on to say : “ however, if incoming information indicates faster progress toward the committee ’ s employment and inflation objectives than the committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated. ” in other words, what the fomc does going forward will depend on how the economy evolves, and how this affects the labor market and the inflation outlook. in considering the appropriate timing of lift - off, there are three important reasons to be patient. first, the committee is still undershooting both its employment and inflation objectives. unemployment is too high and inflation is too low. thus, monetary policy needs to be very accommodative in order to close these gaps relative to the committee ’ s objectives. second, when interest rates are at the zero lower bound, the risks of tightening a bit too early seem considerably greater than the risks of tightening a bit too late. a premature tightening might lead to financial conditions that are too tight, resulting in a weaker economy and an aborted lift - off. this would be problematic in that it would harm the fed ’ s credibility and, more importantly, would be difficult to rectify. the u. s. experience during the great depression and the japanese experience over the past two decades illustrate the risks of raising interest rates too soon, especially when inflation is running below the central bank ’ s objective. finally, given the still high level of long - term unemployment, there could be a significant benefit to allowing the economy to run “ slightly hot ” for a while in order to get these people employed again. if they are not employed relatively soon, their job skills will erode further, bis central bankers ’ speeches reducing their long - term prospects for employment and, therefore, the productive capacity of the u. s. economy. all that said, i hope the economic outlook evolves so that it will be appropriate to begin to raise interest rates sometime next year. while raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about. raising interest rates would signal that the u. s. economy is finally getting healthier, and that the fed is getting closer to achieving its dual mandate objectives of maximum employment and price stability. that would be very good

lending. there were obvious excesses in terms of underwriting standards, product design and risk management. but addressing those issues during the boom would have required the supervisor to absorb attacks that reining in some of these practices would make it more difficult for some low - and moderate - income households to become homeowners for the first time. system dynamics in thinking about interconnectedness, we also need to focus on system dynamics. by system dynamics, i mean how the different parts of the system interact. do they interact in a way that dampens a shock or in a way that intensifies it? to the extent that the system has important reinforcing rather than dampening mechanisms, then it may need to be modified. that may require significant re - engineering. let me give you some examples of reinforcing and dampening mechanisms : capital. when firms have incentives to continue to pay dividends to show they are strong that is a reinforcing or amplifying mechanism. the paying of the dividends depletes capital, making the firms weaker. in contrast, when firms have incentives ( or are forced ) to cut dividends quickly to conserve capital, that is a dampening mechanism. foreign exchange. when the debts of a country held by foreigners are denominated predominantly in the home currency, currency depreciation reduces the net debt burden – the value of foreign assets climbs relative to the asset claims of foreigners. the u. s. operates in a dampening regime in this respect. in contrast, when the debts of the home country are denominated in foreign currency, currency depreciation increases the net debt burden. some of the baltic countries are wrestling with this dilemma currently. some reinforcing mechanisms that we might want to engineer out of the financial system : • collateral tied to credit ratings. credit downgrades lead to increased collateral calls which drains liquidity, leads to forced asset sales, further weakening the firm subject to the collateral calls. i don ’ t have any great ideas on how to address this, but it is a problem that needs to be fixed. • collateral and haircuts. when volatility rises and that leads to increased haircuts, the result can be a vicious cycle of forced asset sales, higher volatility and still higher haircuts. • compensation tied to short - term revenue generation, rather than long - term profitability over the cycle. this causes risk - takers to take on too much risk because