’ s balance sheet. the final numbers aren ’ t in yet, but it now appears that the downturn in real gross domestic product ( gdp ) in the united states lasted about a year and a half, much shorter than the typical banking crisis downturn. peak to trough, output fell about 4 percent, less than half the typical decline seen in past financial crises. while there are still some significant downside risks to the economy, in general, the outlook is improving. of particular note, the capital markets – except for certain securitization markets – are now generally open for business. in addition, the big banks in the united states have been able to raise a large amount of equity capital to put themselves in a stronger position. i believe that federal reserve actions over the last year and a half have contributed very substantially to this improvement. but there still is a lot of work to do. smaller banks – especially those with large commercial real estate exposures – are under pressure, while households and smaller businesses find that their access to credit is still constrained. moreover, regulatory reform is essential to prevent this type of financial crisis going forward. we need to ensure that no financial institution is “ too big to fail. ” this means we need congress to enact a resolution mechanism that allows large, complex financial firms to be wound down smoothly, without the need for extraordinary interventions. in addition, we need to take steps to make the financial system as a whole more resilient and robust. this requires many steps – some already in train – including higher capital requirements for large banks, bigger liquidity buffers, and changes to ensure that compensation practices are consistent with safety and soundness and financial stability. it ’ s a long list – there is no single silver bullet – and it will take time, but the regulatory community and the political leadership will fail to meet our shared responsibility as stewards if we do not implement the necessary reforms in a timely and effective manner. outlook for the recovery and risks from the financial sector the u. s. economy has begun to recover. growth in the second half of 2009 was a bit stronger than expected and the pace of layoffs has diminished. we currently expect that the economy will keep expanding, but at a somewhat slower growth rate than during the second half of 2009 as the temporary boost from the inventory cycle fades and the effects of the stimulus bill gradually weaken. with modest growth, we expect price pressures to remain well contained. nonetheless, it ’ s far too early

william c dudley : the challenges ahead remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the center for the new economy 2010 economic conference, san juan, puerto rico, 19 february 2010. * * * thank you very much and good morning. although this is my first visit to puerto rico in my current role, i have been here a number of times, going way back to a childhood visit with my parents. it ’ s a beautiful and special place, but i must admit that coming in february has some special advantages. i welcome this opportunity to talk with business leaders, workers and educators. my goals are to hear what issues are on the minds of people here and to let you know what the federal reserve has been doing to help improve the economy. so i ’ m very grateful to the center for the new economy ( cne ) for giving me the opportunity to speak to – and learn from – you. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee or the federal reserve system. i want to start by talking about the implications of the close economic ties between the mainland and puerto rico. since the economies of the mainland and the commonwealth are very tightly linked, what happens on the mainland has important consequences for puerto rico, as well. in the aftermath of the financial crisis, we anticipate that the mainland recovery will prove to be sustainable, and that this will ultimately benefit the economy here. but puerto rico faces some significant challenges beyond its ties to the weaknesses in the broader u. s. economy, including problems in its own financial sector. dealing with these problems forcefully and expeditiously is crucial to ensuring that puerto rico benefits fully from the expected economic recovery over the next few years. the fed is assisting in several ways : by setting the stage for a resumption of world economic growth, by helping to resolve problems in the u. s. mainland and commonwealth financial sectors and by partnering with puerto rican groups to make meaningful contributions toward resolving some of the commonwealth ’ s other underlying issues. puerto rico ’ s special economic relationship with the mainland puerto rico has what economists often call an “ open economy. ” what this means is that puerto rico is especially dependent on external trade, so what happens to the puerto rican economy is greatly affected by what is going on with its major trading partners. when demand from puerto rico ’ s export customers is weak, then sales and prices