carefully weigh the risks. but the strong economy reassures me here : earnings are growing, many businesses have ample stockpiles of cash, expected bond defaults are below their long - run medians, and the pace of credit rating downgrades has slowed to a trickle. when i think about financial stability, i think most directly about resilience to shocks, and it would be hard to imagine a better test of that resilience than what occurred in the spring of 2020. banks met extraordinary demands for credit last spring from nonfinancial businesses and households while simultaneously providing forbearance on millions of existing loans and building substantial loss reserves, all without significant strains to their overall health. the largest banks at the core of the financial system are better capitalized than they have been in decades, and these institutions are sitting on large amounts of highly liquid assets while relying on relatively low levels of short - term funding. the banking sector is strong. i also see a resilient household sector. household credit is primarily owed by borrowers with prime credit scores, rising home prices have most homeowners flush with equity, and, as i noted earlier, households are sitting on a large stock of savings. it is true that there are structural vulnerabilities in the nonbank financial sector, particularly money funds and hedge funds, and these are being scrutinized by u. s. and international authorities, including the financial stability board under my chairmanship. 78 but i believe these risks are manageable, and i come down on the side of the research that concludes these and other concerns are best addressed by targeted financial regulation and supervision rather than the blunt tool of monetary policy. 89 at a crucial moment in our recovery from the covid - 19 event, the utility of using monetary policy to try to address financial stability concerns would be greatly outweighed by the costs to employment and growth. before ending, i ’ d like to reemphasize that i am quite optimistic about the path of the economy. while prices will run above our 2 percent target this year, i believe most of this increase will be transitory. after an exceedingly difficult year, we are poised to enter a robust and durable expansion. thank you again for the invitation to be here today, and i look forward to our discussion. 1 all of my remarks today represent my own views and not necessarily those of my colleagues on the federal open market committee. return to text 2 note : this speech

freddie mac grew more than tenfold, from $ 135 billion to $ 1. 56 trillion, and the share they hold of outstanding residential mortgages increased from less than 5 percent to more than 20 percent. 5 moreover, to finance their own holdings of mbs and other assets, in 2005 the two gses together issued almost $ 3 trillion in debt. today, the two companies have $ 5. 2 trillion of debt and mbs obligations outstanding, exceeding the $ 4. 9 trillion of publicly held debt of the u. s. government ( lockhart, 2007 ). the activities of the gses are not confined to debt markets ; because the gses engage in extensive hedging activities, these companies are among the most active users of derivative instruments. thus, by any measure, the gses have a significant presence in u. s. financial markets. 6 in most situations, policymakers can rely on market forces to constrain the risk - taking behavior of privately owned financial organizations. market discipline is effective because, normally, the creditors of private firms have powerful incentives to monitor the risk - taking and risk - management activities conducted by these organizations. in particular, if creditors believe that an organization is taking on increased risk, they will reduce their exposure to the organization or demand greater compensation for bearing the additional risk. these market responses act as a brake on an organization ’ s risk - taking behavior and consequently reduce the likelihood that the company will fail. unlike other private firms, however, the gses face little or no market discipline from their senior debt holders because of the belief among market participants that the u. s. government will back these institutions under almost any circumstances. as a result, increased risk - taking by the gses does not significantly increase their cost of funding or reduce their access to credit, as it would for other private firms. indeed, as i have already noted, gse debt trades at a narrow spread over u. s. treasury debt and at spreads below those of other highly rated financial institutions, including the largest u. s. bank holding companies. 7 moreover, the spread of gse debt over treasuries has been remarkably unresponsive to the recent problems of the gses ( including the turnover of senior management and the inability of either company to provide current financial statements ), suggesting that investors ’ faith in an implicit government guarantee remains unshaken. as i have also noted, their low cost of borrowing gives gses an advantage over market participants