growth picking up further in 2009. however, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. recent increases in oil prices pose additional downside risks to growth. inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. thus far, the pass - through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. however, the continuation of this pattern is not guaranteed and will bear close attention. futures markets continue to predict – albeit with a great range of uncertainty – that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. a rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of federal reserve governors and reserve bank presidents for 2009 and 2010. unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. the possibility that commodity prices will continue to rise is an important risk to the inflation forecast. another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long - term inflation rates, an expectation that could ultimately become self - confirming. the federal reserve's policy response the federal reserve's mandate is to foster maximum sustainable employment and price stability. to achieve these goals, we must also support the return of financial markets to more normal functioning. the federal reserve is pursuing its objectives through several means. first, we have eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. our decisive policy actions were premised on the view that a more gradual reduction in short - term rates could well have failed to contain the financial and economic problems confronting us. for now, policy seems well positioned to promote moderate growth and price stability over time. we will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate. in collaboration with our colleagues at the treasury, we continue to carefully monitor developments in foreign exchange markets. the challenges that our economy has faced over the past year or so have generated

– did not keep up with changes in the financial sector and were insufficiently attuned to systemic risks. once concerns began to develop about escalating losses at large firms, insufficient liquidity and capital interacted in an adverse feedback loop. funding pressures contributed to “ fire sales ” of financial assets and losses, reducing capital levels and heightening liquidity pressures – culminating in the near collapse of the financial system in late 2008. capital and liquidity several factors encouraged excessive leverage, including market perceptions that some institutions were “ too big to fail. ” 8 financial institutions also had an incentive to engage in regulatory arbitrage, moving assets to undercapitalized off - balance - sheet vehicles. the complexity of the largest banking organizations also may have impeded market discipline. in addition, financial intermediation outside of the traditional banking sector grew rapidly in the changes in payment technologies have been rapid, and an area of particular interest is the fast growth of mobile payment and financial service technologies. the federal reserve has conducted several surveys to understand these developments, and the most recent results are discussed in board of governors ( 2015 ). a substantial body of research finds that financial development supports economic growth, including goldsmith ( 1969 ), king and levine ( 1993 ), rajan and zingales ( 1998 ), and levine ( 2005 ). it is noteworthy that this research emphasizes differences across countries, and that the united states is among the most financially developed countries in the world. beck, demirguc - kunt, and levine ( 2007 ) show that financial development reduces poverty and inequality in a study examining evidence across countries. zingales ( 2015 ) raises a number of questions regarding ways in which distortions in the financial sector may contribute to “ rent seeking ” activity that may promote inefficiency. philippon and reshef ( 2012 ) examine trends in compensation in the financial sector and the contribution of such trends to the increase in income inequality in the united states in recent decades. philippon and reshef ( 2013 ) and cecchetti and kharroubi ( 2012 ) revisit the links between financial development and economic growth, focusing particularly on these relationships around periods of rapid growth in the financial sector or among economies with a large financial sector. for a review of many factors that may have contributed to leverage in the financial sector and a discussion of how, in some cases, these factors reflect distortions that imply leverage was excessive, see admati and others ( 2013a