reducing the federal funds rate. this means that we will need to allow our restrictive policy some further time to continue to do its work. i think we are in a good position to hold steady and closely watch how conditions evolve. i remain vigilant to the risks to achieving both components of our mandate. i believe that the current approach is a prudent way to manage those risks. evaluating risks is also fundamental to my other role as vice chair for supervision. in the same way that the public depends on monetary policy to support a healthy economy, the public also depends on a strong and stable financial system, so i would like a spend the remainder of my time discussing the prudential regulatory framework the fed uses to oversee banks and promote financial stability. conceptual framework underpinning our regulatory structure the prudential regulatory framework for the banking system is crucial to supporting an economy that works for everyone. as i have spoken about many times before, banks play a critical role in the economy in taking deposits and providing credit to households and businesses, but distress in the banking system can impose widespread costs on society. the government and taxpayers support the banking system through deposit insurance and other forms of government support. the system relies on banks having the capacity to remain resilient and continue lending to households and businesses through times of stress. - 3i will focus on three key components that underlie the resilience of the banking system : capital, liquidity, and resolution resources. each component plays a distinct role in fostering a safe and stable banking system by promoting the resilience of banks and limiting the impact of their distress or failure on the broader economy. the three elements work together : capital absorbs the impact of unanticipated losses ; liquidity enables a bank to meet funding withdrawals and provides time to right itself from a bout of stress ; and resolution resources facilitate an orderly wind down of a failing bank, which promotes financial stability and limits damage to the economy. capital is a core source of resilience, and common equity is the core of capital. common equity provides the greatest degree of loss absorbency, and it is the first line of defense against the risk of bank runs. sufficient capital makes a bank resilient both to cyclical economic downturns and unexpected shocks like we saw in march 2023. capital can absorb losses no matter the source, so it is an effective defense against a wide range of risks that banks face. we use different models to set capital

lengthened negative tail. consistent with a greater variability of earnings expectations, volatility of stock prices has been elevated in recent years. the increased volatility of stock prices and the associated quickening of the adjustment process would also have been expected to be accompanied by less volatility in real economic variables. and that does appear to have been the case. that is, after all, the purpose of a prompter response by businesses : to prevent severe imbalances from developing at their firms, which in the aggregate can turn into deep contractions if unchecked. as might be expected, accumulating signs of greater economic stability over the decade of the 1990s fostered an increased willingness on the part of business managers and investors to take risks with both positive and negative consequences. stock prices rose in response to the greater propensity for risk - taking and to improved prospects for earnings growth that reflected emerging evidence of an increased pace of innovation. the associated decline in the cost of equity capital spurred a pronounced rise in capital investment and productivity growth that broadened impressively in the latter years of the 1990s. stock prices rose further, responding to the growing optimism about greater stability, strengthening investment, and faster productivity growth. these are earnings - weighted projections for s & p 500 corporations as reported by securities analysts to i / b / e / s, a financial research firm. the roughly twenty - year history of this series confirms a pronounced upward bias in these long - term projections of analysts of approximately 4 to 5 percentage points in annual expected growth. there is little evidence, however, one way or the other, of bias to changes in the rate of growth. but, as we indicated in congressional testimony in july 1999, 2 "... productivity acceleration does not ensure that equity prices are not overextended. there can be little doubt that if the nation's productivity growth has stepped up, the level of profits and their future potential would be elevated. that prospect has supported higher stock prices. the danger is that in these circumstances, an unwarranted, perhaps euphoric, extension of recent developments can drive equity prices to levels that are unsupportable even if risks in the future become relatively small. such straying above fundamentals could create problems for our economy when the inevitable adjustment occurs. " looking back on those years, it is evident that increased productivity growth imparted significant upward momentum to expectations of earnings growth and, accordingly, to price - earnings ratios.