for release on delivery 12 : 00 p. m. est november 28, 2018 the federal reserve ’ s framework for monitoring financial stability remarks by jerome h. powell chairman board of governors of the federal reserve system at the economic club of new york new york, new york november 28, 2018 it is a pleasure to be back at the economic club of new york. i will begin by briefly reviewing the outlook for the economy, and then turn to a discussion of financial stability. my main subject today will be the profound transformation since the global financial crisis in the federal reserve ’ s approach to monitoring and addressing financial stability. today marks the publication of the board of governors ’ first financial stability report. earlier this month, we published our first supervision and regulation report. together, these reports contain a wealth of information on our approach to financial stability and to financial regulation more broadly. by clearly and transparently explaining our policies, we aim to strengthen the foundation of democratic legitimacy that enables the fed to serve the needs of the american public. outlook and monetary policy congress assigned the federal reserve the job of promoting maximum employment and price stability. i am pleased to say that our economy is now close to both of those objectives. the unemployment rate is 3. 7 percent, a 49 - year low, and many other measures of labor market strength are at or near historic bests. inflation is near our 2 percent target. the economy is growing at an annual rate of about 3 percent, well above most estimates of its longer - run trend. for seven years during the crisis and its painful aftermath, the federal open market committee ( fomc ) kept our policy interest rate unprecedentedly low - - in fact, near zero - - to support the economy as it struggled to recover. the health of the economy gradually but steadily improved, and about three years ago the fomc judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates. we therefore began to raise our policy rate - 2gradually toward levels that are more normal in a healthy economy. interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy - - that is, neither speeding up nor slowing down growth. my fomc colleagues and i, as well as many private - sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent. there is a

anachronisms, and, indeed, much as been written about the " disintermediation " of banks. for all the discussion of disintermediation, however, recent events suggest that depository institutions still play a crucial role in the global economy, particularly during times of turbulence. economists identify two related but distinct basic functions of banks in the economy. first, banks help direct capital to productive investments by identifying and monitoring suitable borrowers. second, banks provide liquidity to both borrowers and depositors. without minimizing the importance of the first function, i would like to focus on banks'role in creating liquidity. randall s. kroszner ( 2007 ), " liquidity and monetary policy, " speech delivered at the u. s. monetary policy forum, washington, march 9. what is liquidity? the term means different things to different people, and it wouldn't surprise me to find about 2, 000 different definitions among the lexis / nexis citations i mentioned earlier. today, i'll use a definition put forward by the bank for international settlements in 2000 : " liquidity is the ability to fund increases in assets and meet obligations as they come due. " as i will discuss in a moment, banks'role as liquidity providers is particularly crucial when markets are under stress. by pooling the assets of many depositors and offering term loans and credit lines to borrowers, banks effectively provide insurance against the uncertain liquidity requirements of households and firms. 2 while the liquidity needs of an individual household or firm may be difficult to foresee, in normal circumstances some individuals'and firms'high demands for liquidity will typically be offset by others'low demands ; hence, on average in normal times, the liquidity needs of large groups of households or firms are reasonably predictable. so when the savings of many investors are pooled together, a significant share of deposits can be used to make productive long - term loans, while a smaller share are held back as reserves to meet depositors'liquidity needs. loan commitments and lines of credit serve a similar function by allowing borrowers with uncertain future liquidity requirements to take on bank debt as needed. banks have been managing expected liquidity demands since the beginning of banking itself. this is accomplished today by, for example, holding some liquid assets such as treasury bills and possibly by funding a share of assets with long - term debt. a mismatch in the duration