, financial markets process new information efficiently : if some unexpected news arrives, markets adjust, sometimes even sharply, and they should. these types of movements are healthy, even necessary. they serve to quickly bring prices in line with underlying fundamentals. and markets that move quickly and adroitly do not necessarily produce unstable financial conditions. nor should those who take up the cause of ensuring financial stability protect individual investors or financial institutions from substantial losses or insolvency. to the contrary, a healthy and well - functioning financial system will tend to reward well - managed risk - taking and punish imprudence. i am inclined to interpret the federal reserve's interest in promoting financial stability as a desire to foster conditions that favor sustainable growth and stable prices. in this sense, financial stability concerns may rightly shape policymakers'views about the modal outlook for the federal reserve is by no means the only institution in the united states that is concerned with the stability and functioning of the financial system. indeed, the federal reserve works closely with a number of other u. s. government agencies on both a bilateral basis and jointly through the president's working group on financial markets to enhance the integrity, efficiency, orderliness, and competitiveness of financial markets and to maintain investor confidence. in addition, the federal reserve participates in a number of important international groups, such as the financial stability forum, the basel committee on banking supervision, the committee on the global financial system, and the committee on payments and settlement systems, to name just a few. indeed, in today's tightly integrated international financial markets, fostering financial stability requires a global perspective. the first bank of the united states was created in 1791 and lasted until 1811. the second bank of the united states operated from 1816 to 1836. originally, the preamble to the federal reserve act of 1913 stated that the federal reserve system was created " [ t ] o 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. " macroeconomic objectives were explicitly introduced later, with the 1977 amendment of the federal reserve act, which stated, " the board of governors of the federal reserve system and the federal open market committee shall maintain long - run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and

many state governments are taking actions to make long - term structural reductions in spending. federal fiscal policy is widely acknowledged to be on an unsustainable path for the long term and must be addressed ( chart 33 ). for example, the expiration of the bush - era income tax cuts and legislated cuts in medicaid, if they went into effect, would stabilize the debt to gdp ratio at around 80 percent ; if, however, their effective date continued to be deferred, the debt to gdp ratio could move toward 100 percent fairly rapidly. the proposed budget delivered by the u. s. administration on february 14 begins the process of adjusting the fiscal trajectory. fifth, the challenge for monetary policy has been to provide stimulus and support in the wake of the combined financial crisis and recession. as noted at the outset, economic history suggests that such a combined financial and economic shock can drive the economy down very deeply. strong, forceful policy – both monetary and fiscal – is necessary to stem the contractionary forces in the economy. the federal reserve responded by lowering interest rates to near zero, to provide substantial liquidity support to the economy and to conduct the first large - scale asset purchase program, more than doubling the federal reserve ’ s balance sheet. history also suggests that the recovery from a combined financial and economic shock can be fragile. the federal reserve responded to the slowing of the recovery in midyear 2010 by beginning a second round of large - scale asset purchase programs. those purchases are resulting in a rough tripling of the federal reserve ’ s balance sheet ( chart 42 ). u. s. economic conditions are currently quite far away from levels consistent with the federal reserve ’ s dual mandate of the pursuit of the highest level of employment consistent with price stability. i ’ ve discussed the high unemployment and unused productive capacity in the united states. let ’ s turn to inflation. while trend inflation is quite low at the moment, we see it likely to be near the low point of this cycle. the rate of inflation for nonenergy services is beginning to increase, led by faster increases in apartment rents ( chart 36 ). a firming of demand along with a decline of the exchange value of the dollar should begin to put upward pressure on nonfood, nonenergy goods prices. however, underlying inflation fundamentals suggest relatively low trend inflation for some time : a substantial amount of slack in the economy, reflected in the sharp deceleration of core services prices – and the united states