william c dudley : economics at the federal reserve banks remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the american economic association 2014 annual meeting, philadelphia, pennsylvania, 4 january 2014. * * * it is a pleasure to be here today and to have the opportunity to talk about the role of economics and economists at the reserve banks. economics is a critical discipline at the new york fed, just as it is at the board of governors and the other reserve banks. nevertheless, i expect that my perspective will differ a bit from that of eric, charlie, or narayana. 1 in part, this is because my background is different. although i have a ph. d. from berkeley, unlike charlie and narayana, i never spent time in academia, and, unlike eric, i spent most of my career not in public service, but working in the private sector. my focus during my time in the private sector was also somewhat different than my colleagues, with an emphasis on those issues that affect financial markets. don ’ t get me wrong, i am very happy i got a ph. d. in economics, the training has been invaluable. it ’ s just that my career path is a bit unusual relative to other central bankers, so that must influence my perspective. of course, another important point of differentiation is where i am now and the unique role that the new york fed performs within the federal reserve system. all of the federal reserve banks have their areas of specialization. in my opinion, the new york fed has at least four that are worthy of mention today because these affect the work of the new york fed ’ s economists. first, we are the operational arm of the federal reserve, responsible for the implementation of monetary policy. this means we have a unique set of relationships with the securities dealer community and with respect to monitoring financial markets. it also means that we work very closely with the board of governors and the federal open market committee ( fomc ) in implementing monetary policy. second, we have a unique endowment and responsibility by virtue of our location. new york city is a global financial center, and finance is a very important aspect of the second district ’ s economy. most of the largest global financial institutions have a major presence here. with delegated authority from the board of governors, we are responsible for the supervision of most of the major financial institutions headquartered in our district, as well as numerous foreign banking organizations that

spreads have declined to quite low levels. market participants report exceptionally high levels of liquidity. and volatility, both realized and expected, has remained low across many different types of financial assets, market and economies. this general constellation of market conditions and asset prices is unusual, at least in comparison to what we have seen over the past several decades. this has been a distinguishing feature of the present expansion, but it is not something we fully understand, and we cannot be confident in judgments about how durable it will prove to be. to a significant extent, these financial developments reflect a high degree of confidence in future macroeconomic and financial stability, reinforced by the improvements in inflation performance, growth outcomes and financial resilience of the past several years. better monetary policy has lowered expectations of future inflation and inflation volatility and has contributed to lower risk premiums in general. changes in the cyclical behavior of financial intermediation and credit provision, coupled with the increased stability of the real economy, seem likely to have reinforced the improvements on the monetary policy front. and rapid growth in the major emerging market economies, together with the substantial earnings of energy - producing and commodity - exporting countries, have produced a substantial increase in wealth and savings relative to perceived investment opportunities. in a world where capital can now flow much more freely across national borders, a significant portion of these savings has moved across national borders. these are powerful and fundamental forces, and they certainly help explain the broad reduction in risk premiums and the substantial demand for credit risk and financial assets. there are other factors at work as well, however, that have less favorable implications. part of this recent dynamic in financial markets is a consequence of the present state of the international monetary system, in which a substantial part of the world economy runs exchange rate regimes tied in some way to the dollar. this has entailed a sustained period of very substantial official accumulation of dollar reserves, putting downward pressure on u. s. interest rates and upward pressure on u. s. asset prices. these forces are surely transitory, but their impact on capital flows, interest rates and asset prices are important, not just in terms of their short - term impact on growth. if they are large enough, they have the potential to alter or distort current decisions about investment and consumption in a way that could be detrimental to our longer - run growth prospects. and they are important because they work to mask or dampen the effects on risk premiums in financial markets