indicators continue to suggest that economic activity outside the housing and motor vehicle sectors is likely to post continuing healthy gains over coming quarters. although several regional manufacturing surveys have suggested that the weakness in factory production extended into december, the national purchasing managers'survey rose a notch last month. prices of many industrial commodities are typically sensitive to developments in the manufacturing sector, and these prices generally remain firm, as is consistent with sustained demand here and abroad. more broadly, last friday's employment report suggested no signs of cumulating weakness either in manufacturing or private service - producing industries. new job creation has remained relatively brisk in recent months ; over the fourth quarter, private businesses added an average of 119, 000 jobs to payrolls each month - only a little below the pace of hiring earlier in the year. and the unemployment rate remained in the neighborhood of 4 - 1 / 2 percent. on the whole, businesses seem to be reasonably upbeat. the reserve bank districts, including atlanta, report that most firms are anticipating good gains in sales over the coming year. the semiannual economic forecast of the institute for supply management, released in mid - december, was optimistic - perhaps surprisingly so in light of the recent slowdown in industrial activity. respondents indicated that capital spending in 2007 would increase at a robust pace similar to that for all of 2006. that businesses are beginning the year with a positive outlook is not surprising : profits have been high, encouraging business expansion, and external funding for capital projects remains readily available on favorable terms. and as i noted, firms in their hiring decisions seem to be acting on plans to increase output. most importantly, the data we have in hand suggest that consumer demand for nonhousing goods and services has been well maintained. the retail sales report for november was strong across the board, and surveys of consumer confidence show that, in the final months of 2006, households'views about business conditions and about their financial situations improved noticeably. spending and attitudes have been supported over recent months in part by solid gains in household income and employment. one caution is that some of the recent buoyancy in household attitudes and strength in consumer demand also may reflect the unwinding of earlier increases in gasoline prices, in which case part of the strong gain in spending in recent months may be transitory. another cautionary note is that the strength in consumer spending throughout 2006 received a considerable boost from the earlier rise in household wealth. in the wake of the current slowdown in house price gains, i expect that, over

daniel k tarullo : the present and future of community banking speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the federal reserve bank of new york community bankers ’ conference, new york, 8 april 2010. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * these are difficult times for many community banks, a reflection of the difficult times for the many workers and businesses across the nation who depend on the loans provided by your institutions. this morning i will address some of the problems that you currently face and offer a few thoughts about the future of community banking. before doing so, however, i thought it would be useful to explain my perspective on the federal reserve ’ s monetary policy posture, which will obviously have great significance for the economic environment in which community banks will be operating. specifically, i want to speak about what has become known as our “ exit strategy ” – that is, the means by which the federal reserve will bring to an end the extraordinary lending and monetary policies that it adopted in response to the financial crisis. planning and implementing an exit strategy in thinking about an exit strategy, it is important to distinguish between two types of policies that the federal reserve adopted, beginning in 2007 and continuing thereafter, beyond its sharp reductions in the target for the federal funds rate. first, the federal reserve created a number of liquidity programs, which provided well - secured, mostly short - term credit to various parts of the financial system that were under increasingly severe strains. among these were the term auction facility ( taf ), which auctioned short - term funds to banks ; the primary dealer credit facility, which served as a backstop liquidity provider for securities firms ; the term asset - backed securities loan facility ( talf ), which was designed to help revive the market for asset - backed securities, and others. second, and separately, the federal open market committee ( fomc ) undertook large - scale purchases of treasury securities, agency mortgage - backed securities, and agency debt. this unconventional monetary policy action was taken because the fomc, after having reduced short - term interest rates nearly to zero, determined that the severity of the economic downturn made additional stimulus necessary. in addition to improving conditions in mortgage markets, these asset purchases helped lower yields on long - term debt ; they also substantially increased the level of reserve balances that depository