of the remaining presidents on a rotating basis. 3 in normal times, monetary policy is implemented through the purchase or sale of securities, which affects the supply of bank reserves and so has an effect on short - term interest rates. but monetary policy also works by influencing expectations of future short - term interest rates and thereby affecting longer - term rates and asset prices. central bank communications can help individuals, businesses, and investors formulate their expectations for interest rates and inflation in the future and thus influence their actions today. recognizing the importance of communications as a policy tool, the fomc has been engaged in a conversation about how we might better explain our framework for decision - making. in designing its communications, the fomc faces complexities that make clear communication more difficult than you might think. first, we need to explain the way we think about both parts of our dual mandate. establishing a target for inflation is a tool used by many central banks to anchor inflation expectations. central banks can establish such a target because, over the longer run, inflation is determined primarily by monetary policy. by contrast, the level of unemployment that would be considered to be consistent with maximum employment is influenced by factors other than monetary policy that may vary over time. the difficulty for the federal reserve lies in communicating clearly about the employment portion of the mandate without creating an impression that the committee is either establishing an unemployment target or ignoring that part of the mandate altogether. i do not believe that establishing an inflation target is inconsistent with a commitment to both parts of the dual mandate. on the contrary, it can help with thinking about and achieving both of our mandated objectives. for example, if having an explicit numerical target for inflation helps anchor inflation expectations over the longer run, then monetary policy will have greater flexibility to pursue the goal of maximum employment in the shorter term. the second complexity in our communication has to do with the nature of committee decision - making and the unusual voting structure of our committee. for example, when preparing for a committee meeting, i formulate my own outlook for the economy and opinions about the best policy path to follow. but i also rely on the committee discussion to help me decide whether or not to support the policy favored by a majority of the voting members. as long as it is within a range of policies that i would view as appropriate, and i don ’ t believe that the potential negative consequences outweigh the expected benefits, i will support the committee decision. now, consider the three different ways that i might communicate

the tumultuous events that were about to unfold. the federal reserve is the central bank of the united states. the congress created the federal reserve in 1913, after a series of banking panics, “ to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the united states, and for other purposes. ” 1 when i joined the board of governors in august 2008, the fed ’ s ability to respond to financial crises was about to be tested as never before. for as long as they have existed, central banks have calmed financial crises by lending to financial institutions against good collateral. because central banks step in when other sources of funds retreat, central banks acting in this capacity are known as lenders of last resort. but that phrase doesn ’ t mean that central banks make bad loans ; nearly all of their loans are to sound borrowers with sound collateral. banks rely on short - term funding such as overnight interbank loans or customer deposits to make the longer - term loans their customers need. if funding becomes scarce, banks become less willing to extend credit. to maintain the flow of credit to businesses and consumers, the federal reserve provides short - term credit to sound depository institutions as needed. to ensure that banks use the facility only as a backup source of funds, federal reserve loans are usually made at an above - market rate. in the panic of 2008, liquidity needs were not confined to the banking system. 2 the shadow banking system, made up of investment banks, money market funds, finance companies, and investors in a wide range of debt securities, provided a large part of the credit that fueled our economy. when panic set in, it froze lending in banks and nonbanks alike and produced funding pressures across a wide range of markets and institutions. the actions taken by the federal reserve to fight the crisis were quite traditional in the sense that, for years, central banks have been providing liquidity by lending to financial intermediaries. but they were unconventional in that the concepts had to be adapted to fit markets and lenders that had never been supported by the federal reserve before. now, i didn ’ t live through the banking crises of the distant past or those that might have occurred in other countries. but i can tell you what it was like at the center of the most recent federal reserve act, ch. 6, 38 stat. 251 ( 1913 ). kevin warsh ( 2009 )