory process. financial markets and monetary policy markets affect monetary policy predominantly through the information provided by asset prices. the available menu of prices is extensive, including those of treasury securities ( nominal and real ), corporate debt, equities, and derivatives. these prices embed investors'expectations of the future paths of economic growth, inflation, and financial conditions. at least as important, these prices also can provide some insight into the uncertainty surrounding likely outcomes. monetary policy makers can use economic models and statistical techniques to extract the views of market participants about these key macroeconomic variables. nellie liang, wayne passmore, daniel covitz, and diana hancock, of the board's staff, contributed to these remarks. let me cite a few simple examples of how we interpret asset prices. through open market operations, the fomc sets the target federal funds rate, which is the overnight rate at which depositories lend to each other the balances they hold at the federal reserve. interest rates for periods extending beyond that very short horizon, however, are established by market participants rather than the fomc, although members of the committee may be able to influence these longer - term rates somewhat through what is affectionately described as " open mouth operations. " in this way, market - based interest rates reflect primarily the path investors expect for monetary policy. that expected path is of keen interest to us as policymakers. the market's view of very near term policy is reflected in futures contracts on federal funds. futures on eurodollars provide information on expectations for the period beyond the next six months or so. for longer time horizons, investors'views can be determined from yields on medium - and long - term treasury securities. this determination is based on two estimates incorporated in the yield on a nominal treasury security, such as the ten - year note. the first estimate is essentially a weighted average of the current one - year rate

kevin m warsh : financial markets and the federal reserve remarks by mr kevin m warsh, member of the board of governors of the us federal reserve system, at the new york stock exchange, new york, 21 november 2006. * * * thank you for inviting me to speak about the role of financial markets and market discipline in federal reserve policymaking. as chief financial officers and business leaders, you work assiduously to incorporate real - time information about your companies - and about the competitive and economic landscape - into your decisionmaking. similarly, financial market participants quickly assimilate publicly available information to help judge the market clearing price for securities that you issue. indeed, this process is what makes the venue for today's discussion - the new york stock exchange, home of the world's deepest equities market - so appropriate. the nyse provides a platform for realtime, information - rich assessments of leading global companies, incorporating both an evaluation of the overall economic outlook and firm - specific considerations. it is also fitting to be speaking today before members of the securities industry and financial markets association, who trade in these markets daily. the federal reserve, too, relies on multiple sources of data to help achieve our dual mandate : ensuring price stability and achieving maximum employment. some of the data upon which we draw statistical indicators of activity and prices in the real economy - tend to be backward - looking and subject to considerable revision. other information we use is drawn from financial market prices ; although subject to rapid change and " noisy " market signals, this information can be considerably more timely and forward looking. in its role as a bank regulator and supervisor, the federal reserve also often looks to market prices to help assess the safety and soundness of financial institutions. today, i will discuss the role of financial markets in effective monetary, regulatory, and supervisory policy making by the federal reserve. in particular, i will discuss the potential for markets to inform the fed's policy judgments - even as our policies also affect markets. i will also describe the important role of markets in disciplining private entities. of course, the views i will express are my own and not necessarily those of my colleagues on the federal open market committee ( fomc ). 1 my remarks will cover three points. first, financial markets can inform and, in some cases, complement the actions of the federal reserve by providing timely information about the outlook for economic activity, inflation, and the health of individual financial institutions. second, the