william c dudley : the spread between primary and secondary mortgage rates – recent trends and prospects opening remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york and chairman of the committee on the global financial system ( cgfs ), at the spread between primary and secondary mortgage rates : recent trends and prospects workshop, jointly sponsored by the federal reserve banks of boston and new york, new york city, 3 december 2012. * * * good morning. i ’ m william dudley, president of the federal reserve bank of new york. i would like to welcome all of you to the bank and thank you for participating in today ’ s workshop. my colleague eric rosengren, president of the federal reserve bank of boston and i asked our staffs to organize this workshop because the topic of the primary - secondary mortgage rate spread is important for current efforts by the federal open market committee ( fomc ) to foster faster economic growth. as i have said on a number of occasions, while the u. s. economy has expanded since mid2009, the pace of the economic recovery has been too slow to make rapid inroads into the spare capacity left over from the recession. as a result the unemployment rate remains unacceptably high. to support a stronger economic recovery in the context of price stability, the fomc took action at its september meeting to provide additional monetary accommodation. this included a new program to purchase an additional $ 40 billion a month of agency mortgage - backed securities ( mbs ). the fomc reiterated in october that it will continue its purchases of agency mbs, undertake additional asset purchases, and employ its other tools as appropriate until there is a substantial improvement in the outlook for the labor market in a context of price stability. monetary policy works in large part through its effect on financial markets and financial conditions. the impact on economic activity depends on the extent to which policy actions are effectively transmitted to key sectors of the economy. while actions such as mbs purchases help ease financial conditions more broadly, a key channel through which monetary policy affects the economy is through the housing and mortgage markets. an easing of policy lowers the secondary market rate at which mortgage - backed securities trade, which puts downward pressure on the primary mortgage interest rate. a lower primary mortgage rate enables borrowers to refinance their existing loans at lower rates, and increases demand for home purchases, supporting house prices and household wealth, which in turn may increase household access to credit

importance of solid domestic fundamentals, including exchange rate flexibility, a credible monetary policy framework, sustainable fiscal policy, sufficient foreign exchange reserves, and a strong financial system. the united states has a special responsibility to keep its own house in order, given the large size of its financial markets and the u. s. dollar ’ s status as a reserve currency. indeed, the u. s. financial system was the epicenter of the global financial crisis. i believe that promoting economic growth and financial stability at home is the most important contribution the united states can make to promoting growth and stability worldwide. with that in mind, u. s. monetary policy can have a significant impact on global financial conditions, including exchange rates, and shifts in u. s. monetary policy can lead to consequential shifts in global capital flows. therefore, good communication and transparency from the federal reserve is needed. in this respect, i believe we have made a number of improvements in recent years that have facilitated smoother market adjustments to policy changes. one example is the process by which the federal reserve began the normalization of its balance sheet last year. we foreshadowed our intentions and initiated a program that was transparent in its design and ramped up only slowly. while the federal reserve has a domestic mandate set for it by the u. s. congress, it needs to be mindful of the international effects of its actions, which can have important potential consequences for the global economy and financial markets. 9 a high level of global interdependence also requires robust cooperation and effective international 6 / 8 bis central bankers'speeches institutions. to provide one example, i have traveled several times a year for the last decade to basel, switzerland, to discuss economic, monetary, and regulatory policy with foreign central bankers at the bank for international settlements ( bis ). this dialogue — supported by ongoing bilateral discussions between central banks — helps build trust, understanding, and the valuable relationships that are crucial during periods of stress. the global financial crisis put the need for a more robust and resilient financial system in stark relief. such a regime is necessary if we are to maintain the flow of credit to the real economy — both domestically and internationally — during times of stress. over the last decade, policymakers have implemented a range of reforms that have materially strengthened the banking system, including higher capital and liquidity buffers for the major international banks. 10 international coordination has been essential to the successful implementation of these reforms. banking