whole and not be limited to the individual financial institution or the individual financial market. the term used to refer to this supervision of the financial sector is macroprudential policy, which has to be based on analyses of the financial sector as a whole. the bank for international settlements ( bis ) defines the objective of macroprudential policy as follows : “ … the objective of macroprudential policy is to reduce systemic risk by explicitly addressing the interlinkages between, and the common exposures of, all financial institutions, and the procyclicality of the financial system. ” new rules regulating the financial sector have now been adopted in the us. a new council, the financial stability oversight council, will be established to monitor risk in the us financial system. the council can propose stricter regulation of systemically important financial corporations, approve any proposals from the federal reserve to break up large banks and require that systemically important financial institutions other than banks are subjected to supervision. in the uk, a proposal has been made to assign responsibility for supervision and regulation of the financial sector to a subsidiary of the bank of england ( the prudential regulation authority ). a financial policy committee, similar to the bank ’ s monetary policy committee, will also be established within the bank. in the eu, the european systemic risk board ( esrb ) will be established and will probably be chaired by the president of the european central bank ( ecb ). we can distinguish between two approaches to the design of instruments to safeguard financial stability. one is to make the financial system more robust by, for example, reducing interdependency among financial corporations. the other is to curb procyclical behaviour in financial corporations. limitations on loan - to - value and loan - to - income ratios, which are applied in norway, are examples of rules that can have a stabilising effect. minimum capital requirements for financial institutions and liquidity and funding structure requirements are other examples of rules that will make high credit growth more expensive for financial institutions, and thereby for customers. rules to ensure that shareholders and creditors bear the cost if banks suffer substantial losses or have to be wound up will have a similar effect. financial vulnerability can build up more quickly in periods of expansion, partly because financial institutions then have a stronger inclination to take risk. this implies that regulations should be countercyclical, having the strongest effect when the risk of a buildup of imbalances is greatest. it is important that the rules

keep real interest rates below r * will eventually face rising inflation and inflation expectations, while a central bank that seeks to keep real interest rates above r * will eventually face falling inflation and inflation expectations. 3 my own and others'research suggests that the failure of the fed to respect this principle contributed to the great inflation of the 1970s, while the incorporation of this principle into fed policy in the 1990s and 2000s contributed to the achievement of stable and low inflation during and since those years. 4 so, even though estimates of r * are imprecise, i do not believe they should be ignored. instead, when thinking about monetary policy, i believe it is best not to ignore entirely an admittedly imprecise estimate of r * today, but instead to update that estimate as new data on inflation, inflation expectations, employment, growth, and productivity arrive. moreover, because monetary policy operates with a lag, and with inflation presently close to the 2 percent goal, it will be especially important to monitor inflation expectations closely using both surveys and financial market data to best calibrate the pace and destination for policy normalization. it will also be important to monitor both model - based and financial - market based estimates of expected future inflation - indexed real interest rates ( for example, 5 - year real rates 5 years forward ) suitably adjusted for term premium and liquidity effects as one indicator of longer - run r *. before the financial crisis, these 5 - year real rates 5 years forward averaged around 2 percent after a term premium and liquidity adjustment. since 2015, they have averaged about 0. 50 percent but recently have approached 0. 75 percent, also after a term and liquidity premium adjustment. given that real interest rates and economic growth tend to move together over the longer run, one possible source of these upward revisions in forward real rates could be that financial market participants may have become more optimistic about the growth potential of our economy. evidence also suggests that the term premium that investors require to hold longermaturity bonds has risen as well. the way forward if the data come in as i expect, i believe that some further gradual adjustment in the federal funds rate will be appropriate. as i mentioned earlier, i believe monetary policy today remains accommodative, and that, with the economy now operating at or close to mandate - consistent levels for inflation and unemployment, the risks that monetary policy must balance are now more symmetric and less skewed to the downside. raising rates too quickly could un