fail. " it is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk - takers during the boom period. the existence of too - big - to - fail firms also violates the presumption of a level playing field among financial institutions. in the future, financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk - taking. also urgently needed in the united states is a new set of procedures for resolving failing nonbank institutions deemed systemically critical, analogous to the rules and powers that currently exist for resolving banks under the so - called systemic risk exception. conclusion the world today faces both short - term and long - term challenges. in the near term, the highest priority is to promote a global economic recovery. the federal reserve retains powerful policy tools and will use them aggressively to help achieve this objective. fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit. despite the understandable focus on the near term, we do not have the luxury of postponing work on longer - term issues. high on the list, in light of recent events, are strengthening regulatory oversight and improving the capacity of both the private sector and regulators to detect and manage risk. finally, a clear lesson of the recent period is that the world is too interconnected for nations to go it alone in their economic, financial, and regulatory policies. international cooperation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.

donald l kohn : the economic outlook remarks by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, at the atlanta rotary club, atlanta, 8 january 2007. * * * thank you for inviting me to fill in for jack guynn today to discuss the economic outlook for the new year. those are big shoes to fill. jack played a prominent and constructive role in the federal reserve system, as i know he did in the atlanta community, bringing his vast experience and uncommonly good sense to bear on a wide variety of important policy issues. as we enter 2007, the current economic expansion is now more than five years old. although it got off to a slow start, the expansion was quite strong from mid - 2003 through mid - 2006. over that period, a good deal of the slack in our nation's utilization of resources was taken up, and the unemployment rate reached its lowest level in five years. at the same time, however, core inflation - that is, inflation without potentially volatile food and energy prices - as measured by the price index for personal consumption expenditures, moved up from less than 1 - 1 / 2 percent to about 2 - 1 / 2 percent. to safeguard the gains made over the past quarter century in the achievement of price stability and to promote sustained economic expansion, the federal reserve in mid - 2004 began removing the considerable monetary accommodation it had earlier put in place. more recently, led by a sharp pullback in housing activity, economic activity decelerated in the second half of 2006 to a pace that was probably a bit below the long - term rate of growth in our nation's productive capacity. at the same time, decreases in energy prices have substantially reduced overall consumer price inflation of late, and core inflation has showed signs of slowing. my expectations for 2007 quite naturally rest on an assessment of how recent trends are likely to play themselves out. how long will the decline in housing activity hold back overall economic growth? what about spillovers from housing to other sectors? what are we to make of the recent weakness in manufacturing activity? will the recent good news on inflation persist? before venturing some guesses on these questions, i need to issue two caveats. first, events will probably unfold differently than currently seems likely, and the range of uncertainty around any forecast is considerable. that uncertainty does not, however, diminish the value of having and discussing an outlook. monetary policy must be based on our best