few years and i expect to see inflation begin to firm later this year. if this labor market improvement continues and the fomc is reasonably confident that inflation will move back to our 2 percent objective over the medium term, then it would be appropriate to begin to normalize interest rates. at their march meeting, the fomc removed language from the statement that indicated that we would be patient in beginning the process of normalizing monetary policy. but, as chair yellen remarked in her most recent press conference, removal of the word “ patient ” from the statement does not indicate that we will now be “ impatient ” to begin to normalize monetary policy. rather, the timing of normalization remains uncertain because how the economy evolves is also uncertain. when, hopefully, the data support a decision to lift off later this year, it does not mean that u. s. monetary policy will be tight. rather, we will simply be moving from an extremely accommodative monetary policy to one that is only slightly less so. i would view this as a positive signal about the progress we have made in restoring the u. s. economy to health. it is important to remember that near zero short - term interest rates and the large expansion of the federal reserve ’ s balance sheet were designed to be a temporary extraordinary treatment to help the economy regain its vitality, and not a permanent palliative. i remain confident that when the fomc decides to begin to remove policy accommodation that we have the requisite tools to support this decision. we have tested numerous tools including overnight reverse repurchase operations, term reverse repurchase operations and term deposit facilities to ensure that, when the time comes, lift - off can be managed smoothly. as the fomc has communicated, the primary tool will be interest on excess reserves ( ioer ), with overnight reverse repurchases as a supplemental tool to be used as needed to help ensure a firm floor under short - term interest rates. bis central bankers ’ speeches once normalization has begun, two important questions will be : how fast will it proceed? and how high will short - term rates ultimately need to go? how fast the normalization process will proceed depends mainly on two factors : how the economy evolves and how financial market conditions respond to movements in the federal funds rate target. if financial market conditions do not tighten much in response to higher short - term interest rates, we might have to move more quickly to achieve the appropriate

size of the banking system ’ s balance sheet by a dollar. keister ( 2016 ) shows that it is optimal to commit to providing liquidity to a bank that faces a run. moral hazard is addressed ex ante, by setting a pigouvian tax that gives incentives for the bank to invest in the optimal amount of liquid assets. the tax can be interpreted as liquidity regulation and supervision. goodfriend and lacker ( 1999 ), however, argue that neither constructive ambiguity nor extended supervisory and regulatory reach can effectively overcome the fundamental forces that cause a central bank to lend. they propose that the only way for a central bank to credibly limit lending is for it to build a reputation over time for restraining lending. carlson, duygan - bump, and nelson ( 2015 ) argue that central bank liquidity provision and liquidity regulations are complementary tools. the bank of england ( 2013 ) defines stigma as “ the risk that drawings from [ the central bank ’ s liquidity ] facilities may be taken as a signal ( by investors, depositors, rating agencies, regulators or even firms ’ own boards of directors ) of more serious weaknesses at the firm in question. see for example federal reserve ( 2007 ). bis central bankers ’ speeches this led to the creation of the term auction facility, or taf, which used an auction mechanism to allocate funds in the hope that banks would feel more comfortable borrowing if other banks were doing the same. the taf was a success and can perhaps teach us something about ways to mitigate stigma. the ecb seems to have had a different experience. its lending facilities do not appear to have suffered from stigma to the same extent as those in the u. s. or the u. k. 14 this is related to the fact that banks rely more consistently on central bank provided liquidity in the euro area. this difference could perhaps provide insights into what gives rise to stigma and how to address it. in any case, understanding stigma, and potential ways to mitigate it, seems like an under - researched area at the moment. 15 let me put aside stigma now and focus on moral hazard. an important development, which researchers should take into account when thinking about liquidity provision and moral hazard, is new liquidity regulation. 16 ulrich is not an optimist when it comes to the ability of regulations to mitigate moral hazard. as exhibited in figure 6, he notes that “ … managing liquidity risk is a core activity