be difficult to identify in their early stages. moreover, addressing the pervasive problem of pro - cyclicality in the financial system will require efforts across financial sectors. to help address these issues, the administration has proposed the establishment of a financial services oversight council composed of the treasury and all of the federal financial supervisory and regulatory agencies, including the federal reserve. the board sees substantial merit in the establishment of a council to conduct macroprudential analysis and coordinate oversight of the financial system as a whole. the perspective of, and information from, supervisors on such a council with different primary responsibilities would be helpful in identifying and monitoring emerging systemic risks across the full range of financial institutions and markets. a council could be charged with identifying emerging sources of systemic risk, including : large and rising exposures across firms and markets ; emerging trends in leverage or activities that could result in increased systemic fragility ; possible misalignments in asset markets ; potential sources of spillovers between financial firms or between firms and markets that could propagate, or even magnify, financial shocks ; and new markets, practices, products, or institutions that may fall through the gaps in regulatory coverage and become threats to systemic stability. in addition, a council could play a useful role in coordinating responses by member agencies to mitigate emerging systemic risks identified by the council, and by helping coordinate actions to address procylicality in capital regulations, accounting standards ( particularly with regard to reserves ), deposit insurance premiums, and other supervisory and regulatory practices. in light of these responsibilities and its broad membership, a council also would be a useful forum for identifying financial firms that are at the cusp of being systemically important and, when appropriate, recommending such firms for designation as systemically important. finally, should congress choose to create default authority for regulation of activities that do not fall under the jurisdiction of any existing financial regulator, the council would seem the appropriate instrumentality to determine how the expanded jurisdiction should be exercised. a council could be tasked with gathering and evaluating information from the various supervisory agencies and producing an annual report to the congress on the state of the financial system, potential threats to financial stability, and the responses of member agencies to identified threats. such a report could include recommendations for statutory changes where needed to address systemic threats due to, for example, growth or changes in unregulated sectors of the financial system. more generally, a council could promote research and other efforts to enhance understanding, both nationally and internationally,

demand has persistently outstripped even accelerating potential supply. as i have previously noted, we cannot be sure in an environment with so little historical precedent what degree of labor market tautness could begin to push unit costs and prices up more rapidly. we know, however, that there is a limit, and we can be sure that the smaller the pool of people without jobs willing to take them, the closer we are to that limit. as the fomc indicated after its last meeting, the risks still seem to be weighted on the side of building inflation pressures. a central bank can best contribute to economic growth and rising standards of living by fostering a financial environment that promotes overall balance in the economy and price stability. maintaining an environment of effective price stability is essential, because the experience in the united states and abroad has underscored that low and stable inflation is a prerequisite for healthy, balanced, economic expansion. sustained expansion and price stability provide a backdrop against which workers and businesses can respond to signals from the marketplace in ways that make most efficient use of the evolving technologies. federal budget policy issues before closing, i should like to revisit some issues of federal budget policy that i have addressed in previous congressional testimony. some modest erosion in fiscal discipline resulted last year through the use of the “ emergency ” spending initiatives and some “ creative accounting ”. although somewhat disappointing, that erosion was small relative to the influence of the wise choice of the administration and the congress to allow the bulk of the unified budget surpluses projected for the next several years to build and retire debt to the public. the idea that we should stop borrowing from the social security trust fund to finance other outlays has gained surprising - and welcome - traction, and it establishes, in effect, a new budgetary framework that is centered on the on - budget surplus and how it should be used. this new framework is useful because it offers a clear objective that should strengthen budgetary discipline. it moves the budget process closer to accrual accounting, the private - sector norm, and - i would hope - the ultimate objective of federal budget accounting. the new budget projections from the congressional budget office and the administration generally look reasonable. but, as many analysts have stressed, these estimates represent a midrange of possible outcomes for the economy and the budget, and actual budgetary results could deviate quite significantly from current expectations. some of the uncertainty centers on the likelihood that the recent spectacular growth of labor productivity will persist over the