, particularly with new products. as i noted in a speech last fall, firms should have greater motivation for applying proper valuation practices as part of good risk management. 1 at the center of these practices is the ability to make appropriate judgments about the quality of information being used for valuations. the process usually starts with an initial experimentation phase in which market participants learn a great deal about the product's expected performance and risk characteristics, preferably under different market conditions. conducting due diligence about new products can be costly and take time, but it is usually worth it. unfortunately, in some recent cases new products were developed very quickly and not properly road tested. in observing the valuation challenges, the " trust but verify " adage has equal application. market participants must ensure that they do not make valuation decisions based solely on excessive reliance on external ratings or evaluations, but that they also undertake their own assessment. and i would suggest that the value of independent due diligence on the part of market participants is especially high for newer and more - complex products. we all know that reductions in market liquidity played a large role in recent events, affecting the valuation of financial products. as with other risk areas, a number of practices were applied over the past nine months to identify and try to quantify the potential for disruptions in market liquidity. good practices included attempts by business lines and trading desks to randall s. kroszner, 2007, " innovation, information, and regulation in financial markets, " speech delivered at the philadelphia fed policy forum, philadelphia, november 30. embed market - liquidity premiums or to apply market - liquidity haircuts in pricing models and valuations. that is, there was an understanding that information in benign periods did not reveal the full set of potential outcomes, and that disruption of market liquidity had the potential to affect market prices by driving down the value of certain instruments and to create losses. conversely, problems arose when some managers did not make marketliquidity adjustments in their quantitative estimates and models and simply relied on recent information from good times, when there was ample liquidity. the basel committee's working group on liquidity began an exercise to review liquiditysupervision practices early last year and just last week issued a public report that builds on the basel sound practices for managing liquidity risk issued in 2000. the report emphasizes that financial institutions should conduct stress tests and contingency planning exercises to prepare for potential problems in

depreciating the cost over time, it provides an incentive to firms to invest in new capital goods. however, estimates of the quantitative effect of this tax incentive on investment are highly uncertain. and anecdotal evidence that firms are responding to the partial - expensing provision is not clear - cut. as a result, the impact of its removal is equally unclear. specifically, if partial expensing is having a very limited effect on firms ’ investment decisions, recent increases in business spending on equipment would be consistent with a stronger underlying pace of investment and faster gdp growth next year. finally, the sustainability of expansion will depend importantly on the pace of improvement in the labor market. to be sure, october ’ s payroll employment report was a positive sign. but as we saw earlier this year, one month of data does not make a trend. robust job gains in the coming quarters would be a convincing sign that businesses have become more confident about the future course of the expansion and would provide households with the wherewithal to maintain a healthy pace of spending growth. let me turn finally to a brief discussion of monetary policy. as i noted earlier, monetary policy has played an important role in providing support for the economy in recent years. but our work is not done. now that the expansion seems to have taken hold, we face the challenge of making the transition to a policy stance more appropriate for sustained economic expansion. our goal is to do so in a way that maximizes economic growth while sustaining the progress that we have made in achieving price stability. keeping inflation low and stable will contribute importantly to sustaining financial conditions conducive for further gains in economic activity. along these lines, the fomc has raised the target federal funds rate by 25 basis points at each of our last four meetings. as indicated in its most recent statement, the fomc continues to support the assessment that removal of accommodation will likely proceed at a measured pace. however, the committee will respond to changes in economic prospects as needed to maintain price stability, and it is those developments that will ultimately determine the level and term structure of interest rates.