the foreign exchange value of the dollar, and equity prices. although many other measures and prices can also be included in one ’ s assessment, i think these five are the most essential. 3 in the conduct of monetary policy, the fomc does not have targets for either specific components of financial conditions or for financial conditions more broadly. we care about financial conditions not for themselves, but instead for how they can affect economic activity and ultimately our ability to achieve the statutory objectives of the federal reserve — maximum employment and price stability. let me provide a few examples. a decline in mortgage rates can lift the demand for owner - occupied housing and support construction activity. a rise in equity prices can boost household wealth, which is one factor that underpins consumer spending. the foreign exchange value of the dollar can affect the relative competitiveness of importers and exporters, which, in turn, influences the country ’ s trade performance. narrower credit spreads can reduce the cost of capital for business and help support greater business investment. 1 / 6 bis central bankers'speeches in sum, financial conditions affect households ’ and firms ’ saving and investment plans, and, therefore, play a key role in influencing economic activity and the economic outlook. this is why the evaluation of financial conditions is so crucial in the conduct of monetary policy. the fomc traditionally implements monetary policy by adjusting the federal funds rate — the short - term interest rate paid by banks that borrow reserves from other financial institutions. however, few economic decisions directly depend on the federal funds rate. rather, changes in the federal funds rate affect the economy through their impact on other interest rates, which, consequently, influence broader financial conditions. if financial conditions moved predictably with the policy rate, then there would be no need for the fomc to focus on financial conditions. in such a world, by adjusting the level of the federal funds rate, the fomc could be fully confident that it could generate the appropriate financial conditions necessary to support achievement of full employment and price stability. in fact, the response of financial conditions to changes in short - term interest rates is not rigid and predictable. instead, as we shall see shortly, the linkage between the federal funds rate and financial conditions changes over time, as it is influenced by a whole host of other factors. recent evidence suggests that even the relation between short - term and long - term rates has shifted substantially over the past 15 years. 4 moreover, at times, we have observed cases in which financial conditions

activity would be mainly driven by a gradual recovery in domestic and external demand, with the pickup in domestic demand being supported by several factors : first, reduced uncertainty is expected to gradually feed through to the real economy. second, our accommodative monetary policy stance will continue to support the recovery, by providing for : low monetary policy interest rates ; extensive funding reassurance to euro area banks, inter alia, by offering liquidity via the fixed rate full allotment mode at least until mid2015 ; and a lasting positive impact of forward guidance on money market conditions. third, the euro area economy will encounter less fiscal drag as countries have made important progress in improving their budgetary positions. bis central bankers ’ speeches fourth, real disposable incomes are expected to benefit from a drop in commodity prices. and, finally, starting from 2014, the recovery is also expected to benefit from fading credit supply constraints. still, the key question to ask is why are we not moving faster out of the crisis? the recovery continues to face headwinds, especially in stressed countries and a number of factors may hinder a faster recovery. first, notwithstanding some progress in rebalancing, in many euro area countries we will still see further adjustment of private and public sector balance sheets. don ’ t forget in this context that past recoveries have been driven by a pick - up in housing and construction activity that then continued to feed its way through to overall economy. now, with a lot of household wealth lost in this crisis and with the balance sheets of the private and public sectors still retrenching, this traditional source for recovery seems to be hampered and less desirable, calling for more structural and balanced growth models. second, and closely related, investment has been declining over the past year and will most likely only gradually pick - up, starting from levels far below pre - crisis averages. of course, anaemic demand conditions, corporate balance sheet restructuring and high lending rates particularly for smes are in several countries weighing on investment. and third, labour market conditions do not provide much comfort. unemployment is expected to remain high and persistent. considering also the somewhat less favourable outlook in labour intensive sectors and the growing structural component in the current unemployment figures we may see sluggish labour market conditions for some time in the future, despite decreasing labour cost conditions. overall, a significant amount of slack in the economy will persist until the end of the projection horizon. moreover, the balance of risks