william c dudley : the challenges ahead remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the center for the new economy 2010 economic conference, san juan, puerto rico, 19 february 2010. * * * thank you very much and good morning. although this is my first visit to puerto rico in my current role, i have been here a number of times, going way back to a childhood visit with my parents. it ’ s a beautiful and special place, but i must admit that coming in february has some special advantages. i welcome this opportunity to talk with business leaders, workers and educators. my goals are to hear what issues are on the minds of people here and to let you know what the federal reserve has been doing to help improve the economy. so i ’ m very grateful to the center for the new economy ( cne ) for giving me the opportunity to speak to – and learn from – you. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee or the federal reserve system. i want to start by talking about the implications of the close economic ties between the mainland and puerto rico. since the economies of the mainland and the commonwealth are very tightly linked, what happens on the mainland has important consequences for puerto rico, as well. in the aftermath of the financial crisis, we anticipate that the mainland recovery will prove to be sustainable, and that this will ultimately benefit the economy here. but puerto rico faces some significant challenges beyond its ties to the weaknesses in the broader u. s. economy, including problems in its own financial sector. dealing with these problems forcefully and expeditiously is crucial to ensuring that puerto rico benefits fully from the expected economic recovery over the next few years. the fed is assisting in several ways : by setting the stage for a resumption of world economic growth, by helping to resolve problems in the u. s. mainland and commonwealth financial sectors and by partnering with puerto rican groups to make meaningful contributions toward resolving some of the commonwealth ’ s other underlying issues. puerto rico ’ s special economic relationship with the mainland puerto rico has what economists often call an “ open economy. ” what this means is that puerto rico is especially dependent on external trade, so what happens to the puerto rican economy is greatly affected by what is going on with its major trading partners. when demand from puerto rico ’ s export customers is weak, then sales and prices

past 13 years. • the first lesson is that our policy responses need to be holistic. in the heat of the battle, the right mix of fiscal, monetary and financial policies is needed. all of them need to play their part. interactions between them are important, as in earlier crises. • the second lesson is that within this holistic approach, fiscal policy must be in the lead in order to minimize scarring of our production capacity. it is important that the fiscal stimulus is not prematurely withdrawn but rather remains geared towards supporting ailing businesses. it may even have to be scaled up to buffer the effect of the renewed containment measures. timely and correct use of the next generation eu recovery package can and will play an important role in this respect as well. • the third lesson is that monetary authorities have to stand ready to act and contribute to tackling any escalation of the corona crisis. but beyond that, there are limits to what monetary policy can achieve. • with renewed fears about a resurgent corona pandemic and renewed restrictions imposed to contain it, aggregate demand is inelastic with respect to financing conditions. in such a situation, it would seem more fruitful to directly focus on financing conditions to ensure that demand can display its full elasticity once no longer constrained. the best that monetary policy can then do in support of the economic outlook, is to continue to neutralize the tightening effect that the pandemic would otherwise have on the highly accommodative financial conditions that were already in place pre - corona. • we have announced that at our december meeting we will recalibrate our monetary instruments. this will also include a reflection on the efficiency of the use of these instruments, with a view to providing effective support for the euro area economy. • the fourth and last lesson is that for the post - crisis recovery phase in the euro area, growth - enhancing structural reforms are key, because they attack problems at their roots. the inevitable but unprecedented fiscal spending will raise public deficits and debts substantially. future generations can only bear and redress such debt burdens if simultaneously structural measures are taken to protect the public investments needed to boost potential growth. • and with this, let me conclude.