economic downturn has not significantly eroded the capital of most financial intermediaries, and the terms and availability of credit have not tightened to such an extent as to be significant factors in deepening the contraction or impeding the recovery. the use of a growing array of derivatives and the related application of more - sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries. derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management. because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. concentrations of risk are more readily identified, and when such concentrations exceed the risk appetites of intermediaries, derivatives can be employed to transfer the underlying risks to other entities. as a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient. individual institutions ’ portfolios have become better diversified. furthermore, risk is more widely dispersed, both within the banking system and among other types of intermediaries and institutional investors. even the largest corporate defaults in history ( worldcom and enron ) and the largest sovereign default in history ( argentina ) have not significantly impaired the capital of any major financial intermediary. likewise, record amounts of home mortgage refinancing and accompanying declines in mortgage asset durations have not imperiled the principal intermediaries in the mortgage markets, in substantial part because these institutions were able to use derivatives to transfer a significant portion of the convexity risk associated with prepayments of fixed - rate mortgages to investors in callable debt and issuers of putable debt. risks associated with the use of derivatives if derivatives and the techniques for risk measurement and management that they have facilitated have produced all these benefits, why do they remain so controversial? the answer is that the use of these instruments and the associated techniques pose a variety of challenges to risk managers. inevitably, risk - management failures occur, and in two instances - - the highly publicized cases of barings and long term capital management - - they proved destabilizing. those that question the net benefits of derivatives see daunting risk - management problems and thus foresee catastrophic outcomes. in particular, they fear that common deficiencies in risk management will result in widespread failures or

there is no long - run tradeoff that monetary policy can exploit. monetary policy is generally thought to be able to control inflation over the long run. in contrast, the maximum level of employment depends on structural forces and economic policies beyond the influence of monetary policy. in the short run, the two mandates often suggest the same course of action. this is particularly true in the presence of demand shocks. for instance, a negative demand shock in the economy will tend to raise unemployment and also put downward pressure - 7on inflation. in this case, both mandates suggest a need for monetary stimulus to increase demand in the economy, bring down unemployment, and keep inflation from falling significantly below target. however, a negative supply shock ( like a rise in oil prices ) will tend to increase both inflation and unemployment at first, which creates a short - run tradeoff for monetary policy. stimulus to bring down unemployment could push inflation even higher, but responding aggressively to inflation may have significant employment costs. the fomc lays out our approach to this potential tradeoff in its annual statement on longer - run goals and monetary policy strategy, which says the following : the committee ’ s employment and inflation objectives are generally complementary. however, under circumstances in which the committee judges that the objectives are not complementary, it takes into account the employment shortfalls and inflation deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. 10 in 2022 and into 2023, with unemployment near historical lows but inflation at its highest level in four decades, it was clear that this approach to meeting the dual mandate implied forceful tightening of monetary policy. more recently, with inflation having fallen substantially, even as the labor market has remained strong, it is worth considering how economic developments may have shifted policy tradeoffs and associated risks. inflation indicators how do we evaluate whether we are meeting our dual - mandate goals? starting with inflation, we look at the 12 - month change in the pce price index, which rose to more than 7 percent in mid - 2022 ( slide 1 ). as economies around the world gradually see paragraph 6 of the statement on longer - run goals and monetary policy strategy, which is available on the board ’ s website at https : / / www. federalreserve. gov / monetarypolicy / files / fomc _ longerrungoals. pdf. - 8reopened after pandemic - related shutdowns, demand picked