on asset prices and would have further reduced credit availability for households and businesses. but we are not out of the woods yet. for many borrowers, credit remains much harder to get and far more expensive than it was in the summer of 2007. some reductions in leverage and tightening of credit conditions relative to earlier this decade clearly were needed, and i expect that lower leverage and tighter lending standards and terms will be enduring features of the financial landscape. but current credit conditions are far tighter than these adjustments would seem to justify. many financial markets remain under considerable stress, asset prices have been reduced by the lack of liquidity in markets, and credit spreads and availability still reflect very high aversion to risk. these conditions are not conducive to a substantial and sustained economic rebound, and the federal reserve will continue to be alert to ways that monetary policy can contribute to economic recovery. we are also conscious of a potential adverse feedback loop between persistent economic weakness and a continuing decline in inflation and inflation expectations. with the federal funds rate about as low as it can go, significant further decreases in inflation as a result of the substantial slack in resources, lower import prices, and declines in the prices of oil and other commodities could imply an increase in the real federal funds rate. indeed, if such a process continued for some time, we could fall into deflation, much as japan did for a time in the 1990s and earlier this decade. then again, the substantial increase in the size of the federal reserve's balance sheet as a result of the credit programs that have been implemented have led some to worry that inflation could rise sharply when the economy recovers unless the federal reserve moves quickly when the time comes to unwind the programs and limit the growth in credit. because inflation expectations play a key role in the setting of prices and wages, firmly anchored inflation expectations can help avoid both of these outcomes. to help anchor inflation expectations, the fomc is now providing extended projections of inflation – along with growth and unemployment – in its quarterly economic projections. to improve transparency regarding its programs to help stabilize the financial sector, as well as its other operations, the federal reserve has established a resource, credit and liquidity programs and the balance sheet, on its website that provides detailed information on credit and liquidity programs and the federal reserve ’ s balance sheet. to address concerns about its ability to rein in its balance sheet, the federal reserve must be prepared to exit from its various programs when the time is right. we

mr. ferguson speaks on the future of the financial services sector remarks by mr. roger w. ferguson, jr., a member of the board of governors of the us federal reserve system, at the college of management of the university of massachusetts in boston, massachusetts on 27 / 10 / 98. some observations on the future of the financial services sector and related public policy issues let me first thank you for your invitation to speak today at this very topical conference. the future of the financial services sector holds great interest for industry participants as well as bank regulators, given the remarkable changes affecting the industry. developments in this sector will affect all of us. we are all acutely aware of the trend toward the blurring of lines that have separated the various parts of the financial sector, particularly commercial banking, investment banking, and insurance. most recently, we are faced with the prospect of the formation of huge financial conglomerates, composed of amalgams of firms that have previously operated within the roughly defined boundaries of their respective industries. in addition, we have witnessed a substantial degree of consolidation through mergers in the commercial banking and other industries. i will begin my remarks today by discussing historical experience with conglomeration in the us, and the underlying conditions necessary for conglomeration to be a successful business strategy. i will then offer some thoughts regarding what the financial services sector may look like in the future. finally, i will address some of the issues that the federal reserve as a supervisor and regulator will need to consider. there are several conclusions that i would like to highlight. the first is that the movement to financial conglomerate may prove to be transitory. second, basic financial and risk management skills will likely remain the most important determinant of a company ’ s viability and success. third, even in a world of financial conglomerates there will be room for smaller, and more nimble, participants. finally, the supervisory and regulatory structure will need to evolve to meet these new challenges, but regulatory authorities should remain vigilant to carry out our duties, particularly in enforcing the antitrust laws. ii. will financial service conglomerates be successful? the historical context of conglomeration the concept of the financial conglomerate is receiving a great deal of attention at this time because of the diminishing distinctions across financial industries. however, the success of such conglomerates is certainly not guaranteed, based on historical experience. for an illustration, one need only look back to the conglomerate merger movement in the industrial sector during the 1960s