credit is available and affordable. at the same time, mortgages are the largest debt most people will take on in their lifetime, so governments also like to put laws in place to protect consumers and to make sure they understand the risks that go with mortgages. and bank regulators pay close attention to mortgages because they often represent a big portion of the assets in the banking sector. in canada, residential mortgages make up about half the banking system's assets, so keeping mortgages safe keeps our banks safe. and a safe banking sector is a precondition for a stable economy. 2 / 8 bis - central bankers'speeches the policy objectives of governments and regulators can shift over time in response to changing conditions. as policies shift, so do the balance and distribution of risks. to understand this, it's helpful to keep in mind some basics of how mortgages work and who the different stakeholders are. a mortgage is simply a contract with a set of conditions that prescribe the obligations of both the lender and borrower - things like the interest rate, the term, the amortization period and the payment schedule. once a mortgage is originated, the lender sometimes retains it as an asset or an investment. other times they turn it into a security and sell it to an investor. if the lender doesn't sell the mortgage, they need to fund it. to reduce interest rate risk, they will want to fund it with a deposit that is about the same size and duration as the term of the mortgage. lenders sell mortgages so that they have a variety of funding sources and don't find themselves constrained by the availability of the deposits they hold. so investors play an important role because they give lenders access to pools of capital that let them fund more mortgages. whatever your policy objective, when you make changes to the mortgage market, it's important to keep these three groups - borrowers, lenders and investors - in mind. you need all three to have a healthy, functioning mortgage market. the challenge, of course, is that how you view a change will depend on whether you're a borrower, a lender or an investor. and sometimes, an attempt to improve conditions for one can negatively impact another. borrowers want affordability and investors want an acceptable risk - adjusted rate of return. features that reduce risk or flexibility for the borrower can increase risk or flexibility for the lender or investor and vice versa. the bottom

publicly that the decision to reduce purchases did not reflect any change in the committee ’ s plans for holding the federal funds rate at its current level. the september decision not to reduce purchases clearly took some market participants by surprise. for me, the decision was a close call, and i would have been comfortable with a small reduction in purchases. however, as the minutes of the september fomc meeting reflect, there were legitimate concerns about the strength of incoming economic data, the economic effects of tighter financial conditions and of tighter fiscal policy, and the prospect for disruptive events on the fiscal front. 7 i supported the decision as a reasonable exercise in risk management. events since the september meeting suggest that the concerns regarding fiscal matters were well founded. i would like to push back against the narrative that the decision at the september meeting has damaged the committee ’ s communications strategy. in its communications, the committee seeks to influence market conditions over the medium term in a way that is consistent with its policy intentions. as i suggested earlier, as we navigate this unprecedented transition back to more normal policy, there may be volatility in the short run. and we will continually strive to improve our communications and avoid surprises. but, at the end of the day, my own judgment is that market expectations are now better aligned with committee assessments and intentions. the september decision underscored the committee ’ s intention to determine the pace of purchases in a data - dependent way based on progress toward our objectives. moreover, the modest net tightening in financial conditions since the june meeting has likely reduced the prevalence of highly leveraged, speculative positions. i believe that the market is now prepared for a reduction in purchases when the economic outlook and the broader situation support it. see board of governors of the federal reserve system ( 2013 ), “ federal reserve issues fomc statement, ” press release, september 18. decomposing federal funds futures into components representing the true expected path of the federal funds rate and term premiums is difficult. staff models suggest that a portion of the upward revision in the federal funds futures curve over this period was associated with a pulling forward in the expected date of liftoff in the federal funds rate. see board of governors of the federal reserve system ( 2013 ), “ minutes of the federal open market committee, september 17 – 18, 2013, ” press release, october 9. bis central bankers ’ speeches short term rates have fallen back since the september meeting, and are now better aligned with the committee ’ s forward