pricing of default correlation. default correlation measures the tendency of firms to default at the same time. suppose a bank makes a set of loans that appear to be safe when looked at individually. whether the loans are likely to default at nearly the same time can represent the difference between whether the bank remains healthy or has the potential to become insolvent. for this reason, the modeling of default correlations, and how correlations change with economic conditions, is one of the most important inputs into measures of portfolio credit risk at banks. default correlations and how they are modeled are also important to bank regulators and are heavily emphasized within the basel ii capital standards. collateralized debt obligations, or cdos, are one of a number of financial instruments whose prices are sensitive to the pattern of default correlations. as a result, the prices of these instruments provide us with a forward - looking picture of the market ’ s perception of default correlations and an indication of how the risks of changes in correlation are priced. of course, as some of the papers in the conference demonstrate, the pricing of correlation - sensitive instruments is, putting it generously, somewhat less than straightforward. for that reason, there is substantial model risk involved in making inferences from these prices. nevertheless, the prices of these instruments provide a blurry view of default correlations that i expect will improve through time as credit derivatives markets continue to grow and mature. credit derivatives, like all derivatives, are in zero net supply, and, abstracting from the very important issue of counterparty credit risk, they neither add to nor subtract from the stock of financial risk in the economy. they do, however, provide new and more - efficient ways for sharing and hedging the risks that do exist, and they facilitate the transfer of those risks to those who are most willing to evaluate and bear them. as a consequence, as the credit derivatives market continues to develop and deepen, my guess, and it is just a guess, is that cleaner measures of credit risk will, all else being equal, reduce the costs of arbitraging between markets and will improve the harmonization of risk across markets – one of the asset - pricing puzzles i highlighted. two of the other puzzles i described earlier are the credit - spread and equity - premium puzzles. at least a part of these puzzles may be due to imperfect risk sharing among active market participants. if this is indeed part of the puzzle, then financial innovations such as credit derivatives may,

. thus, there are compelling reasons to expect the well - entrenched inflation dynamics that prevailed for a quarter - century to reassert themselves next year as imbalances associated with reopening are resolved, work and consumption patterns settle into a post - pandemic “ new normal, ” and some of the current tailwinds shift to headwinds. 14 i will be carefully monitoring measures of longer - term inflation expectations to ensure they are well anchored at 2 percent. to date, various measures suggest inflation expectations remain well anchored and broadly consistent with our new framework. the index of common inflation expectations moved back to 2 percent in the first quarter, returning to its level in 2018, which is lower than its level prior to 2014. 15 in addition, the term structure of market - based measures of inflation compensation is consistent with market participants expecting a limited period of inflation above 2 percent. a straight read of the difference between the forward nominal treasury curve and the forward treasury inflation - protected securities curve implies inflation compensation is expected details on the cfo survey, which is a partnership of duke university, the federal reserve bank of richmond, and the federal reserve bank of atlanta, can be found on the richmond fed ’ s website at https : / / www. richmondfed. org / research / national _ economy / cfo _ survey. statistical models estimate that underlying core pce inflation ranges from 0. 1 to 0. 4 percentage point below the 2 percent longer - run target. see the point estimates for 2019 : q2 in table 1 in jeremy b. rudd ( 2020 ), “ underlying inflation : its measurement and significance, ” feds notes ( washington : board of governors of the federal reserve system, september 18 ), https : / / www. federalreserve. gov / econres / notes / feds - notes / underlying - inflation - its - measurement - andsignificance - 20200918. htm. see hie joo ahn and chad fulton ( 2020 ), “ index of common inflation expectations, ” feds notes ( washington : board of governors of the federal reserve system, september 2 ), https : / / doi. org / 10. 17016 / 2380 - 7172. 2551. - 9to be higher for the next two years and to decline subsequently and remain stable 5 and 10 years into the future. i will remain attentive to the risk that what seem like transitory inflationary pressures