to reverse these policies? what are the right pace and sequence for each element? bis central bankers ’ speeches a key step in normalizing policy will be to start increasing the target for the federal funds rate, which is currently still in a range of 0 to 1 / 4 per cent. this can be accomplished, in part, by gradually raising the interest rate the fed pays on excess reserves. the fed will also remove excess reserves from the financial system, in order to control shortterm interest rates. they have introduced and test - driven an overnight reverse repo facility that they will use for that purpose. restoring the federal reserve ’ s balance sheet to its normal size is a process that is likely to be accomplished over a longer period. it is important to note, however, that the size of its balance sheet will not hinder the fed ’ s ability to control the policy rate and liquidity in the economy. the framework they have outlined will limit the risk that large excess reserves could lead to excessive loan creation and a sharp increase in inflation. does this sound complicated? yes – because it is complicated. but we have full confidence in our colleagues at the federal reserve to manage this process well. how will the renormalization of monetary policy play out in the financial system – both in the united states and globally? asset prices, risk spreads and volatility are at levels that reflect the abundant liquidity provided through unconventional monetary policies in the united states and some other countries, together with expectations that interest rates will be kept at very low levels for a long time. while the federal reserve will seek to guide the renormalization process so that markets readjust smoothly as monetary policy is brought back to normal, there is an important risk that there will be some bumps along the way. what will the exit mean for canada? on the whole, the federal reserve ’ s planned exit from unconventional monetary policies is part of a good news story for canada. it is a sign that a sustained u. s. expansion is well under way. a more sustained u. s. expansion – a stronger housing market and robust business investment – should help our non - energy exports, which remain below their prerecession level. as the u. s. economy regains vigour, it should also contribute to improved business and consumer confidence in canada. bis central bankers ’ speeches however, from a policy - maker ’ s perspective, the renormalization of u. s. monetary policy will act to tighten canadian

annual real rate of return of 1½ - 2 per cent. by way of comparison, the authorities have based their use of petroleum revenues over the central government budget on the assumption that the petroleum fund can generate a long - term real return of 4 per cent. it is unlikely that this rate of return will be achieved if we only invest in bonds. buying a bond means lending money to others. buying equities is the same as investing in real assets. buying equities gives us direct ownership of the means of production in global business and industry. on the one hand, these ownership rights provide high returns when companies are flourishing. on the other, shareholders are the first to sustain losses when companies fail. consequently, the return on shares fluctuates far more than the return on bonds, reflecting the higher level of risk. over the past 75 years, equity returns in the us market have been negative almost every third year. an investor will only invest in high - risk vehicles if it is reasonable to expect compensation for the risk. the compensation for high risk in the stock market is a far higher average return for equities compared with bonds. since 1926, the annual return on us equities has on average been 4. 8 percentage points higher than the return on bonds. also in most ten - year periods, investing in us equities has been profitable, with the exception of the depression in the 1930s and the last half of the 1970s. equity returns have been negative after ten years only in the years between 1928 and 1938, in other words on equity investments made the year before the 1929 stock market crash. it may also be worth noting that equities purchased during recessions - such as in the mid - 1930s and mid - 1970s - brought solid returns ten years later. the picture is the same for most other countries. since short - term fluctuations in equity prices are difficult to predict, it may be a sound strategy to keep the share of equities constant over time. this means buying a relatively large volume of equities when prices are low, and buying a smaller volume - or selling - when prices are high. this is the strategy applied by the petroleum fund. let us now revert to the norwegian economy and norwegian economic policy. the revision of economic policy in march 2001 can to some extent be said to be a consequence of our oil economy. the new guidelines have also changed the interaction between the different components of economic policy. fiscal policy will now have an