the national income from a level that is already high by historic standards. such conditions have led in the past to labor market pressures that thwarted further profit growth. the second consideration with respect to how high asset values can rise is : how far can risk and equity premiums fall? a key factor is that price inflation has receded to quite low levels. the rising level of confidence in recent years concerning future outcomes has doubtless been related to the fall in the rate of inflation that has, of course, also been a critical factor in the fall in interest rates and, importantly, the fall in equity premiums as well. presumably, the onset of deflation, should it occur, would increase uncertainty as much as a re - emergence of inflation concerns. thus, arguably, at near price stability, perceived risk from business - cycle developments would be at its lowest, and one must presume that would be the case for equity premiums as well. in any event, there is a limit on how far investors can rationally favorably discount the future and therefore how low equity premiums can go. current claims on a source of income available 20 or 30 years in the future still have current value. but should claims on the hereafter? an implication of high equity market values, relative to income and production, is an increased potential for instability. as i argued earlier, part of capital gains increases consumption and incomes. since equity values are demonstrably more variable than incomes, when equity market values become large relative to incomes and gdp, their fluctuations can be expected to effect gdp more than when equity market values are low. clearly, the history of large swings in investor confidence and equity premiums for rational and other reasons counsels caution in the current context. we have relearned in recent weeks that just as a bull stock market feels unending and secure as an economy and stock market move forward, so it can feel when markets contract that recovery is inconceivable. both, of course, are wrong. but because of the difficulty imagining a turnabout when such emotions take hold, periods of euphoria or distress tend to feed on themselves. indeed, if this were not the case, the types of psychologically driven ebbs and flows of economic activity we have observed would be unlikely to exist. perhaps, as some argue, history will be less of a guide than it has been in the past. some of the future is always without historical precedent. new records are always being made

lael brainard : safeguarding financial resilience through the cycle speech by ms lael brainard, member of the board of governors of the federal reserve system, at the global finance forum, washington dc, 19 april 2018. * * * i am grateful to anna harrington of the federal reserve board for her assistance in preparing this text. the remarks represent my own views, which do not necessarily represent those of the federal reserve board or the federal open market committee. i am honored to be here today to participate in the global finance forum. it is a good moment to take stock of the cyclical position of the economy and the health of the banking system. in many respects, where we are today is the mirror image of where we were just a decade ago. the job market is strong, household balance sheets have improved, and business activity is solid. banks are doing well — credit growth is robust, profitability is strong, and capital and liquidity buffers have been fortified. while this progress is heartening, we cannot afford to be complacent. if we have learned anything from the past, it is that we must be especially vigilant about the health of our financial system in good times, when potential vulnerabilities may be building. safeguarding resilience through the cycle should be a critical consideration in our ongoing evaluation of the regulatory framework. with that in mind, i will spend a few minutes describing current conditions and then outline our ongoing work to ensure the financial system ’ s buffers continue to sustain resilience over the cycle. current conditions cyclical conditions have been strengthening. our growth here at home has been bolstered by synchronized growth abroad as well as supportive financial conditions. employment growth has been heartening, and we are seeing the strong labor market continue to draw prime age americans back into the labor force from the sidelines. sizable fiscal stimulus is likely to reinforce cyclical pressures at a time of above - trend growth and tightening resource utilization. there are few historical episodes of similar pro - cyclical fiscal stimulus to draw upon as we assess the outlook. but in the few cases where resource utilization has been near the levels we may soon be approaching, there have been heightened risks either of inflation, in earlier decades, or of financial imbalances more recently. currently, inflation appears to be well - anchored to the upside around our 2 percent target, but there are some signs of financial imbalances. our scan of financial vulnerabilities