this lecture series is intended to be a pillar on which these bridges will rest by creating space for avid fans of monetary policy, a meeting that would bring the central banking community and the fund closer ogether year after year. before i leave you to the wisdom of our speakers, allow me to highlight three of the main questions on the future of monetary policy. first question -- the crisis as a stark reminder that price stability is not always sufficient for greater economic stability. should central banks put more weight on growth and employment? hould central banks mandate to cover not only price stability but also financial stability? what role should monetary

policy play in preserving financial stability and how to ake sure that central-bank independence is preserved? second, with increasingly complex financial interconnections, many small, open, and emerging-market economies have found a challenging to deal with large changes in exchange rates. how can these economies retain monetary policy independence in uch a policy-setting, and what tools should they use? finally, the crisis has galvanized a broad effort to reform the global regulatory framework. there has been progress on various aspects, but much still remains to be done. how will financial regulations and the new structures of the financial system affect the functioning of monetary policy domestically and abroad? to all of these questions, i'm

sure some of you have the beginning of the answers. i know that our speakers will offer their proposals, but i hope that it begins here. before i give the floor to chair yellen, it is my real pleasure to introduce the person to whom this lecture series is dedicated and who has kindly agreed to be with us today, michel camdessus. [applause] his legacy is well known to us all. michel, you presided over the fund for 13 years. you were its longest-serving anaging director, and your

stewardship was transformational for this institution. soon after you took the helm in 1987, the world as you knew it, as we all knew it suddenly went into shambles, and it was undone radically and unexpectedly. you managed the fund through the fall of the berlin wall, the unraveling of the soviet union, the mexican crisis, the asian crisis, and the russian crisis. yet when you announced your intention to retire and some frivolous reporter asked you, what should your successor have as a main attribute, you said immediately without thinking about it, a solid sense of humor.

[laughter] throughout these difficult and dynamic times, you steered the fund with a remarkable vision, vigor, and tenacity, but also humanity. your interactions with country authorities were characterized by a unique skill in galvanizing different forces towards favorable outcomes. you were so invested in helping members of the soviet bloc through their transition, for example, that you became a household name from moscow to bishkek, providing an element of continuity amid a continuous turnover of political and public figures. your untiring efforts brought a more human face to the fund. indeed, it was your compassion for the poor that took the fund and its most important direction towards poverty reduction through the establishment of lending through the enhanced structural adjustment facility, and its successor, the poverty reduction and growth facility. your compassion extended well beyond the fund. i'm supposed to show you something, which some of you will recognize. it is the seven pledges of michel camdessus. i have to pay tribute to our

guest in the back who was kind enough to let me have his card of the seven pledges. the seven pledges on sustainable development that became part of the 15 principles of the u.n. millennium development goals. michel, you were and still are a staunch supporter of multilateralism and cooperation, of openness and friendship between nations, and under your leadership, a decisive effort was made to curtail exchange estrictions. as a result, by the mid-1990's, making a public commitment to openness was no longer controversial in many countries. with openness came the need to better integrate. you witnessed the globalization of financial markets, and as a central banker yourself, you had the foresight to recognize that there was needed better integration of monetary exchange rate policies.

it is those products on which e cooperate very well. thanks to your efforts, the imf was able to transform from fiscal two also monetary and financial. thank you, michel. finally, you and your wife always harbored a deep respect and genuine defection -- affection for the staff of the institution. you were deeply concerned with their well-being and stood up for them. the fund staff reciprocated with her trust, respect, and abiding affection for you two. the staff and mayer you

personally and admire what you have achieved for this institution and the membership. we thank you for it. as a music lover, you referred to the fund staff as the world orchestra. [applause] there were plenty who made up this huge orchestra, which today, michel, you have another pportunity to engage with. we cannot wait to be part of it. thank you. [applause] >> you could imagine that i am a little bit overwhelmed by what i've just heard. i had the impression you were

talking about somebody lse. [laughter] let me tell you -- thank you for this kind introduction and also for the pleasure of being ere, back at the fund. it is a little bit like coming back on, very warm and welcome. yes, it's true that the time i've spent in the imf, 30 years, is exactly the same as

the time which went from today when i am back here, but it is my good pleasure to see many amiliar faces, not only in the first row, but many more in this huge audience. of course, i will be happy if i can see those over there some time later. [applause] what i perceive also is plenty of moments coming to my mind, all of these moments of very high pressure, and you have mentioned a few of them.

moments of high pressure, high excitement, i should say, and all of that contributing to create this great atmosphere of this institution. ynamic, professional, focused, people never satisfied with what they have just done and looking forward for finding a way to do better. this is my judgment of the imf. thank you again for this great pleasure and for the great honor, undeserved honor, to get y name for this lecture. totally undeserved. this is something you and i will have to discuss further ater on.

[laughter] i am proud of that. the presence with us today, the chair of the federal reserve, brings prestige to the series of lectures. i will have to get used to seeing my name on that. ok. [laughter] it makes great sense to devote urther intellectual efforts to the issues around a central banking. even if many of you know that i have not been all my life a central banker -- i started as minister of finance in my country. at the time, the bank of france was not yet independent

yet. the bank must be in the hands of the fate, but not too uch. i did everything i could to comply with the second part. [laughter] the bank of france finally got independence. the change is certainly one of the most profound changes in central banking during the last ecade. today, perhaps even more than in the past, we recognize that the economic well-being of nations depends on the quality of their monetary policies.

one couldn't imagine a more important topic for new luck cheers here at the imf -- new lectures here at the imf. why is central banking so crucial? obviously, because the monetary stability is a key component of he common good, the global commons, as they say in new york. yes, and by stability we mean ow and stable inflation, and we know from bitter experiences in the archives of the imf about the damage that high and volatile inflation can do. we no much better now also the effect of deflation. we also understand clearly now that in order to achieve price

stability, we need some policy framework directed towards the financial sector, something which was not that all that familiar when i joined the imf. the financial sector was an area where we were were not allowed to go. i remember a tremendous conversation about that when we started discussing about suggestions i wanted to make to the banking community, and then she told me, never lecture the bankers. never! f course, we continued lecturing a little bit, but nevertheless, we were wearing

difficult counts -- gowns. something which is very unique, their ability to respond quickly. fiscal and social policies are important, but they are not able to change course as quickly as monetary policy. of course, we have just had a very good demonstration of that with the crisis in 2007. we saw the timely and decisive actions of the united states federal reserve and all the central banks around the world. the crisis could have been uch, much worse. f we go back to the history,

you have already help us, christine, we see many examples of the changes which have had to be introduced in the central banking universe. we had this huge transformation in eastern europe and former oviet republics. there, of course, the imf staff had to do an extraordinary job, providing technical assistance and coordinating efforts to reate central banking in a universe where monetary policy did not have the same meaning. as a matter of fact, it had no meaning at all. that had to be created from

scratch, creating the central banks, along with the supporting banking, accounting, and financial infrastructures. the work was enormous. then we had the asian risis. it was a very different kind of problem. e had central banks there. they were severely tested in he affected countries. we had a few false starts in some cases. you may remember them pretty well. also, decisive stabilization

measures. more important probably are the lessons which were learned from them, by them and by the imf, in that occasion. ne was that financial former ulnerabilities can be even when macro economic fundamentals appear sound. this was the surprise of that moment, one of them. another was that the risk from large and volatile capital flows create larger foreign exchange offers. we had some difficulty in convincing our membership that you had to add a zero to the numbers of our loans in several countries. we had some problems with that, but we did it.

hen we had the change in central bank policy frameworks introduced with enormous effort from the staff, and they have paid off. we had a demonstration of this in the fact that all of these countries have been extremely quick in weathering the recent global crisis. of course, one could regret that the advanced economies have not realized deeply enough after the crisis that their own financial systems might be there, another kind of surprise in this world. we have paid a certain price or that.

after expressing this regret, i must say that on the positive side that in europe, which launched the extraordinary experience of creating a new currency -- in europe, we have seen the central banks, and ore broadly, the governments draw two important lessons from this crisis. one, the importance of adhering to fiscal rules. this adherence is changing the landscape. this is a lesson which has been well received. another one, the importance of banking supervision and crisis

resolution, an issue for which our predecessor has made a very superb job over the last few years. another change was the inflation targeting. a canadian invention at the end of the 1990's, which has finally -- which went around during my last stay here, and this was an enormous condition that continues running its course. see that time is running. one of the features of the central banking, which was for so long an archetype, it's always changing.

the definition of central anking is changed now. changes are at times small, and at other times, deep and widespread. change is often induced by outside pressure, but can also happen by design. we know all of that. in any case, it is important that the implications of such changes be carefully onsidered. if i had time, i would take hat. when i was appointed central bank governors in paris, i went immediately to see my predecessor to have his nstructions. he told me only one -- he said, remember, my friend, in central anking, nothing is urgent.

take all the time needed to carefully think about, and then finally, either the crisis will be over -- [laughter] or you'll make the right decision. was not 100% sure that he was right, but nevertheless, i kept that in my mind. the conclusion i did draw -- ttwo things -- one, invest in apacity, talent, applied research, analysis to try to tay in the cutting-edge, and

emain open to new ideas. e are now in a new period of questioning due to the global financial crisis, of course, and i couldn't agree more with hat the managing director just said. the crisis has taught us where in the past years, a little bit too simple, monetary policy years ago you can deploy unconventional measures when necessary. financial stability tools, like

macroeconomic policies and the eternal lesson that preventing crises is a substantial less costly move then managing and containing them. this crisis has left us also with major unanswered questions. in the immense uncharted field that central banks have in common, the international monetary system. here, i couldn't do better than to echo the words of my elder brother in central banking, paul volcker, who in his emarks at the annual meeting one month ago -- of course, in that speech, there were plenty of interesting points.

you alluded to the so-called xorbitant privilege. and the invention, and you have yourself the kind of war at the beginning of the 1970's. history should keep that on ecord. what i want to say is that i would like wholeheartedly to repeat your plea for attention for the need of developing le-based cooperatively-managed monetary systems.

i look forward with high expectations to the measures the central banking community will adopt to face this challenge in the continuing quest for frameworks and policies that would lead us to greater global stability and prosperity. have no doubt that the imf, faithful to its purpose to promote economic cooperation and to provide the machinery for consultation and collaboration on international monetary problems, will contribute -- these are your own words -- to provide the necessary analysis and well conceived approaches that could command support in this long journey towards a better ystem. may our new lectures contribute to it. thank you, thank you all very much.

>> thank you very much, michel. listening to you, i wanted to revisit our traditional thinking about central bankers. no, they are not boring men in grey suits. they are capable of changing, and they are even capable of not being then. which is why i'm not going to spend any more time -- introducing to you and leaving with you an extra ordinary woman who i greatly admire. i have about five pages of complements and reminders of all of her achievements and how much she has done, but i will spare you that. you are all convinced as well as i am. the first woman to take the chair of the federal reserve

board last february -- janet, we all look to you and your deeply experience and everything you bring to the table to guide us in this difficult time. i know you are going to navigate us between price stability, financial stability, and many other issues. he floor is yours. >> thank you, christine. it is an honor to deliver the inaugural michel camdessus central banking lecture. michel camdessus served with distinction as governor of the banque de france and was one of the longest-serving managing directors of the international onetary fund, imf. in these roles, he was well aware of the challenges central banks face in their pursuit of price stability and full employment, and of the interconnections between

macroeconomic stability and financial stability. those interconnections were apparent in the latin american debt crisis, the mexican peso crisis, and the east asian financial crisis, to which the imf responded under camdessuss leadership. these episodes took place in emerging market economies, but since then, the global financial crisis and, more recently, the euro crisis have reminded us that no economy is immune from financial instability and the adverse effects on employment, economic activity, and price stability that financial crises cause. the recent crises have appropriately increased the focus on financial stability at central banks around the world. at the federal reserve, we have devoted substantially increased

resources to monitoring financial stability and have refocused our regulatory and supervisory efforts to limit the buildup of systemic risk. there have also been calls, from some quarters, for a fundamental reconsideration of the goals and strategy of monetary policy. today i will focus on a key question spurred by this debate: how should monetary and other policymakers balance macroprudential approaches and monetary policy in the pursuit of financial stability? in my remarks, i will argue that monetary policy faces significant limitations as a tool to promote financial stability: its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are

not well understood and are less direct than a regulatory or supervisory approach; in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. as a result, i believe a macroprudential approach to supervision and regulation needs to play the primary role. such an approach should focus on through the cycle standards that increase the resilience of the financial system to adverse shocks and on efforts to ensure that the regulatory umbrella will cover previously uncovered systemically important institutions and activities. these efforts should be complemented by the use of countercyclical macroprudential tools, a few of which i will describe.

but experience with such tools remains limited, and we have much to learn to use these measures effectively. i am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns. accordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability. because of this possibility, and because transparency enhances the effectiveness of monetary policy, it is crucial that policymakers communicate their views clearly on the risks to financial stability and how such risks influence the appropriate monetary policy

stance. i will conclude by briefly laying out how financial stability concerns affect my current assessment of the appropriate stance of monetary policy. when considering the connections between financial stability, price stability, and full employment, the discussion often focuses on the potential for conflicts among these objectives. such situations are important, since it is only when conflicts arise that policymakers need to weigh the tradeoffs among multiple objectives. but it is important to note that, in many ways, the pursuit of financial stability is complementary to the goals of price stability and full employment. a smoothly operating financial system promotes the efficient allocation of saving and investment, facilitating economic growth and employment.

a strong labor market contributes to healthy household and business balance sheets, thereby contributing to financial stability. and price stability contributes not only to the efficient allocation of resources in the real economy, but also to reduced uncertainty and efficient pricing in financial markets, which in turn supports financial stability. despite these complementarities, monetary policy has powerful effects on risk taking. indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. but such risk-taking can go too far, thereby contributing to fragility in the financial system.1 this possibility does not obviate the need for

monetary policy to focus primarily on price stability and full employmentthe costs to society in terms of deviations from price stability and full employment that would arise would likely be significant. i will highlight these potential costs and the clear need for a macroprudential policy approach by looking back at the vulnerabilities in the u.s. economy before the crisis. i will also discuss how these vulnerabilities might have been affected had the federal reserve tightened monetary policy in the mid-2000s to promote financial stability. although it was not recognized at the time, risks to financial stability within the united states escalated to a dangerous level in the mid-2000s. during that period, policymakersmyself includedwere aware that homes

eemed overvalued by a number of sensible metrics and that home prices might decline, although there was disagreement about how likely such a decline was and how large it might be. what was not appreciated was how serious the fallout from such a decline would be for the financial sector and the macroeconomy. policymakers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the united states since the great depression because that reversal interacted with critical vulnerabilities in the financial system and in government regulation. in the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, weak underwriting of loans,

deficiencies in risk measurement and risk management, and the use of exotic financial instruments that redistributed risk in nontransparent ways. in the public sector, vulnerabilities included gaps in the regulatory structure that allowed some systemically important financial institutions and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole. it is not uncommon to hear it suggested that the crisis could have been prevented or significantly mitigated by substantially tighter monetary policy in the mid-2000s. at the very least, however, such an approach would have been insufficient to address

the full range of critical vulnerabilities i have just described. a tighter monetary policy would not have closed the gaps in the regulatory structure that allowed some sifis and markets to escape comprehensive supervision; a tighter monetary policy would not have shifted supervisory attention to a macroprudential perspective; and a tighter monetary policy would not have increased the transparency of exotic financial instruments or ameliorated deficiencies in risk measurement and risk management within the private sector. some advocates of the view that a substantially tighter monetary policy may have helped prevent the crisis might acknowledge these points, but they might also argue that a tighter monetary policy could have limited the rise in house prices, the use of leverage within the private sector, and

the excessive reliance on short-term funding, and that each of these channels would have containedor perhaps even preventedthe worst effects of the crisis. a review of the empirical evidence suggests that the level of interest rates does influence house prices, leverage, and maturity transformation, but it is also clear that a tighter monetary policy would have been a very blunt tool: substantially mitigating the emerging financial vulnerabilities through higher interest rates would have had sizable adverse effects in terms of higher unemployment. in particular, a range of studies conclude that tighter monetary policy during the mid-2000s might have contributed to a slower rate of house price appreciation. but the magnitude of this effect would likely have been modest relative to the

substantial momentum in these prices over the period; hence, a very significant tightening, with large increases in unemployment, would have been necessary to halt the housing bubble.2 such a slowing in the housing market might have constrained the rise in household leverage, as mortgage debt growth would have been slower. but the job losses and higher interest payments associated with higher interest rates would have directly weakened households ability to repay previous debts, suggesting that a sizable tightening may have mitigated vulnerabilities in household balance sheets only modestly. similar mixed results would have been likely with regard to the effects of tighter monetary policy on leverage and reliance on short-term financing within the financial sector. in particular, the evidence that low interest rates

contribute to increased leverage and reliance on short-term funding points toward some ability of higher interest rates to lessen these vulnerabilities, but that evidence is typically consistent with a sizable range of quantitative effects or alternative views regarding the causal channels at work.4furthermore, vulnerabilities from excessive leverage and reliance on short-term funding in the financial sector grew rapidly through the middle of 2007, well after monetary policy had already tightened significantly relative to the accommodative policy stance of 2003 and early 2004. in my assessment, macroprudential policies, such as regulatory limits on leverage and short-term funding, as well as stronger underwriting standards, represent far more direct and

likely more effective methods to address these vulnerabilities. turning to recent experience outside the united states, a number of foreign economies have seen rapidly rising real estate prices, which has raised financial stability concerns despite, in some cases, high unemployment and shortfalls in inflation relative to the central banks inflation target.6 these developments have prompted debate on how to best balance the use of monetary policy and macroprudential tools in promoting financial stability. for example, canada, switzerland, and the united kingdom have expressed a willingness to use monetary policy to address financial stability concerns in unusual circumstances, but they have similarly concluded that macroprudential policies should

serve as the primary tool to pursue financial stability. in canada, with inflation below target and output growth quite subdued, the bank of canada has kept the policy rate at or below 1 percent, but limits on mortgage lending were tightened in each of the years from 2009 through 2012, including changes in loan-to-value and debt-to-income caps, among other measures. in contrast, in norway and sweden, monetary policy decisions have been influenced somewhat by financial stability concerns, but the steps taken have been limited. in norway, policymakers increased the policy interest rate in mid-2010 when they were facing escalating household debt despite inflation below target and output below

capacity, in part as a way of guarding against the risk of future imbalances. similarly, swedens riksbank held its policy rate slightly higher than we would have done otherwise because of financial stability concerns. in both cases, macroprudential actions were also either taken or under consideration. in reviewing these experiences, it seems clear that monetary policymakers have perceived significant hurdles to using sizable adjustments in monetary policy to contain financial stability risks. some proponents of a larger monetary policy response to financial stability concerns might argue that these perceived hurdles have been overblown and that financial stability concerns should be elevated significantly in

monetary policy discussions. a more balanced assessment, in my view, would be that increased focus on financial stability risks is appropriate in monetary policy discussions, but the potential cost, in terms of diminished macroeconomic performance, is likely to be too great to give financial stability risks a central role in monetary policy decisions, at least most of the time. if monetary policy is not to play a central role in addressing financial stability issues, this task must rely on macroprudential policies. in this regard, i would note that here, too, policymakers abroad have made important strides, and not just those in the advanced economies. emerging market economies have in many ways been leaders in applying macroprudential policy

tools, employing in recent years a variety of restrictions on real estate lending or other activities that were perceived to create vulnerabilities. although it is probably too soon to draw clear conclusions, these experiences will help inform our understanding of these policies and their efficacy. if macroprudential tools are to play the primary role in the pursuit of financial stability, questions remain on which macroprudential tools are likely to be most effective, what the limits of such tools may be, and when, because of such limits, it may be appropriate to adjust monetary policy to get in the cracks that persist in the macroprudential framework. in weighing these questions, i find it helpful to distinguish between tools that primarily build through-the-cycle

resilience against adverse financial developments and those primarily intended to lean against financial excesses.12 tools that build resilience aim to make the financial system better able to withstand unexpected adverse developments. for example, requirements to hold sufficient loss-absorbing capital make financial institutions more resilient in the face of unexpected losses. such requirements take on a macroprudential dimension when they are most stringent for the largest, most systemically important firms, thereby minimizing the risk that losses at such firms will reverberate through the financial system. resilience against runs can be enhanced both by stronger capital positions and requirements for sufficient liquidity buffers among the

most interconnected firms. an effective resolution regime for sifis can also enhance resilience by better protecting the financial system from contagion in the event of a sifi collapse. further, the stability of the financial system can be enhanced through measures that address interconnectedness between financial firms, such as margin and central clearing requirements for derivatives transactions. finally, a regulatory umbrella wide enough to cover previous gaps in the regulation and supervision of systemically important firms and markets can help prevent risks from migrating to areas where they are difficult to detect or address. in the united states, considerable progress has been made on each of these fronts. changes in bank capital

regulations, which will include a surcharge for systemically important institutions, have significantly increased requirements for loss-absorbing capital at the largest banking firms. the federal reserves stress tests and comprehensive capital analysis and review process require that large financial institutions maintain sufficient capital to weather severe shocks, and that they demonstrate that their internal capital planning processes are effective, while providing perspective on the loss-absorbing capacity across a large swath of the financial system. the basel iii framework also includes liquidity requirements designed to mitigate excessive reliance by global banks on short-term wholesale funding. oversight of the u.s. shadow banking system also has been strengthened. the new financial stability

oversight council has designated some nonbank financial firms as systemically important institutions that are subject to consolidated supervision by the federal reserve. in addition, measures are being undertaken to address some of the potential sources of instability in short-term wholesale funding markets, including reforms to the tri-party repo market and money market mutual fundsalthough progress in these areas has, at times, been frustratingly slow. additional measures should be taken to address residual risks in the short-term wholesale funding markets. some of these measuressuch as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale fundingwould likely apply only to the largest, most complex

organizations. other measuressuch as minimum margin requirements for repurchase agreements and other securities financing transactionscould, at least in principle, apply on a marketwide basis. to the extent that minimum margin requirements lead to more conservative margin levels during normal and exuberant times, they could help avoid potentially destabilizing pro-cyclical margin increases in short-term wholesale funding markets during times of stress. at this point, it should be clear that i think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. this focus on resilience differs from much of the public discussion, which often

concerns whether some particular asset class is experiencing a bubble and whether policymakers should attempt to pop the bubble. because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical. nonetheless, some macroprudential tools can be adjusted in a manner that may further enhance resilience as risks emerge. in addition, macroprudential tools can, in some cases, be targeted at areas of concern. for example, the new basel iii regulatory capital framework includes a countercyclical capital buffer, which may help build additional loss-absorbing capacity within the financial sector during periods of rapid credit creation while also leaning against emerging

excesses. the stress tests include a scenario design process in which the macroeconomic stresses in the scenario become more severe during buoyant economic expansions and incorporate the possibility of highlighting salient risk scenarios, both of which may contribute to increasing resilience during periods in which risks are rising.13 similarly, minimum margin requirements for securities financing transactions could potentially vary on a countercyclical basis so that they are higher in normal times than in times of stress. in light of the considerable efforts under way to implement a macroprudential approach to enhance financial stability and the increased focus of policymakers on monitoring emerging financial stability

risks, i see three key principles that should guide the interaction of monetary policy and macroprudential policy in the united states. first, it is critical for regulators to complete their efforts at implementing a macroprudential approach to enhance resilience within the financial system, which will minimize the likelihood that monetary policy will need to focus on financial stability issues rather than on price stability and full employment. key steps along this path include completion of the transition to full implementation of basel iii, including new liquidity requirements; enhanced prudential standards for systemically important firms, including risk-based capital requirements, a leverage ratio, and tighter prudential buffers for firms heavily reliant on short-term wholesale funding; expansion of the regulatory

umbrella to incorporate all systemically important firms; the institution of an effective, cross-border resolution regime for systemically important financial institutions; and consideration of regulations, such as minimum margin requirements for securities financing transactions, to limit leverage in sectors beyond the banking sector and sifis. second, policymakers must carefully monitor evolving risks to the financial system and be realistic about the ability of macroprudential tools to influence these developments. the limitations of macroprudential policies reflect the potential for risks to emerge outside sectors subject to regulation, the potential for supervision and regulation to miss emerging risks, the uncertain efficacy

of new macroprudential tools such as a countercyclical capital buffer, and the potential for such policy steps to be delayed or to lack public support. given such limitations, adjustments in monetary policy may, at times, be needed to curb risks to financial stability. these first two principles will be more effective in helping to address financial stability risks when the public understands how monetary policymakers are weighing such risks in the setting of monetary policy. because these issues are both new and complex, there is no simple rule that can prescribe, even in a general sense, how monetary policy should adjust in response to shifts in the outlook for financial stability. as a result, policymakers

should clearly and consistently communicate their views on the stability of the financial system and how those views are influencing the stance of monetary policy. to that end, i will briefly lay out my current assessment of financial stability risks and their relevance, at this time, to the stance of monetary policy in the united states. in recent years, accommodative monetary policy has contributed to low interest rates, a flat yield curve, improved financial conditions more broadly, and a stronger labor market. these effects have contributed to balance sheet repair among households, improved financial conditions among businesses, and hence a strengthening in the health of the financial sector. moreover, the improvements in household and business balance sheets have been accompanied by

the increased safety of the financial sector associated with the macroprudential efforts i have outlined. overall, nonfinancial credit growth remains moderate, while leverage in the financial system, on balance, is much reduced. reliance on short-term wholesale funding is also significantly lower than immediately before the crisis, although important structural vulnerabilities remain in short-term funding markets. taking all of these factors into consideration, i do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns. that said, i do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust

macroprudential approach. for example, corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward. in addition, terms and conditions in the leveraged-loan market, which provides credit to lower-rated companies, have eased significantly, reportedly as a result of a reach for yield in the face of persistently low interest rates. the federal reserve, the office of the comptroller of the currency, and the federal deposit insurance corporation issued guidance regarding leveraged lending practices in early 2013 and followed up on this guidance late last year. to date, we do not see a systemic threat from leveraged

lending, since broad measures of credit outstanding do not suggest that nonfinancial borrowers, in the aggregate, are taking on excessive debt and the improved capital and liquidity positions at lending institutions should ensure resilience against potential losses due to their exposures. but we are mindful of the possibility that credit provision could accelerate, borrower losses could rise unexpectedly sharply, and that leverage and liquidity in the financial system could deteriorate. it is therefore important that we monitor the degree to which the macroprudential steps we have taken have built sufficient resilience, and that we consider the deployment of other tools, including adjustments to the stance of monetary policy, as conditions change in potentially

unexpected ways. in closing, the policy approach to promoting financial stability has changed dramatically in the wake of the global financial crisis. we have made considerable progress in implementing a macroprudential approach in the united states, and these changes have also had a significant effect on our monetary policy discussions. an important contributor to the progress made in the united states has been the lessons we learned from the experience gained by central banks and regulatory authorities all around the world. the imf plays an important role in this evolving process as a forum for representatives from the worlds economies and as an institution charged with promoting financial and economic stability globally. i expect to both contribute to and learn from ongoing discussions on these

ssues. [applause] >> oh, my goodness. madam chairman, you have impressed us enormously with a rich, dense, very informative and very candid your read of the current situation and how monetary policy and macroprudential tools could be used in sequence, in parallel, in different circumstances. and i would like to, maybe following the stradivarius analogy of michel, to stay

loyal to him today, what would you say? would you say that macroprudential tools are second fiddle to the main stradivarius of monetary policy? or would you say that, depending on circumstances, macroprudential tools become the premier violon and have to deal with the issues as a first line of defense? >> well, i think my main theme here today is that macroprudential policies should be the main line of defense, and i think the efforts that were engaged in in the united states but all countries coordinating through the -- through basel, through the financial stability boards -- the efforts that we are taking to globally strengthen the resilience of the financial system: more capital, higher quality capital, higher

iquidity buffers, stronger and -- arrangements for central clearing of derivatives that reduce interconnectedness among systemically important inancial institutions, strengthening of the architecture of payments and clearing system dealing with risks we see in areas like tri-party repo. all of these efforts -- and particularly focusing on the resilience of the most systemically important firms through sifi surcharges and other measures -- higher leverage ratios. i see this as the core step that we need to take in the united states and globally to create a safer and sounder

financial system. and if were able to do that, reducing also the reliance on wholesale funding, if the system does experience shocks, it will be better able to deal with it. i would also put resolution planning which were engaging in actively as among those measures. and, you know, as i mentioned, i think cyclical policies and sector-specific policies that were seeing many emerging markets take steps that can be used, particularly when we see problems developing in housing or a particular sector. these are really promising. i dont think we yet understand how they work. when they can be effective, how we should use them. i hope this will be an area for the imf and for us of active research so we can better deploy those tools, capital -- countercyclical capital

charges. but i think importantly, ive not taken monetary policy totally off the table as a measure to be used when financial excesses are developing because i think we have to recognize that macroprudential tools have their limitations. and there may be times when monetary policy does need to be adjusted or deployed to lean against the wind. so to me, its not a first line of defense, but it is something that has to be actively in the mix. >> right. and if you -- if youre using your first line of defense, do you think that this is likely -- not now but sort of in more calm possibly and in more medium-term times, would you -- would that help us get away from this zero lower bound environment in which monetary

policy is currently a bit stark without being negative about the -- being stuck -- words that im using. but whether its here or whether it is in the u.k. or in the euro area, we are faced with that issue. with the exploring of negative interest rates, as is the case now in -- by the ecb. do you believe that the sort of constant use of those macroprudential tools are likely to move us out of that direction? >> so it is remarkable to see how many countries have been affected by the zero lower bound. its something that for most of my career would have seemed frankly unimaginable. and often, it has been the case that these episodes have occurred in the aftermath of a crisis that impacted the financial system whether its in japan or here in the united states. so, you know, i think it will be helpful if we can strengthen

the financial system. such huge adverse shocks are less likely. still it is a real possibility. and for example, the work that weve done with the standard kind of macroeconomic models we use inside the federal reserve, looking at the incidents of shocks that have occurred, there is a real possibility -- there remains a real possibility that we could continue to be hit by the zero lower bound. and i think, you know, weve had recently many discussions of secular stagnation or the notion that for some period of time, whether its because of slower productivity growth or headwinds from the financial crisis or demographic trends that so-called equilibrium real interest rates may be at a lower level than weve seen

historically. and thats one of the factors that i think will be important in determining how frequently a negative shock could push economies against the zero lower bound. so if it is correct that equilibrium rates in the united states and globally may be lower going forward than they have been historically, i think we will have to worry about these episodes more often. and, you know, of course often there are other tools besides monetary policy, and sometimes monetary policy bears the brunt -- i mean, in recent years it has borne the brunt of responding. i think if countries had greater fiscal scope, if they had more room for the use of fiscal policy than many countries have now, there would be a larger toolkit that could be used to respond to the zero lower bound.

>> well, the toolkit of the moment seems to include more structural reforms than fiscal space, although this is -- the situation is improving slightly. on the sort of lower interest rates, our research department that is headed by olivier blanchard, who is around somewhere, has done similar work to the one that youre alluding to, and we point to that direction as well. >> and youve -- so thats >> one -- let me take you one circle further. youve beautifully demonstrated the efforts that have been undertaken from a macroprudential point of view in terms of the universe that you have under your jurisdiction. but this universe, being restricted and well supervised as it is, has generated the creation of parallel universes. and, you know, im just thinking of you, janet, with the toolbox with all the

attributes that you have -- what can you do about the shadow banking at large? and, you know, im not giving it any dismissive connotations. it just happens that there have been developments of alternative funding mechanisms and financing mechanisms that are outside the realm of central bankers. what can be done about them in order to make sure that there is no creation of significant risk threats out there which are not covered by macroprudential tools? >> so i think youre pointing to something that is an enormous challenge. and we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we wont be able to detect them.

and if we can, we wont be -- we wont have adequate regulatory tools. and that is going to be a huge challenge to which i dont have a great answer. but as we think about tools that we can use to address systemic risk, i think its particularly useful to focus on those that have the potential to control risks not only among regulated institutions but also more broadly. and thats one reason that in the speech i gave, i mentioned margin requirements and, you know, limit -- that can serve to limit leverage not only within the banking system but more broadly, by any institution -- >> that would use the clearing system. >> -- hedge fund, an unregulated -- right, that would be borrowing -- using

short-term financing to take on leverage positions. because this is the type of tool that might have wide -- >> universal. yeah. >> -- more universal effect. ill tell you also, we have developed -- as many, you know, as you have and as many central banks have -- very active monitoring programs to try to be on the lookout for what will cause the next crisis. hopefully, many, many years in the future, but >> well both be retired by then. >> i think -- i certainly hope so. but you know, what are the new threats? and, you know, were trying to look for those and to be attentive to them and, you know, particularly to look outside the regulatory perimeter to see where threats are emerging. but this is a -- this is a real challenge, i think, for all of us. >> we share exactly the same concern and we try to -- because we look at the horizon and we know where they -- >> what could happen.

>> -- could be the traditional risks based on history. but what im obsessed about is what do we not know from history and that will arise and that will be the risk of tomorrow. >> yeah. i think we have a much more active program of monitoring for those risks and -- >> yeah. >> -- you know, than we did before the crisis. >> let me take -- youve taken examples from canada, switzerland and a few other countries. you know, id be remiss not to address the issue of spillover. we are an institution that is concerned by 188 countries; they are the members. and we are doing as much research as we can to identify the spillovers from monetary policies and macroprudential tools used as you have described them. we have seen an episode of strong spillovers between, say, may 2013 and august 2013. i know its not directly in

your mandate to worry about the spillovers, its in mine. and we compare our notes and -- on a friendly basis. but what -- how do you perceive them? how do you integrate them in your -- in your way of thinking? and are you attentive as well to what we are working on, which is the study of the spillbacks from the spillover? and for those who are not so much in tune with our spill-spill business, the spillovers i think is widely understood as the consequences outside of domestic base of decisions made in terms of monetary policy in that domestic base. the spillbacks is the consequences of the spillovers as they bounce back to the domestic markets where the decisions were originally made. and im sure that you pay attention to it. >> so we certainly do pay attention to spillovers,

although the fed -- and this is true of most central banks -- the mandates that were given by our -- by congress or the relevant legislatures tend to focus on domestic goals. we certainly strive to avoid harm in generating spillovers when we use monetary policy, and of course, we are very much affected by the global environment. and so the spillbacks to which you refer are central in our analysis of our own economy and what the impact of our policies would be. i mean, i think if you look at u.s. monetary policy generally, given -- of course, there are spillovers. i mean, in global financial markets that -- where capital flows are as large as they are in the global economy today and financial markets are so

interconnected, of course, there are spillovers and there is no denying that. but i think, you know, when youve seen significant impacts on, say, emerging market economies from capital flows, i think most studies -- ours and i think of other researchers -- would suggest that there are a multiplicity of factors that are causing it, of which movements in global interest rates would be only one. so for example, when we instituted qe2, which generated in that period after that there were capital inflows into many emerging markets. i mean, there were other factors also: stronger growth in the emerging markets, i think, was an important factor. and shifts in risk attitudes among investors globally that are not necessarily driven by

monetary policy. but i guess the other point i would make is that the studies that we have done -- and i believe this would be consistent with the imfs analysis -- would suggest that when the united states, as important as we are in the global economy -- when we adopt policies to -- in pursuit of price stability and full employment, given our importance as a purchaser of goods from other countries, generally, these are not beggar-thy-neighbor policies. were not mainly affecting foreign countries by pushing down, say, with expansionary policy, our exchange rate, to their detriment. when our economy expands, we buy more, and on balance, i think the spillovers are not negative, theyre typically positive. but you did refer specifically to the episode a year ago --

and of course we did see before there had been any real change -- >> right. >> -- in monetary policy, but a shift in communications about future monetary policy, a very pronounced jump in interest rates. and for some countries -- and i think they were typically emerging markets with greater vulnerabilities -- there were pronounced capital -- >> currency, yeah. >> -- outflows that put pressure on currencies, caused those countries to tighten monetary policy. and obviously those were disruptive. you know, i think it was -- >> just to give you an example because michelle bachelet was here exactly where you are yesterday, and she was reminding me that at that time the currency in chile went up by 30 percent. now, it sequentially went down a bit, but it had immediate and strong effects on those countries. new zealand is another point and case. >> you know, i think there, in part, what was happening is that traders had built up

positions that were premised on unrealistic expectations about interest rate paths and about the appropriate level of volatility. and it wasnt just a shift in monetary policy, but a rapid unwinding of carry trade and leverage positions that had built up that caused that damage. you know, i pledged often and will continue, we will try to conduct our monetary policy, to communicate about it and to conduct it in a manner that is understandable to financial markets to avoid the kinds of surprises that could cause jumps in interest rates that cause such capital flows. you know -- you know, to some extent -- to some extent, i

think -- i think such spillovers are really unavoidable in a situation in the global capital markets. i dont know if you would share this assessment, but my own assessment is that most emerging markets do have much stronger financial systems than they had at the time of the crisis that michelle had to intervene in because of -- >> and its because they went through the crisis with the support of michelle and the team that they felt a lot stronger afterwards, thats for sure. >> yes. and all the things that were put in place that -- the kinds of shocks that we may see or spillover is -- as hopefully the global economy recovers and were in a position to be able to tighten monetary policy, i wouldnt assume that this is going to go badly. and i can just say that we will do everything on our side to make sure that it goes smoothly. >> well, thank you so much for this commitment to it.

certainly, the -- there are representatives of the emerging market economies in the room and im sure that they are particularly interested in your views as to how we can best -- you can best communicate and they can best anticipate so as to limit the volatility risk that arises from that. i will ask you a financial question before we wrap up because i know that we are pressed for time. michelle referred to napoleon bonaparte who said that the central banks should be independent, but not too much. >> with that enlarged responsibility in a way -- well, purposely i changed a ittle bit. monetary policy, macroprudential tools to be used for financial stability, your dual mandate in a way of both employment and growth --

are you independent? >> well, i think we are independent and appropriately so in the conduct of monetary policy. congress has established the goals the goals that were to pursue. and i think this is true in most countries that theres not goal independence, but there is independence about how to carry out monetary policy. and theres an awful a lot of research that suggests that macroeconomic outcomes are better when central banks have the ability to decide how to use their tools. they have to explain them. they have to be accountable. were accountable to congress. and i think that is very important. sometimes when central banks take on financial stability mandates, it becomes harder. and i dont think independence is appropriate in absolutely

every sphere of conduct that central banks become involved in. so i think its really the conduct of monetary policy where independence is important. we had the experience during the crisis of putting in place a very large number of liquidity programs and when central banks become involved in those kinds of lender of last resort activities. for example, the lines between what should a central bank do and whats the responsibility of government can become blurred. >> right. >> and, you know, these are times when i think the activities of central banks can become quite controversial. and one of the things that we did during the crisis to try to clarify whats the dividing line, what are we supposed to do, what is the line a central bank shouldnt be dragged over,

or if it is, that the fiscal authority should clearly be taking responsibility. we actually had a kind of accord with treasury that was signed. it kind of indicated we may use our balance sheet to lend, but we shouldnt be taking on credit risk. and to the extent we do, its the responsibility of the government. but with cooperation and becomes very natural, the lines do get blurred and there is a potential threat to central bank independence. but i think it is important. >> but from a monetary policy, there is complete independence. >> from a monetary policy, there -- right. released tool independence. >> well, chairman yellen, as a token of our appreciation, i would like to hand over to you a little book which celebrates actually the 70th anniversary of the imf and tells the story of how it all started back 70 years ago plus one day, because the anniversary was actually

yesterday of the beginning of the imf. youve been a fantastic speaker -- >> thank you so much. >> youve been a terrific partner in this venture. and i look forward to continuing working for you. >> as i do too. > thank you so much. [applause] [captioning performed by national captioning institute] [captions copyright national able satellite corp. 2014]

vanderbilt is in our pier group at 6 billion. harvard, which represents the pinnicle of the nation's endowments is at 34 billion and they have a 6 billion campaign

going on right now just to put it in perspective. if we are going to aspire to have that type of excellence, those types of facilities to produce that type of excellence on our campus then we have to have that type of investment. it is my responsibility now and the 17th president when he or she is named to expand those issues. >> on the challenges facing the predominantly black university tonight at 8:00 eastern and pacific on c-span's q&a. >> this morning david crateser of the heritage foundation and daniel wice discuss the issue of climate change. then american university professor benjamin jensen talks about the latest developments in iraq, syria, and the region. and later the pew research

center discuss what is it could mean for future elections. "washington journal" is next. ♪ good morning, it is sunday, july 6, 2014. on today's three-hour washington journal we will discuss the future of a rack, breakdown a report on the politicization of polarization in america and first this morning we will discover the georgia safe carry protection act, known as the georgia guns everywhere law. as we take up the gun debate and reactions, we are asking viewers to weigh in with your thoughts. phone lines are open for you to do that. republicans can call --