, as ever, will provide the public with essential information to assess the health of banks and the overall financial system. to be credible, stress tests will also continue to provide significant information about how the fed does its work, so the public can understand the rigor and independence of our assessment process and how we come to our judgment of the firms we test. fidelity to these principles, embraced in the depths of the crisis by the first stress test a decade ago, does not mean that stress testing should never change or that it hasn ’ t changed over the years. we have learned from our experiences with the early tests and added useful features and adjustments. these include a counterparty default scenario, as well as a number of policy statements that more explicitly convey the principles we find important in a sensible stress testing program. stress testing has evolved, and must continue to evolve, to take on what we as supervisors learn from our work and what we can learn from others. each year, we have refined both the substance and the process of the stress tests, guided by our own experience and by critiques and suggestions from others. this feedback comes from a variety sources, including conferences such as this one, and i am confident that the presentations today will provide 1 / 6 bis central bankers'speeches insights that result in improvements in our stress tests. if stress tests are to continue to be relevant and effective, i strongly believe that they must continue to change : they must respond to changes in the economy, the financial system, and the risk - management capabilities of firms. evolutionary change has been a consistent principle of stress testing since the beginning, embraced by my predecessors at the board of governors and our supervisory staff and reflected in each cycle of tests. without such adjustments, regulators, banks, and the broader public cannot get a clear and dynamic view of the capital positions of the largest banks. stress tests each year have upheld the original principle of transparency around the capital adequacy of our largest banks. stress tests results should allow investors, counterparties, analysts and markets to make more informed judgments about the condition of banks. along with other regulatory measures, this transparency increases market discipline and it subjects the federal reserve to greater outside scrutiny and analysis. accountability is important not only for the usual reasons that apply in a democracy but also, in this case, because stress tests can only be effective when the public has confidence in the fed ’ s evaluation of the capital adequacy of banks. in effect, stress tests are also a

the length of the forecast horizon is particularly relevant at the current juncture in considering the projections for output growth and unemployment. because of the recent adverse shocks to the economy - - including turmoil in financial markets and the sharp increase in the prices of oil - - output growth in recent quarters has fallen below potential, and the range of projections from the april fomc meeting was 1. 5 percent to 2 percent for overall pce, while the central tendency was 1. 8 percent to 2 percent ( fomc, 2008 ). this is particularly true when the underlying level of inflation is reasonably close to the mandate - consistent rate, as i believe to be the case at the present time. the unemployment rate is, as best as i can judge, above the natural rate. similarly, sharp increases in the prices of many commodities have driven inflation above rates consistent with price stability. even under appropriate monetary policy, committee forecasts of inflation, output growth, and unemployment might not settle at their respective long - run rates within the three - year horizon, obscuring committee participants'views about these key parameters. this problem may currently be somewhat less acute for the current set of inflation projections, because inflation is projected to moderate to about 2 percent or below by the end of the projection period. nevertheless, to the extent that some slack in economic activity is projected to persist through 2010, that slack might well induce a modest further decline in inflation, implying that policymakers'projections for inflation in 2010 might be a bit higher than their assessments of the mandate - consistent inflation rate. empirical evidence my discussion of room for improvement relative to the federal reserve's current communication strategy has been theoretical. there is, fortunately, evidence from a number of countries that have adopted an explicit numerical goal for inflation, including canada, new zealand, sweden, and the united kingdom. 18 and there is also evidence from the experience of the european central bank ( ecb ), which has not adopted an explicit numerical goal but has provided a fairly precise verbal description of its commitment to keeping inflation " below, but close to, 2 percent in the medium term. " 19 further details on the experiences of these countries - - as well as other economies that have adopted explicit numerical inflation objectives - - may be found in mishkin and posen ( 1997 ), bernanke and others ( 1999 ), and mishkin and schmidt - hebbel ( 2001, 2007 ). see ecb ( 2003, p. 6 ).