william c dudley : unconventional monetary policies and central bank independence remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the bank of mexico international conference “ central bank independence – progress and challenges ”, mexico city, 15 october 2013. * * * it is a pleasure to be here today. does the implementation of unconventional monetary policies pose a threat to central bank independence? my short answer, which i will elaborate on, is that while the threat is low, central bankers need to be cognizant of such risks, and clearly explain the motivations for their actions in order to mitigate such risks. the best way for central banks to maintain their independence is to use all their available monetary policy tools to best achieve their objectives. because the use of our unconventional monetary policy tools has been in pursuit of our dual mandate objectives of maximum sustainable employment in the context of price stability, i do not see the use of these tools as creating significant new risks to our independence. as always, what i have to say today reflects my own views and not necessarily those of the federal open market committee or the federal reserve system. to start, it is important to be clear on what we mean by unconventional monetary policies. in my remarks, i am going to focus only on the set of unconventional monetary policies that are relevant today in an environment in which central banks are constrained from lowering their policy rate any further due to the zero lower bound. i will not discuss the type of extraordinary interventions that occurred at the height of the financial crisis. 1 a starting point is that the independence of the central bank with respect to its budget supports its overall independence. the federal reserve ’ s traditional monetary policy framework has helped to assure this budgetary independence. the liability side of our balance sheet consisted primarily of currency and reserve balances on which we did not pay any interest. the asset side consisted primarily of treasury securities. there was no meaningful credit risk and the interest rate risk was limited because assets were generally held to maturity. this, combined with the zero cost of the fed ’ s liabilities, resulted in the federal reserve turning over a large amount of earnings to the treasury each year after covering all of its operating costs and retaining a small portion of its earnings to maintain a level of surplus capital equal to the amount of capital paid - in by member banks. thus, one key question is how this budgetary independence might be threatened through the use of unconventional monetary policies. after all, some

market or the distance between a foreclosed home and other surrounding homes. 4 moreover, neighborhoods that have significant concentrations of vacant dan immergluck and geoff smith ( june 2005 ), " there goes the neighborhood : the effect of single - family mortgage foreclosures on property values, " woodstock institute ; william c. apgar and mark duda, properties are not attractive to potential buyers, further challenging community - stabilization efforts. vacant homes also drain the coffers of municipalities, who must secure the homes from crime, keep them clear of trash, or in extreme cases, demolish them in order to maintain stability in the broader community. 5 for example, the chief of regional development for the city of cleveland estimates that the city will spend $ 65 million each year for five years to address costs related to abandoned properties. 6 not only are these costs high, they come at a time when tax revenues are generally decreasing because of declining home values. as state and local governments face diminished resources for dealing with vacant properties, many nonprofit organizations are likewise struggling with capacity issues. we have heard from many nonprofit community development organizations that foreclosures, and the impact on the neighborhoods affected by them, limit the organizations'ability to proactively engage in their previous development activities. as a member of the board of neighborworks america, i am keenly aware of the resources needed to deal with community stabilization in the wake of foreclosures. i am also aware of some promising examples of programs that neighborworks affiliates have developed to address problems associated with vacant and abandoned homes. in chicago, the neighborhood housing services redevelopment corporation, in cooperation with the city, has acquired hundreds of abandoned properties from several sources, such as hud, reo from financial institutions, and private owners. the properties are then rehabilitated and sold to owner - occupants, frequently with appraisal - gap subsidies provided by the city and federal resources. in other highly depressed housing markets across the country, municipalities often demolish the worst - quality units in order to mitigate safety hazards, reduce the total number of vacant homes, and restore the quality of life in the community. the purpose of our partnership with neighborworks america is to support local communities as they assess local housing conditions and evaluate responses to the challenges before them. the partnership will develop and deliver training designed to help local communities acquire, rehabilitate, and manage foreclosed reo. working with neighborworks america, the federal reserve will develop training