i will begin with his role in the conception of the ecb ’ s monetary policy strategy, his most important and enduring contribution to europe ’ s new monetary order. while chief economist of the bundesbank, otmar had written a paper claiming that a future european central bank should have a monetary target, essentially emulating what the bundesbank had achieved. but when he arrived at the ecb, his thinking changed. he realised the risk of a monetary target in a totally new environment. thus, a tailor - made strategy to achieve price stability was called for. it had to include both monetary and economic analysis – the ecb ’ s famous two pillar strategy. by explicitly taking into account the development of page 2 / 4 money and credit in its monetary policy strategy, the ecb was unique in the world of central banking. however, the ecb ’ s monetary policy strategy was questioned by some academics. they favoured inflation targeting. otmar never shied away from his critics and their arguments. consequently, he launched the ecb and its watchers conference. academics, journalists and market participants were invited. there were lively debates about the role of money in the ecb ’ s strategy. in his last contribution to the ecb and its watchers conference in 2006, otmar reviewed the active discussion about the role of money in the ecb ’ s monetary policy strategy over the previous eight years. otmar reminded the audience how some had argued that the role of money was too large. for others it was too small. otmar pointed out that his typical response had been that it was ‘ just right ’. this reminds me of a scene in the film ‘ amadeus ’. mozart, otmar ’ s favourite composer, asks the emperor whether he likes his new piece, the abduction from the seraglio. the emperor answers, hesitantly, that he does, but adds that occasionally the piece seems to have too many notes. ‘ i don't understand ’, mozart replies. ‘ there are just as many notes, majesty, as are required. neither more nor less. ’ hence, while more or fewer notes would have impaired mozart ’ s harmony, more or less emphasis on money in the ecb ’ s strategy would have created monetary instability. the fact is that the development, implementation and communication of the ecb ’ s new monetary policy strategy went smoothly and successfully. this was a remarkable achievement, given the lack of data and the high uncertainty about the structure and functioning of a new

great deal to like about this outlook. but we know that things often turn out to be quite different from even the most careful forecasts. for this reason, sound policymaking is as much about managing risks as it is about responding to the baseline forecast. our gradual pace of raising interest rates has been an exercise in balancing risks. we know that moving too fast would risk shortening the expansion. we also know that moving too slowly - - keeping interest rates too low for too long - - could risk other distortions in the form of higher inflation or destabilizing financial imbalances. our path of gradual increases has been designed to balance these two risks, both of which we must take seriously. we also know that the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realized. while fomc participants ’ projections are based on our best assessments of the outlook, there is no preset policy path. we will be paying very close attention to what incoming economic and financial data are telling us. as always, our decisions on monetary policy will be designed to keep the economy on track in light of the changing outlook for jobs and inflation. under the dual mandate, jobs and inflation are the fed ’ s meat and potatoes. in the rest of my comments, i will focus on financial stability - - a topic that has always been on the menu, but that, since the crisis, has become a more integral part of the meal. - 3historical perspective on financial stability the term “ financial stability ” has a particular meaning in this context. a stable financial system is one that continues to function effectively even in severely adverse conditions. a stable system meets the borrowing and investment needs of households and businesses despite economic turbulence. an unstable system, in contrast, may amplify turbulence and prolong economic hardship in the face of stress by failing to provide these essential services when they are needed most. for economic club of new york trivia buffs, i will note that the second ever presentation to this club by a federal reserve official was about this very topic. the date was march 18, 1929. weeks before, the fed had issued a public statement of concern over stock market speculation, and had provided guidance frowning on bank funding of such speculation. william harding, a former fed chair and then president of the federal reserve bank of boston, defended the fed ’ s actions in his talk. he argued that, while the fed should not act as the