strengthen monetary easing, which, coupled with the government's measures and initiatives taken by private financial institutions, have resulted in limiting increases in corporate bankruptcies and unemployment so far. in considering the direction of monetary policy going forward, the key points to keep in mind are the amount of time required for the economy to recover and the risks and challenges to be addressed if the recovery takes longer than expected. if covid - 19 were to persist longer than expected, the financial situation of firms struggling with their sales would become more strained over time, causing them to eventually become insolvent, which in turn would lead to an upsurge in corporate bankruptcies and a deterioration in the employment situation. this would diminish the supply capacity and hence the growth potential of japan's economy. moreover, if the amount of nonperforming loans were to rise as corporate credit risks materialize, this could impair the soundness of the financial institutions that support such firms, leading to a deterioration in the functioning of the financial system itself. concern over risks to the financial system could then exert further downward pressure on the real economy. at the moment, financial institutions hold adequate capital and there is little concern that the financial system might become unstable. however, it is important to be prepared to take prompt action as needed while closely monitoring both the real economy and the financial system. with the financial system remaining stable, if the economy makes a steady rebound once covid - 19 subsides, it will become possible to increase the robustness of the economy by moving ahead with full - fledged efforts to address medium - and long - term challenges. in doing so, the following two issues will be crucial. the first is whether globalization will return to pre - covid - 19 trends or whether new structural changes will emerge. the second is whether japan's economy can make the structural changes needed to respond adequately to the new global economy. regarding the first question, what is clear is that firms will reconfigure their production locations, for example, to multiple supply chains to avoid a breakdown in their overall supply chains in case production is suspended in a certain region. moreover, firms may reorganize their production locations if the u. s. - china conflict over trade and other issues intensifies. nevertheless, in view of the cost advantages provided, it is unlikely that the system of global supply chains itself will come to an end. and if that is the case, a return to the former

, including the gas we put in our cars and the food we put on our tables. when we make reference to year - over - year core inflation – that is, inflation without food and energy – it ’ s only because we believe that core inflation is a helpful predictor of headline inflation over the next three or four years. i want to spend some time explaining why there is no longer an intrinsic connection between the size of the fed ’ s balance sheet and inflation. in the past three years, the fed has bought over $ 2 trillion of securities issued or backed by the government. the fed has funded that purchase by tripling the amount of deposits held by banks with the fed – what are called bank reserves. the standard reasoning is that this kind of reserve creation is inflationary. banks are only allowed to offer checkable deposits in proportion to their reserves. economists view checkable deposits as a form of money because, like cash, checkable deposits make many transactions easier. in this sense, bank reserves held with the fed are essentially licenses for banks to create a certain amount of money. by giving out more licenses, the fomc is allowing banks to create more money. and if you took any economics in school you learned : more money chasing the same number of goods – voila, inflation. indeed, i think i ’ m pretty safe in saying that after four years in economics grad school, i ’ ve uttered this phrase – more money chasing the same number of goods creates inflation – more often than anyone else in this room. but this connection between bank reserves and inflation is simply not operative right now. banks have few good lending opportunities, and so they ’ re not trying to attract deposits. as a result, they are keeping nearly $ 1. 6 trillion of reserves at the fed in excess of what they need to back their deposits. in other words, banks have the licenses to create money, but are choosing not to do so. bis central bankers ’ speeches i ’ m confident, though, that at some point in the future, the economy will improve and banks will once again have good lending opportunities. some observers are concerned that once this happens, the banks ’ excess reserves will serve as kindling for an inflationary fire. this concern would have been entirely appropriate three years ago. but in october 2008, congress granted the federal reserve the power to pay interest on bank reserves. right now, that interest rate is 25 basis points, or 0. 25 percent. by raising that