janet l yellen : panel discussion on “ monetary policy – many targets, many instruments. where do we stand? ” speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the “ rethinking macro policy ii, ” a conference sponsored by the international monetary fund, washington dc, 16 april 2013. * * * the views i express here are my own and not necessarily those of my colleagues in the federal reserve system. thank you to the international monetary fund for allowing me to take part in what i expect will be a very lively discussion. only five or six years ago, there wouldn ’ t have been a panel on the “ many instruments ” and “ many targets ” of monetary policy. before the financial crisis, the focus was on one policy instrument : the short - term policy interest rate. while central banks did not uniformly rely on a single policy target, many had adopted an “ inflation targeting ” framework that, as the name implies, gives a certain preeminence to that one objective. of course, the federal reserve has long been a bit of an outlier in this regard, with its explicit dual mandate of price stability and maximum employment. still, the discussion might not have gone much beyond “ one instrument and two targets ” if not for the financial crisis and its aftermath, which have presented central banks with great challenges and transformed how we look at this topic. let me start with a few general observations to get the ball rolling. in terms of the targets, or, more generally, the objectives of policy, i see continuity in the abiding importance of a framework of flexible inflation targeting. by one authoritative account, about 27 countries now operate full - fledged inflation - targeting regimes. 1 the united states is not on this list, but the federal reserve has embraced most of the key features of flexible inflation targeting : a commitment to promote low and stable inflation over a longer - term horizon, a predictable monetary policy, and clear and transparent communication. the federal open market committee ( fomc ) struggled for years to formulate an inflation goal that would not seem to give preference to price stability over maximum employment. in january 2012, the committee adopted a “ statement on longer - run goals and monetary policy strategy, ” which includes a 2 percent longer - run inflation goal along with numerical estimates of what the committee views as the longer - run normal rate of unemployment. the statement also makes clear that the fomc will take

help reduce the costs imposed on banks at a time when capital and lending are already under pressure. policymakers should consider additional steps to reduce the possible procyclical effects of deposit insurance costs while still ensuring that riskier banks pay higher premiums than safer banks. one possibility would be to raise the level to which the designated reserve ratio may grow in benign economic environments, so that a larger buffer is available to be drawn down when economic conditions worsen and insurance losses are high. systemic risk authority the policy actions i've discussed would inhibit the buildup of risks within the financial system and improve the resilience of the financial system to adverse shocks. financial stability, however, could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the united states. macroprudential policies focus on risks to the financial system as a whole. such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated in a few key areas. a macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets. how could macroprudential policies be better integrated into the regulatory and supervisory system? one way would be for the congress to direct and empower a governmental authority to monitor, assess, and, if necessary, address potential systemic risks within the financial system. the elements of such an authority's mission could include, for example, monitoring large or rapidly increasing exposures – such as to subprime mortgages – across firms and markets, rather than only at the level of individual firms or sectors ; ( 2 ) assessing the potential for deficiencies in evolving risk - management practices, broad - based increases in financial leverage, or changes in financial markets or products to increase systemic risks ; ( 3 ) analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms ; and ( 4 ) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole. two areas of natural focus for a systemic risk authority would be the stability of systemically critical financial institutions and the systemically relevant aspects of the financial infrastructure that i discussed earlier. introducing a macroprudential approach to regulation would present a number of significant challenges. most fundamentally, implementing a comprehensive systemic risk program financial stability forum ( 2008 ), " report