christopher j waller : financial stabilization and macroeconomic stabilization - two tools for two problems speech by mr christopher j waller, member of the board of governors of the federal reserve system, at the graybar national training conference, san antonio, texas, 14 april 2023. * * * thank you, kathy, it's a pleasure to be with you today. i am going to focus my remarks on the economic outlook, including how the recent turmoil in banking has affected that outlook. 1 relative to the federal open market committee's ( fomc ) economic objectives, data for the first quarter indicate that economic output and employment are continuing to grow at a solid pace while inflation remains much too high. the fomc raised its target range for the federal funds rate to 4 - 3 / 4 to 5 percent at its march meeting, and our statement noted that recent banking developments are likely to result in tighter credit conditions and to weigh on economic activity, hiring, and inflation. we didn't know then, and still don't know, the extent of these possible effects. so, perhaps even more closely than usual, i will be watching the data to evaluate the appropriate path of monetary policy. the sudden failure of silicon valley bank ( svb ) and signature bank, which contributed to stresses felt by other mid - size banks, was a classic bank run, in which the rapid withdrawal of funds by depositors created severe liquidity problems. svb was a specialty bank serving the tech sector. unlike other banks, where a substantial share of deposits is insured and verifiably safe, more than 90 percent of svb's deposits were above the $ 250, 000 - per - account limit for deposit insurance. additionally, those deposits were largely from many of the same types of businesses, resulting in additional risk. chair powell has directed vice chair for supervision barr to report by may 1 on svb's failure, including the federal reserve's supervision and regulation of the bank. based on what is already in the public record, svb seems to have done a terrible job managing its risks. a bank run that undermines confidence in other banks is the most fundamental risk to the financial system, and the fed, serving as the lender of last resort, was created in part to prevent such a development. the job of the lender of last resort is to provide sufficient funds to the banking system so that depositors can be confident they will be able to withdraw their funds on

in addition, the recently announced comprehensive economic stimulus package incorporated measures to enhance asset securitization and real estate liquidation, and a systematic framework for the disposal of nonperforming loans was consolidated. also, the japanese “ big bang ” financial deregulation is being implemented beginning with the amendment of the law on foreign exchange and foreign trade, which came into effect on april 1, 1998. under these circumstances, it is imperative for financial institutions to dispose expeditiously of their nonperforming loans as well as to reallocate their resources, in order to efficiently provide financial services that meet the needs of firms and households. along with the efforts to review and to improve the indirect financing system, it is necessary to reinforce direct financing through the expansion of risk capital offered in the capital markets, thereby encouraging the optimal allocation of funds in the economy. thus, the infrastructure for corporate accounting, disclosure of information, the system of taxation for financial services, and payment and settlement systems must be reviewed and improved expeditiously. the third task is to make steady progress in the reform of japan ’ s economic structure through measures such as deregulation and revision of the taxation system. the relaxation and abolition of various economic regulations would bring about higher productivity and economic growth rates in the long run by creating demand and promoting effective resource allocation among industries and firms. also, a revision of the taxation system aimed at improving the return on investment and supporting the optimal allocation of capital should have positive effects on the overall economy. restructuring of other economic systems is also required in order to smoothly shift resources. for example, the current employment system should be reviewed to promote mobility in the labor market. in addition, while efforts should be made to achieve greater efficiency in the public for details, see “ annual review of monetary and economic developments in fiscal 1996 ” in the bank of japan ’ s annual review 1997. sector, a nationwide consensus regarding the direction of the social security system reform should be reached as quickly as possible to ease the deep - rooted concerns in the household sector over the future burden of social security costs. the diverse events that the japanese economy experienced in fiscal 1997 demonstrated the importance of influencing expectations of various economic entities and to gain confidence among market participants in managing economic policy. in this regard, policy makers should strive to reduce the uncertainty concerning the outlook for the economy through improved transparency and consistency in their policy, while initiating effective measures in order to support economic activities of private - sector entities.