Speech by the Chancellor of the Exchequer, Rt Hon George Osborne MP, on the Reform of Banking

Thank you for welcoming me to JP Morgan here in Bournemouth.

When you think about where to give a speech on culture and ethics and the future of British banking, the offices of one of the world’s largest American investment banks may seem like an odd choice of venue.
But it’s a deliberate one.
For the four thousand people who work here are, each one of you, a reminder that when banking works, it works for the families and communities of the whole of Britain. 
You, each one of you, are a reminder that when we attract international firms to our country – firms that could go anywhere in the world to do their business – those firms bring jobs, and investment and prosperity.
That for every one of the people employed here at the largest business in Dorset, there are many more employed in the businesses that support this office, in the shops that take your custom, and in the local economy that has grown stronger on your back.
I’m going to see two of those businesses after I speak here – a catering company and a landscaping business called Stewarts.
Four of the employees at that landscaping business work full time on JP Morgan site, jobs that wouldn’t exist without your presence.
From JP Morgan, one of the world’s biggest companies, to Stewarts landscaping, Bournemouth teaches us that Britain should continue to aspire to be a home to the world’s financial services.
And what is true for Bournemouth is also true of Bristol, and Edinburgh, Leeds, Cardiff, Birmingham and Manchester.
In all these cities, financial services are some of our largest and most innovative employers.
And it’s true about London too – and the City of London.
Generations have created in the City something extraordinary – a global centre of finance.
The global centre of finance.
Whether its insurance and accountancy, shipping and legal services, hedge funds, private equity, asset management or investment banking, when the world wants to transact – it wants to transact through London.
And we want to keep it that way in the years ahead.
That’s why it’s been good to see Britain and London maintain its number one spot as the home of global financial services.
That’s why it’s been exciting to see the first Renminbi bond issued anywhere in the world outside of Chinese sovereign territory issued in London in the last twelve months.
 For that is not just good for their future, it’s good for ours too.
It’s how we will win in the global race.
It’s what I am personally determined to achieve.
And part of having a successful financial services industry is having successful British banks, who want to lend at home and compete around the world.
Think of some of the most important moments in your life.
When you bought your own home with a mortgage.
When you took the plunge and started your own business.
When you retired and drew on your pension.
On each of those occasions, you relied on the financial system and put your trust in them
That is why it’s so important to have that trust reciprocated and a banking system that works for you.
And that is what I’m working night and day to deliver for you.
Like all this Government’s reform – to welfare, to the economy, to schools and to banking – we want to back aspiration and be on the side of those who want to work hard and get on.
Our principles are simple: if you do the right thing, government should support and help you, and remove the barriers in your way.
If you do the wrong thing, you should take responsibility for your actions.
And sadly, nowhere have these simple principles been broken more clearly and indefensibly than in our banking system over the last decade.
Irresponsible behaviour was rewarded, failure was bailed out, and the innocent – people who have nothing whatsoever to do with the banks – suffered.
For many, the financial crash was confirmation of what they felt about our society: that those who are only out for themselves get away with it; and those who work hard and play by the rules get punished.
That is why, five years on from that crash, people are still so angry.
And when people discover more about what went so wrong:

• the mis-selling of interest rate swaps to small firms who went bust as a result;
• the greed and corruption on the LIBOR trading floor.

They get angrier still.
I understand that anger.
I feel it too.
But anger can be a negative, destructive thing if it is not channelled into change.
Change for the good.
Any bunch of politicians can bash the banks, chase the headlines, court the populist streak.
But what good would that do our country?
The jobs, the investment, the banking system we all need would go with it.
Let’s take the anger we feel about the banks and turn it into change to build the banking system that works for us all.
That is precisely what we are doing.
And through the work we’ve done, the expert help we’ve enlisted, we can make 2013 the year of change in our banking system.
2013 is the year when we re-set our banking system.
So the banks work for their customers – and not the other way round.
So that those who guard over the banks to keep our economy safe are the right people with the right weapons to do the job.
And so that when mistakes are made, it’s the banks and not the taxpayer that picks up the bill.
Let me explain how.
Let me tell you about the four concrete things that are going to change this year.
First, we’ve got a brand new watchdog with new powers to keep our banks safe so they don’t bring down the economy.
Second, we’ve got a new law to separate the branch on the high street from the dealing floor in the city to protect taxpayers when mistakes are made.
Third, we’re going to start, with the industry, changing the whole culture and ethics of the business, so they work for you.
Fourth, we’re going to give customers the most powerful weapon of all: choice.
Real choice about who you bank with – and choice to change who you bank with if you want a better deal.
Let me take each in turn.
First, protecting our economy by keeping our banks safe.
The decision taken by the last government to divide responsibility for financial stability from banking supervision was one of the worst economy policy mistakes of the modern era.
The Bank of England was stripped of its responsibility for keeping the banking system safe. 
The Financial Services Authority was only focussed on compliance, with a myriad of individual rules, and missed the wood for the trees.
The Treasury’s banking division was run down.
No-one saw it as their job to monitor risks across the whole system.
So no-one spotted the increase of debt.
Staggeringly, total debt reached five times the size of the entire economy.
The fire alarm was ringing when Northern Rock handed out 120 per cent mortgages.
The fire alarm was ringing when the Royal Bank of Scotland made its reckless purchase of ABN AMRO, after the credit markets had already seized up.
The fire alarm was ringing, but no-one was listening.
And when the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out.
Ten per cent of the entire wealth of this country was lost.
Hundreds of thousands of people lost their jobs and their livelihoods.
Yes, those responsible should be held to account.
But British people need to know that lessons have been learnt.
And they have.
This April, the FSA is being abolished.
This April, the Bank of England will be in charge of keeping our financial system safe.
With the authority that comes from its history, and the new powers we have given it for the future, the Bank of England will be the super cop of our financial system.
The Bank is ready.
The logistics are in place.
And from day one, we will have a powerful new watchdog with real teeth.
Not just to intervene and stop individual wrong doing.
But the power to make a judgement call about the whole system - the power to spot increases in debt or warn of risky practices.
The power to call time before the party gets out of control.
But also the power to support the economy if credit conditions get too tight.
The Bank of England won’t be just empowered to protect us from the excesses of a banking boom, but also to help the bank support us in a bust.
And we’re also creating from April a strong new conduct regulator, the FCA, to ensure London and the UK have the best, most open, and transparently policed markets in the world.
That will win business for Britain, attract investment.
And through the Funding for Lending scheme, we’re giving banks incentives to boost lending to families and businesses.
We’ve already seen the availability and cost of borrowing coming down, but we are monitoring it closely to ensure that rates and availability continue to improve.
Good regulation.
Watchdogs with real teeth.
Open markets with clear rules, properly policed.
These support innovation.
For the industry that suffers most when something goes wrong in finance – is finance itself.
Second, this year we’re going to start separating the high street banking we all depend on from the City trading floor.
When the RBS failed, my predecessor Alistair Darling felt he had no option but to bail the entire thing out.
Not just the RBS on Britain’s high streets, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.
I want to make sure that the next time a Chancellor faces that decision they have a choice.
To keep the bank branches going, the cash machines operating, while letting the investment arm fail.
No more rewards for failure.
No more too big to fail.
No more taxpayers forking out for the mistakes of others.
The same rules for the banking business as any other business in a free market.
When the Government came into office, there was no agreement about how this massive task would be achieved.
That’s why we spent two and a half years painstakingly building a consensus on the future structure of our banking industry, working with leading experts and Members of Parliament and I want to thank Vince Cable for his help in doing that with me.
The work that Sir John Vickers and his Commission has done has won respect all around the world, and has already influenced the European debate.
Today, we are published the legislation that will turn their ideas and this consensus for change into law.
A law for the first time ever, to separate the retail and investment arms of banks, and erect a ring fence around the retail bank so its essential operations continue even if the whole bank fails.
I’m sending the legislation to the House of Commons today and I expect them to be passed by Parliament this time next year.
It won’t mean banks won’t make mistakes.
But it does mean that if they do, those parts of the banking system that are vital for families and businesses can continue without resort to the taxpayer.
Today, we will go further than previously announced, enshrining in law these simple principles.
I can announce that your high street bank will have different bosses from its investment bank.
Your high street bank will manage its own risks, but not the risks of the investment bank.
And the investment bank won’t be able to use your savings to fund their inherently risky investments.
My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence.
We’re not going to repeat the mistakes of the past.
In America and elsewhere, banks found ways to undermine and get around the rules.
Greed overcame good governance.
We could see that again – so we are going to arm ourselves in advance.
In the jargon, we will “electrify the ring fence”.
I want to thank Andrew Tyrie and the fellow members of the Banking Commission we established for help developing this important new idea.
Let’s get on and pass it all into law.
Let me turn to the third force for change – a change in the culture and ethics of the banking industry itself.
I have to say nowhere is this more keenly appreciated than in the responsible parts of the financial community itself.
You here work hard in a great business.
You service customers all over the world.
You don’t want the name of your whole industry to be besmirched because of the crimes of a few.
And nor do I.
That’s why the LIBOR scandal is about far more than atoning for the mistakes of the past.
It’s about becoming a catalyst for change in the future.
We know what happened.
From 2005, traders, brokers and bank officials attempted manipulation of one of the most important reference rates in our economy – a rate which affects the mortgage payments and loan rates of millions of families and hundreds of thousands of firms, large and small.
Deliberately submitting false rates for no motive other than greed.
“Lowballing” their Libor submissions to conceal how vulnerable their banks really were.
Years of manipulation, in twenty banks on three continents.
Over a billion pounds of fines have already been applied worldwide.
And we still haven’t seen the full extent of it – more revelations will come.
We’re expecting reports into what happened at RBS very shortly.
I expect there will be even more public anger – if that’s possible.
But anger is not enough – we need to channel the anger into change.
And I want to do the right thing for the hundreds of thousands of people in the banking sector – like you – in all parts of our country who do conduct themselves with professionalism – and make sure the reputation and standards of the industry are restored.
LIBOR manipulation happened in many countries.
But no country has responded as quickly as decisively as we have now done.
Where people have broken the law, the authorities will have all the resources they need to make sure they are punished.
I’ve changed the system I inherited so that fines paid by banks for wrongdoing got to good causes not back to the industry – I have already announced that £35 million pounds of Barclay’s fines will go to British Armed Forces charities to help those who fight on all our behalves.
The first million has been allocated to the Fisher House Project, which will help the families of wounded soldiers being treated at the Queen Elizabeth Hospital in Birmingham to stay close by.

And we’re now stepping in to regulate previously unregulated markets and we’re making it a criminal offence to make misleading statements about LIBOR. 
Shockingly that was not the case before.
And as we approach bonus season let me say this.
This country now has the toughest and most transparent pay regime of any major financial centre in the world.
City bonuses fell by almost two thirds last year, and are less than a quarter of their peak before the crash. 
Everyone should exercise restraint and responsibility, but it’s important to remember that the vast majority of people in the banking sector – like the people in this room – do not receive million pound bonuses.
We all know there are Libor investigations ongoing into RBS in both the UK and the US.
Any UK fine will benefit the public.
And when it comes to RBS, I am clear that the bill for any US fine related to this investigation should on this occasion be paid for by the bankers, and not the taxpayer.
But the change to the culture and ethics of banking go beyond bonuses and fines.
I believe we need proper professional standards in the banking sector – just as we have for doctors and lawyers. 
I want to see the industry take pride in those standards, as our medical and legal professions do.
And I want to see how we can strengthen the sanctions regime for senior bankers – for example, should there be a presumption that the directors of failed banks do not work in the sector again?  
I have asked the Parliamentary Commission to look at how to improve the professional standards and culture of the banking sector.
Their work is underway and will report in the spring.
I would encourage the Commission to come forward with far reaching proposals.
The fourth and final change we need to banking is more choice.
Choice is the most powerful tool we have to improve markets and customer service, reward good companies and penalise poor ones.
Yes, our new regulator can pick up the pieces from the interest swap mis-selling or PPI.
Yes, I believe we must do much more to expose hidden charges and remove the conflicts of interest that plague too much so called independent financial advice.
But I also want to see more banks on the high street, so customers have more choice.
One of the prices we’re paying for the financial crisis is that our banking sector is now dominated by a few big banks.
It verges on an oligopoly.
75% of all personal current accounts are in the hands of just four companies.
I want new faces on the high street.
I want upstart challengers offering new and better services that shake up the established players.
We’ve made a start: with the sale of Northern Rock to Virgin Money, and the proposed sale of Lloyds branches to Co-op.
We’re seeing new banks like Metro Bank on our high streets – but I want to make it easier to start a small bank and grow the business.
This year, in 2013, we’re taking a huge step towards making that happen – by making it easier for customers to move banks if they can get a better deal elsewhere. 
From September this year, every customer of every bank in Britain will be able to switch their bank account from their existing bank to another one in seven days.
All they will have to do is sign up to a new bank – and the rest will follow.
All the direct debits, the standing orders, everything will be switched for you with no hassle.
This is a revolution in customer choice.

But today, we will go further.
Payments systems sit at the heart of the banking system.
They are the hidden from view wirings that operate every time you get wages paid into your bank account, deposit a cheque or withdraw money from an ATM.
It’s how the money flows around the system.
And it’s a bit like the electricity grid, every person and every business needs to be plugged into them to enter the banking market.
At the moment, a new player in the industry has to go to one of the existing big banks to use the payment system.
Asking your rival to provide you with the essential services you need at a reasonable price is not a recipe for success.
And it other walks of life, like telecoms, we don’t operate like that.
There are no incentives on the big banks to deliver new and better services for users – like saving the cheque or creating new services like mobile payments.
Why, in the age of instant communication, do small businesses have to wait for several days before they get their money from a credit or debit card payment?
It should be much quicker.
Why do cheques take six days to clear?
Customers and businesses should be able to move their money round the system much more quickly.
Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days?
The system isn’t working for customers, so we will change it.

I can announce today that the Government will bring forward detailed proposals to open up the payment systems.
We will make sure that new players in the market can access these systems in a fair and transparent way.
The last Government let the established players off the hook by failing to implement the conclusions of the review they themselves commissioned, and allowing the big existing banks to regulate themselves.
This Government will make sure payment systems serve the needs of consumers, not the needs of the established banks.
Bank working for their customers, not themselves.
Taxpayers’ money protected.
The guardians of financial stability with the tools they need to keep us safe.
On all these fronts, we are making major changes.
A financial industry that is strong, successful and inspires the pride of all those who work for it.
That’s what Government should be about – taking the big tough decisions because they’re right for the long-term good of our country.
Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system.
The anger people feel is very real.
Let’s turn that anger from a force of destruction into a force for change.
Change that will give us a banking system that will work for us all.
In 2013, thanks to the changes we are making, that goal is in sight

Source: hm-treasury

How To Trade Like The ‘Market Wizards 1

Hello Traders,

I am Joshua, a trader like you. I have been trading for over 5years now. This has come to my mind that i should use my experience in trading to increase the knowledge of up coming traders to have a link where they can also tap knowledge.

Initially, my thought was Forex Trading is no go area and the business is not for me. Couple with family issues and other extended and inner emotions. In actual fact, there is a spirit behind forex trading therefore, only those who are spiritually strong can make it in forex.

A friend of my called me very early in the morning in 2010 and told me that; " Mr Olaitan! forex trading is too risky a lot of people in my church have loose money that they borrow from people as a result of that, i will advice you to stop it" Unfortunate for me that was the period i lost my teaching job. Life was terrible and unfair to me. My wife mounted a pressure on me then i became afraid. All my trading account was lost, i couldn't tell my wife what was going on and at the same time getting another teaching to solve the problem was not coming forth. It was like spiritual attack to me. Within me there was a strong conviction about making it in forex but the voice was faintly, i can not pick from the spiritual realm into reality. Even till this present time some of my colleagues are on the fence of indecision. They are afraid of loosing their money, they want to go back to the basis. They don;t want people to make mockery about their failure yet, they are not comfortable with their present job. Dear traders, i am bringing this to let you know that, inadequate knowledge about forex trading can make you to burn several accounts and even loose your hard earn money to brokers.
Later i got to understand that there is no spirit contriling forex trading but traders determined the trend of the market. Conversant with information and news around helps to make decisions and plan on the step to take in forex trading. I have decided to seek for more information and married it with technical analysis. On the journey to seek more information, i came across my best friend who has being into this business for some years back and a good technical trader, who is also a writer. One of my friends mention his name and his site to me in a forum since then i subscribed to his mail since 2010 and i have being enriched with good information from him. I will like to share some his write ups and articles on my blog for some week from now on. This article i am going to tag them as series 1-5 sharing in this article, Nail fuller interview experience traders and successful forex trader. I will want you to sit back and enjoy this unpolluted information that will help you make the write decision in forex trading. Here is the first series and our comment on each Quotes of these forex Gurus of the our time.

How To Trade Like The Wizard (series 1)

The concepts and ideas discussed in this lesson are going to completely transform the way you think about successful trading. The knowledge you learn here today will inspire you to change the way you trade, how you think and how you act into the future.  Most importantly, if you study and apply these concepts, you are going to dramatically improve your trading performance.

This is by far one of the most inspirational and insightful articles I’ve written since I started writing back in 2008. I have immensely enjoyed producing it and I must humbly thank my good friend Larry for his assistance with research & writing as well as Jack Schwager and all the traders he interviewed, who are of course the true inspiration behind this article.

Enjoy…  Nial Fuller  – Australia.

Today’s article was inspired by the Market Wizards Book Series by Jack D. Schwager; a couple of my all-time favorite trading books. In the Market Wizards books, Schwager interviews various pro traders and picks their brains about how they became successful. One of the most intriguing aspects of the books that Schwager discusses at the end of The New Market Wizards is that despite having vastly different trading styles, there are “certain principles that held true” for all the traders he interviewed. We will discuss some of these principles and more from the Market Wizards books in today’s lesson.

There really is a lot to learn from these two books and much of what they discuss is relevant to the style of trading we practice here at Learn To Trade The Market, i.e., position / swing trading on higher time frame charts. There are also a lot of relevant and helpful points on money management and trader psychology, these parts of the books are what I found the most fascinating.

To write today’s lesson, I had to get reacquainted with much of what’s in both of these books because it’s been a while since I first read them. Note: this article is a lot longer than most of my lessons, so make sure you have an extra thirty minutes and your favorite coffee or energy drink before you begin if you want to read it one sitting.

Below, I have provided some of my favorite quotes from the pro traders that Schwager interviewed followed by a synopsis of what I feel are the most important points to take away.

In the preface to The New Market Wizards, Schwager says

“In conducting the interviews for this book and its predecessor, Market Wizards, I became absolutely convinced that winning in the markets is a matter of skill and discipline, not luck. The magnitude and consistency of the winning track records compiled by many of those I interviewed simply defy chance.”

This quote, and the ones that follow, should provide you with a lot of motivation and insight into how professional traders think.

Tips From The Market Wizards

(1) Michael Marcus:

“If trading is your life, it is a torturous kind of excitement. But if you are keeping your life in balance, then it is fun. All the successful traders I’ve seen that lasted in the business sooner or later got to that point. They have a balanced life; they have fun outside of trading. You can’t sustain it if you don’t have some other focus. Eventually, you wind up over-trading or getting excessively disturbed about temporary failures”

Summary

The above quote by Michael Marcus from Market Wizards, fits perfectly with our style of trading here at LTTTM. We focus on end of day trading methods and “part-time” trading. Essentially, what Michael is saying here is that if you let trading overtake your life, you will end up over-trading and getting too attached to positions. Just like anything else, you need a healthy involvement with trading, not an addiction to it.

With my humble experience, since the year i have been trading forex. To me it is phenomenon that every beginners will first under go. It can be called first experience because the instinct should be to make money and if they actually see it rolling, some will want to give it fight to fight bases and because of in experience they are, they will glue themselves to the system. That is why some are emotionally down if they eventually loose an account. I am talking basically from experience, i had gone through it before. The best method to avoid young traders from getting emotionally down is to understand the nitty-gritty of the forex trading and instructors share some experince with the traders before going into live and mentoring would help traders to stay long in the market and succeed.

Continues from the second series.

Happy trading experience
Joshua

Daily Forecast

The EURUSD opened lower earlier today at 1.2889 after closed at 1.3073 on Friday. Gaps are usually filled so although nearest term bias is bearish, watch out for upside pullback. Immediate resistance is seen around 1.3000 followed by 1.3100. Overall I still prefer a bearish scenario. On the downside, a clear break and daily close below 1.2875 could trigger further bearish pressure testing 1.2800 or lower.

 If you want to see my chart click HERE to see it.

 

 The GBPUSD was corrected higher last week topped at 1.5177. Although price is still in bullish correction phase, overall I still prefer a bearish scenario with sell on rallies strategy. Immediate support is seen around 1.5070. A clear break below that area could trigger further bearish pressure testing 1.5000. On the upside, a clear break and daily close above 1.5177 - 1.5200 could trigger further bullish correction.

If you want to see my chart click HERE to see it.

The USDJPY was corrected lower last week and fell below 95.00. The bias is bearish in nearest term testing 94.00. I still prefer a bullish scenario. Immediate resistance is seen around 95.00. A clear break above that area could lead price to neutral zone in nearest term testing 95.50.

If you want to see my chart click HERE to see it.

The USDCHF was indecisive last week. The bias is neutral in nearest term. Overall I still prefer a bullish scenario. Immediate resistance is seen around 0.9475. A clear break above that area could trigger further bullish pressure testing 0.9520/50 or higher. Immediate support is seen around 0.9400 followed by 0.9350.

 If you want to see my chart click HERE to see it.

Australian Dollar Aiming Higher as Risk Trends Find Support

 

The Australian Dollar finds itself re-coupling with risk appetite trends as the specter of interest rate cuts is chased off by the Reserve Bank of Australia and investors are drawn to the highest yields in the G10 FX space. The central bank poured cold water on stimulus expectations last week, with RBA Governor Glenn Stevens saying that while an “accommodative stance of monetary policy is appropriate,” it appeared “prudent” to keep rates unchanged for now while the “substantial easing of policy as a result of previous decisions” works its way into the economy. Fourth-quarter GDP data reinforced the RBA’s position.

Looking ahead, the economic calendar is relatively quiet. On the domestic front, the focus will be on February’s Employment report. Expectations call for the economy to add 10,000 jobs, an outcome broadly in line with recent trends that is unlikely to materially change the outlook for monetary policy. A possible near-term headwind may emerge from Chinese CPI figures released over the weekend.

The report showed the year-on-year inflation rate unexpectedly accelerated to 3.2 percent in February, marking the highest reading in 10 months. That could create concerns about policy tightening that slows Chinese growth and hurts demand from Australia’s largest trading partner. Follow-through seems limited however considering the Beijing already unveiled measures to crimp the price growth in the property market while introducing fiscal stimulus in its 2013 budget last week.

Sizing up the macro sentiment landscape, the resilience of the US recovery in the face of headwinds from fiscal retrenchment following the onset of “sequester” spending cuts as well as lingering uncertainty in the Eurozone remain central themes. On the former side of the equation, a somewhat lackluster US data docket in the wake of last week’s robust ISM and NFP numbers is likely to allow optimism to remain well-supported. Indeed, CPI and UofM Consumer Confidence numbers are the only major standouts, with the former expected to keep inflation at paltry 1.8 percent – thereby leaving Fed stimulus expectations at status quo – while the latter produces the third consecutive uptick. In the Eurozone, a meeting an EU leaders’ summit at the end of the week is unlikely to prove eventful as the core issue at hand – the political upheaval in Italy – looks increasingly likely to drag on until another election is held in the summer.

Source: Dailyfx 

Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close

Dollar Rallies for 8 Weeks Straight after Strong NFP-Friday Close

Perhaps the only thing more remarkable from the market’s this past week than the Dow Jones Industrial Average hitting a record high was the US dollar’s incredible run. Though the Dow Jones FXCM Dollar Index (ticker = USDollar) can only boast a two-and-a-half year high, the currency has climbed for eight consecutive weeks. That is the longest rally the benchmark has sustained since historical price action became available back on 1999 (with the introduction of EURUSD – a quarter of the index). The critical, fundamental question here how one of the world’s move recognizable safe havens can advance with such abandon at the same time the most basic risk measure is on a record breaking run. This isn’t a fundamental shift in the dollar’s orientation to risk, but a side effect of the manipulation in risk itself: stimulus.

The final trading session of this past week gives us a prime example of how the market is focusing in on stimulus and investor sentiment. The February nonfarm payrolls (NFP) report hit the wires in the morning hours of the New York session with a much-better-than-expected 236,000 net addition- the second largest increase in a year. Stronger employment trends speak to general growth and thereby confidence in investing. That was the initial thought process as we could see from the climb in S&P 500 futures (the report was released before the shares market opened). Yet, despite the implications this data has for the needs of a last resort safe haven; EURUSD responded to the same news with a 135-pip drop. Why did the dollar gain so much ground? Because the unemployment rate unexpectedly dropped to a four-year low 7.7 percent. The subtext here is very different. The Fed has stated that its inevitable cap on stimulus and turn to tightening will come when the medium-term outlook for the unemployment rate was 6.5 percent.

Given the pace of employment improvement over the past year, the central bank’s unemployment target could be reached as soon as April of next year. They would project that eventuality well before it would be met. In this fundamental calculation, we can start to see a rough time frame for the slowdown in stimulus (before the end of the year) and a shift to tightening in either rates or balance sheet (1Q or 2Q 2014). That is a serious boon for the dollar. Though that time frame is set well into the future, the market has priced in a lot for the dollar. Seeing the end of the road while a steep hill is just appearing for currencies like the yen and the pound represents a serious shift.

Euro: How will the Market React to the Italian Downgrade?

Two weeks ago, FX trades were delivered an unpleasant surprise when Moody’s announced it had downgraded for the UK from its AAA status. That gave plenty of time for pound traders to brew for the new trading week, but the torrent never came for the sterling the following Monday. Things might be a little different for the Euro this coming week after Fitch announced its downgrade of Italy. Admittedly, the UK lost a more prized rating, but it was already under significant selling strain, and it was expected. The Eurozone, however, is attempting to stave off the disaster of a returned financial crisis for the region and Italy is at the center of the latest flare up after its election left the country incapable of making the decisive moves to answer recession and deficits. Watch the euro specifically during the European session Monday.

British Pound Dives to Two-and-a-Half Year Low Versus DollarThe bleeding doesn’t seem to stop for the sterling. The currency tumbled against most of its counterparts this past week, but the GBPUSD’s epic drop stood out of the crowd. The four-week plunge has torn the sterling down nearly 1500 pips from its peak on the opening day of the year. Why is the cable at a two-and-a-half year low? The dollar certainly has something to do with it, but the pound is bigger player here. Where the market is starting to see the finish line on the US stimulus horizon, the Bank of England seems to be walking up to the starting line. The fact that the sterling didn’t rally after the BoE held rates this past week suggests expectations for easing are growing extreme.

Japanese Yen Reversal Window Closing as Stimulus Closes In

What does the future hold for the Japanese yen – aggressive easing by the country’s monetary policy body. There is no doubt about the Bank of Japan’s (BoJ) efforts and how committed the group will be; and that means that the yen will suffer for it. The question is whether the central bank will act as quickly and forcefully as speculators are pricing in. Traders await confirmation one way or another. This past week, the Governor and two Deputy Governor nominees clearly vowed their commitment to accelerate their easing to compete with the Fed. We will hear more of the same when they speak in the Upper House next week. We have until April 4 until the next meet, will we have a risk pullback by then?

Canadian Dollar Struggles to Hold Gains After Strong Jobs Report

As expected, USDCAD was exposed to serious volatility between the Canadian and US employment statistics. Yet, the positive stimulus reaction from the greenback obscured a remarkable move from the loonie in response to particularly strong data. In February, the world’s eleventh largest economy added 50,700 jobs (33,600 of them permanent). Far better than the forecast, implications for the BoC keeping to its rate hike threat are reinforced; and the currency winds a significant fundamental upgrade.

New Zealand Dollar Traders Look Ahead to RBNZ Rate Decision

The kiwi was on the lam through the end of this past week, though momentum is not yet on the sellers’ side. In the upcoming week, we have a key release to contemplate – the RBNZ rate decision. In the past weeks we have seen the Governor Wheeler lament the level of the currency, inflation expectations ease and a change to more democratic meetings for policy. Could this precede a warning of possible easing?

Gold’s Activity Lull this Past Week an Indication of Near-Term Breakout

Inordinately quiet or active markets naturally return to a norm. That’s what we should remember with gold heading into the new trading week. This past week, the metal managed a range of only $25 through the entire week. A particularly quiet market at the end of a multi-month decline often piques speculators’ interest as they dream of how quick a reversal could be on an extended trend. Yet, we should be open to the alternative as well: a burst of momentum behind the prevailing trend could break $1,500. The deciding factor: the net stimulus outlook.

**For a full list of upcoming event risk and past releases,go to www.dailyfx.com/calendar

 Source: Dailyfx

Latest Speeches From (FOMC)

Challenges Confronting Monetary Policy

       Thank you. I'm delighted to address the National Association for Business Economics (NABE), a group that has done so much to promote understanding of the economy and the appropriate role of policy.
My topic today is the challenges confronting monetary policy in what has been an unusually weak recovery from a severe recession. I will discuss the Federal Reserve's ongoing efforts in these circumstances to speed the U.S. economy's return to maximum employment in a context of price stability. 
As you know, the Federal Open Market Committee (FOMC) has recently taken new steps to achieve this objective. In September, the Committee approved a new program of agency-guaranteed mortgage-backed securities (MBS) purchases, pledging to continue the program--contingent on favorable ongoing evaluations of its efficacy and costs--until there has been a substantial improvement in the outlook for the labor market.  Most recently, in December the Committee announced that it would purchase longer-term Treasury securities after completion of the maturity extension program. At the same time, it revamped its forward guidance for the federal funds rate, explicitly linking the path of that rate to quantitative measures of economic performance. 
My goal today is to explain these policies and why I consider them appropriate under current conditions. With respect to the asset purchase program, I will discuss several economic indicators that I plan to consider in evaluating the outlook for the labor market and then offer my perspective at present on the program's efficacy and costs, an assessment I will continue updating in light of experience.
The Outlook for the Labor Market and Inflation
The Committee's recent actions are shaped by the fact that the labor market is still far from healed from the trauma of the Great Recession. Despite some welcome improvement, employment remains well below its pre-recession peak, reflecting an economy that is still operating far short of its potential. At 7.9 percent in January, the unemployment rate has declined from its recent peak of 10 percent in October 2009. But that's still higher than unemployment ever reached in the 24 years prior to the recent recession and well above the 5.2 to 6 percent that is the central tendency of FOMC participants' estimates of the longer-run normal rate of unemployment. With economic activity constrained by fiscal consolidation, the lingering effects from the financial crisis, and the added headwinds of Europe's recession and debt problems, most FOMC participants reported in December that they expected only a gradual decline in unemployment over the next two years, to about 7 percent by the end of 2014.
The official estimate of 12 million currently unemployed does not include 800,000 more discouraged workers who say they have given up looking for work.  In addition, nearly 8 million people, or 5.6 percent of the workforce, say they are working part time even though they would prefer full-time jobs. A broader measure of underemployment that includes these and others who want a job stands at 14.4 percent, nearly double the 7.9 percent "headline" rate that is most commonly reported in the media. 
The large shortfall of employment relative to its maximum level has imposed huge burdens on all too many American households and represents a substantial social cost. In addition, prolonged economic weakness could harm the economy's productive potential for years to come. The long-term unemployed can see their skills erode, making these workers less attractive to employers. If these jobless workers were to become less employable, the natural rate of unemployment might rise or, to the extent that they leave the labor force, we could see a persistently lower rate of labor force participation. In addition, the slow recovery has depressed the pace of capital accumulation, and it may also have hindered new business formation and innovation, developments that would have an adverse effect on structural productivity.
In contrast to the large gap between actual and maximum employment, inflation, apart from fluctuations due to energy and other commodity prices, has been running for some time now a little below the rate of 2 percent per year that the Committee judges to be consistent with the Federal Reserve's dual mandate. The Committee anticipates that inflation will continue to run at or below 2 percent over the medium term. Moreover, expectations for inflation over the next 5 to 10 years remain well anchored, according to surveys of households and professional forecasters.
With employment so far from its maximum level and with inflation running below the Committee's 2 percent objective, I believe it's appropriate for progress in the labor market to take center stage in the conduct of monetary policy. Let me therefore turn to the FOMC's recent actions and describe how I see them promoting this important goal.
Forward Guidance for the Federal Funds Rate I'll begin with the Committee's forward guidance for the federal funds rate. The FOMC has employed such forward guidance since 2003 but has relied more heavily on it since December 2008, when the target for the federal funds rate was reduced to its effective lower bound. In current circumstances, forward guidance can lower private-sector expectations regarding the future path of short-term rates, thereby reducing longer-term interest rates on a wide range of debt instruments and also raising asset prices, leading to more accommodative financial conditions. In addition, given the FOMC's stated intention to sell assets only after the federal funds rate target is increased, any outward shift in the expected date of liftoff for the federal funds rate suggests that the Federal Reserve will be holding a large stock of assets on its balance sheet longer, which should work to further increase accommodation. 
Starting in March 2009, the FOMC's postmeeting statements noted that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," and in November of the same year added "low rates of resource utilization, subdued inflation trends, and stable inflation expectations" as justification for this stance."  In August 2011, the Committee substituted "at least through mid-2013" for the words "for an extended period."  This date was moved further into the future several times, most recently last September, when it was shifted to mid-2015. Also in September, the Committee changed the language related to that commitment, dropping the reference to "low rates of resource utilization and a subdued outlook for inflation." Instead, it emphasized that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," clarifying the Committee's intention to continue to provide support well into the recovery. 
Finally, last December, the Committee recast its forward guidance for the federal funds rate by specifying a set of quantitative economic conditions that would warrant holding the federal funds rate at the effective lower bound. Specifically, the Committee anticipates that exceptionally low levels for the federal funds rate will be appropriate "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored." 
An important objective of these changes in forward guidance is to enhance the public's understanding of the Committee's policy strategy and its "reaction function"--namely, how the FOMC anticipates varying its federal funds rate target in response to evolving economic developments. For example, the Committee's initial, calendar-based guidance did not clearly convey the rationale for the specified date. In particular, when the Committee extended the calendar date, the public was left to infer whether the change reflected a deterioration in the Committee's economic outlook or, instead, a decision to increase policy accommodation.
In my view, the language now incorporated into the statement affirmatively conveys the Committee's determination to keep monetary policy highly accommodative until well into the recovery. And the specific numbers that were selected as thresholds for a possible change in the federal funds rate target should confirm that the FOMC expects to hold that target lower for longer than would be typical during a normal economic recovery. This improved guidance should help the public to accurately adjust their expectations for the federal funds rate in response to new financial and economic information, which should make policy more effective.¹³  In addition, I hope that improved guidance will help to boost confidence in the outlook and bolster households' unusually depressed expectations for income gains, which in turn will spur a faster recovery.
A considerable body of research suggests that, in normal times, the evolution of the federal funds rate target can be reasonably well described by some variant of the widely known Taylor rule.  Rules of this type have been shown to work quite well as guidelines for policy under normal conditions, and they are familiar to market participants, helping them judge how short-term rates are likely to respond to changing economic conditions.
The current situation, however, is abnormal in two important and related ways. First, in the aftermath of the financial crisis, there has been an unusually large and persistent shortfall in aggregate demand. Second, use of the federal funds rate has been constrained by the effective lower bound so that monetary policy has been unable to provide as much accommodation as conventional policy rules suggest would be appropriate, given the weakness in aggregate demand. I've previously argued that, in such circumstances, optimal policy prescriptions for the federal funds rate's path diverge notably from those of standard rules.  For example, David Reifschneider and John Williams have shown that when policy is constrained by the effective lower bound, policymakers can achieve superior economic outcomes by committing to keep the federal funds rate lower for longer than would be called for by the interest rate rules that serve as reasonably reliable guides for monetary policy in more normal times.  Committing to keep the federal funds rate lower for longer helps bring down longer-term interest rates immediately and thereby helps compensate for the inability of policymakers to lower short-term rates as much as simple rules would call for.
I view the Committee's current rate guidance as embodying exactly such a "lower for longer" commitment. In normal times, the FOMC would be expected to tighten monetary policy before unemployment fell as low as 6-1/2 percent. Under the new thresholds guidance, the public is informed that tightening is unlikely as long as unemployment remains above 6-1/2 percent and inflation one to two years out is projected to be no more than a half percentage point above the FOMC's 2 percent longer-run goal. The evidence suggests that the evolution I've described in the Committee's forward guidance, particularly the new thresholds, has shifted the market's view of how forceful the FOMC intends to be in supporting the recovery. In the Federal Reserve Bank of New York's Survey of Primary Dealers, for example, participants have repeatedly revised downward the unemployment rate at which they anticipate that tightening will first occur.
I mentioned that the FOMC's new forward guidance offers considerable insight into the Committee's likely reaction function, but I should note that the guidance it provides is not complete. For example, the Committee has not specified exactly how it intends to vary the federal funds rate after liftoff from the effective lower bound, although it has stated that "when the Committee decides to begin to remove policy accommodation, it will take a balanced approach." This language is consistent with optimal policy prescriptions that call for lower-for-longer considerations to pertain to the path of the federal funds rate both before and after liftoff.
In addition, the guidance specifies thresholds for possible action, not triggers that will necessarily prompt an increase in the federal funds rate. The FOMC statement therefore notes that "in determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments."
For example, the Committee could decide to defer action even after the unemployment rate has declined below 6-1/2 percent if inflation is running and expected to continue at a rate significantly below the Committee's 2 percent objective. Alternatively, the Committee might judge that the unemployment rate significantly understates the actual degree of labor market slack. A decline in the unemployment rate could, for example, primarily reflect the exit from the labor force of discouraged job seekers. That is an important reason why the Committee will consider a broad range of labor market indicators. I will discuss some of the additional indicators I plan to consider in judging the strength of the labor market in connection with the Committee's current asset purchase program.
The Federal Reserve's Asset Purchase Program
Turning next to that program, the Federal Reserve initiated a new asset purchase program last September, extending it in December, under which the Federal Reserve is currently buying agency-guaranteed MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. As with the guidance for the federal funds rate, the Committee tied the new program to labor market conditions, stating that purchases would continue until there is a substantial improvement in the outlook for the labor market in a context of price stability. The FOMC's earlier large-scale asset purchase programs, in contrast, were fixed in size and carried out on a specified schedule. The Committee has also noted that, in determining the size, pace, and composition of its asset purchases, it would take appropriate account of the likely efficacy and costs of such purchases. 
The purpose of the new asset purchase program is to foster a stronger economic recovery, or, put differently, to help the economy attain "escape velocity." By lowering longer-term interest rates, these asset purchases are expected to spur spending, particularly on interest-sensitive purchases such as homes, cars, and other consumer durables. Research on the effects of such asset purchases suggests that what matters for the reaction of longer-term interest rates to a purchase program is the extent to which the program leads market participants to change their expectations concerning the entire path of the Federal Reserve's holdings of longer-term securities. Other things being equal, the greater the effect that a purchase program has on the expected path of the Federal Reserve's securities holdings, the more substantial should be the downward pressure on the term premium in longer-term interest rates. By linking the pace of purchases and how long that pace will be maintained to the outlook for the labor market, the program acts as a sort of automatic stabilizer: As market perceptions of the prospects for the economy vary, so too should expectations of the pace and duration of asset purchases.
In stating that asset purchases will continue, subject to caveats pertaining to efficacy and costs, until there has been a substantial improvement in the outlook for the labor market, the FOMC established a criterion that differs in three important respects from the forward guidance for the federal funds rate: (1) It is qualitative, not quantitative; (2) it refers to an improvement in the outlook for the labor market rather than an improvement in actual labor market conditions; and (3) it requires the Committee not only to consider progress toward its employment goal, but also to evaluate the efficacy and costs of asset purchases on an ongoing basis. The public is, naturally, eager to understand how the FOMC will approach such complex judgments. I cannot, of course, speak for the Committee on this issue, but I can spell out some of the key factors that will guide my conclusions.
A "Substantial Improvement in the Outlook for the Labor Market"
The first imperative will be to judge what constitutes a substantial improvement in the outlook for the labor market. Federal Reserve research concludes that the unemployment rate is probably the best single indicator of current labor market conditions. In addition, it is a good predictor of future labor market developments. Since 1978, periods during which the unemployment rate declined 1/2 percentage point or more over two quarters were followed by further declines over the subsequent two quarters about 75 percent of the time.
That said, the unemployment rate also has its limitations. As I noted before, the unemployment rate may decline for reasons other than improved labor demand, such as when workers become discouraged and drop out of the labor force. In addition, while movements in the rate tend to be fairly persistent, recent history provides several cases in which the unemployment rate fell substantially and then stabilized at still-elevated levels. For example, between the fourth quarter of 2010 and the first quarter of 2011, the unemployment rate fell 1/2 percentage point but was then little changed over the next two quarters. Similarly, the unemployment rate fell 3/4 percentage point between the third quarter of 2011 and the first quarter of 2012, only to level off over the subsequent spring and summer.
To judge whether there has been a substantial improvement in the outlook for the labor market, I therefore expect to consider additional labor market indicators along with the overall outlook for economic growth. For example, the pace of payroll employment growth is highly correlated with a diverse set of labor market indicators, and a decline in unemployment is more likely to signal genuine improvement in the labor market when it is combined with a healthy pace of job gains.
The payroll employment data, however, also have shortcomings. In particular, they are subject to substantial revision. When the Labor Department released its annual benchmarking of the establishment survey data last month, it revised up its estimate of employment in December 2012 by 647,000.
In addition, I am likely to supplement the data on employment and unemployment with measures of gross job flows, such as job loss and hiring, which describe the underlying dynamics of the labor market. For instance, layoffs and discharges as a share of total employment have already returned to their pre-recession level, while the hiring rate remains depressed. Therefore, going forward, I would look for an increase in the rate of hiring. Similarly, a pickup in the quit rate, which also remains at a low level, would signal that workers perceive that their chances to be rehired are good--in other words, that labor demand has strengthened.
I also intend to consider my forecast of the overall pace of spending and growth in the economy. A decline in unemployment, when it is not accompanied by sufficiently strong growth, may not indicate a substantial improvement in the labor market outlook. Similarly, a convincing pickup in growth that is expected to be sustained could prompt a determination that the outlook for the labor market had substantially improved even absent any substantial decline at that point in the unemployment rate.
The Efficacy of Asset Purchases Let me turn next to the efficacy and potential costs of asset purchases, a topic discussed at recent FOMC meetings and that I suspect will be discussed at succeeding meetings as well. I see the currently available evidence as suggesting that our asset purchases have been reasonably efficacious in stimulating spending. There is considerable evidence that these purchases have eased financial conditions, and so have presumably increased interest-sensitive spending.²⁴  Research suggests that our purchases of mortgage-backed securities pushed down MBS yields and that MBS yields pass through, with a lag, to mortgage rates. Indeed, I see the recent strength in housing and consumer durables, such as motor vehicle purchases, as partly reflecting the effect of reduced borrowing costs. Plausible, albeit uncertain, estimates of the ultimate economic effect of asset purchases can be obtained from simulations of the Board's FRB/US model. Such simulations suggest that a hypothetical program involving $500 billion in longer-term asset purchases would serve to lower the unemployment rate by close to 1/4 percentage point within three years while keeping inflation close to the Committee's 2 percent objective.
One issue on which there has been considerable debate is whether low interest rates are doing as much to promote economic growth since the financial crisis as they would have before the financial crisis--whether the interest rate channel of transmission for monetary policy has been attenuated. I agree with those who think this channel has been partially blocked. Individuals who have impaired credit histories, have been unemployed, or hold underwater mortgages are experiencing great difficulty gaining access to credit, whether to buy or refinance a home, finance a small business, or support spending for other needs. Even those with good, but not stellar, credit histories and sufficient income are facing capacity constraints in the mortgage market. However, even if the interest rate channel is less powerful right now than it was before the crisis, asset purchases still work to support economic growth through other channels, including by boosting stock prices and house values. The resulting improvement in household wealth supports greater consumption spending.
The Costs of Asset Purchases Turning to the potential costs of the Federal Reserve's asset purchases, there are some that definitely need to be monitored over time. At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.
To address one concern that I have heard, there is no evidence that the Federal Reserve's purchases have impaired the functioning of financial markets, and, while we continue to monitor market function carefully, so long as we pursue our purchases sensibly, I do not expect market functioning to become a problem in the future. Further, I've argued previously, and still judge, that the FOMC has the tools it needs to withdraw accommodation, even if the balance sheet at that time is large. These tools include a new one, approved by the Congress during the financial crisis, which allows the Federal Reserve to pay banks interest on their reserves. A suite of supporting tools, such as reverse repurchase agreements with a wide range of counterparties and the Term Deposit Facility, are routinely tested to make sure that the Federal Reserve is prepared to use them and that they will work as planned.
Two additional costs have been discussed at recent meetings of the FOMC. First, the expansion of the balance sheet has implications for the Federal Reserve's earnings from its asset holdings and, hence, for its remittances to the Treasury. Second, some have raised the possibility that the Committee's policies could have negative consequences for financial stability.
With respect to the Federal Reserve's remittances, balance sheet operations are intended to support economic growth and job creation in a context of price stability and not to maximize Federal Reserve income. There is a possibility that the Federal Reserve's earnings from its assets and the remittances of those earnings to the Treasury will decline later in the decade, perhaps even ceasing entirely for some period. It is important to note, however, that any losses that could conceivably occur would not impair the Federal Reserve's conduct of monetary policy.  Further, even if remittances to the Treasury ceased for a time, it is highly likely that average annual remittances over the period affected by our asset purchases will be higher than the pre-crisis norms.
Though our expanded portfolio of longer-term securities has in recent years translated into substantial earnings and remittances to the Treasury, the Federal Reserve has, to be sure, increased its exposure to interest rate risk by lengthening the average maturity of its securities holdings. As the economic recovery strengthens and monetary policy normalizes, the Federal Reserve's net interest income will likely decline. In particular, the Federal Reserve's interest expenses will increase as short-term interest rates rise, while reserve balances initially remain sizable. In addition, policy normalization may well involve significant sales of the Federal Reserve's agency securities holdings, and losses could be incurred in these sales. A recent study by the Board staff considered the effect of a number of scenarios on Federal Reserve income, based on assumptions about the course of balance sheet normalization that are consistent with the exit strategy principles adopted at the June 2011 FOMC meeting. 
The projections resulting from this exercise imply that Federal Reserve remittances to the Treasury will likely decline for a time. In some scenarios, they decline to zero. Once the Federal Reserve's portfolio is normalized, however, earnings are projected to return to their long-run trend. The study supports the conclusion that the Federal Reserve's purchase programs will very likely prove to have been a net plus for cumulative income and remittances to the Treasury over the period from 2008 through 2025, by which time it is assumed that the balance sheet has been normalized. 
Focusing only on the ebb and flow of the Federal Reserve's remittances to the Treasury, however, is not, in my view, the appropriate way to evaluate the effect of these purchases on the government's finances. More germane is the overall effect of the program on federal finances. If the purchases provide even a modest boost to economic activity, increased tax payments would swamp any reduction in remittances. By depressing longer-term interest rates, the purchases also hold down the Treasury's debt service costs. These effects can be quantified through simulations of the Board's FRB/US model. In the simulation I described earlier, a hypothetical program involving $500 billion of asset purchases would reduce the ratio of federal debt to gross domestic product (GDP) by about 1.5 percentage points by late 2018. The lower debt-to-GDP ratio mainly reflects stronger tax revenue as a result of more-robust economic activity.
Finally, let me comment on the possibility that our asset purchase program could threaten financial stability by promoting excessive risk-taking, a significant concern that I and my colleagues take very seriously. To put this concern in context, though, remember that during the most intense phase of the financial crisis, risk aversion surged. Even in the aftermath of the crisis, businesses, banks, and investors have been exceptionally cautious, presumably reflecting their concern about future business conditions, uncertainty about economic policy, and the perception of pronounced tail risks relating, for example, to stresses in global financial markets. I see one purpose of the Committee's accommodative policies as promoting a return to prudent risk-taking. Indeed, the return to more normal levels of risk-taking and the associated normalization of credit markets have been vital to recovery from the Great Recession.
Of course, risk-taking can go too far, thereby threatening future economic performance, and a low interest rate environment has the potential to induce investors to take on too much leverage and reach too aggressively for yield. At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability. That said, such trends need to be carefully monitored and addressed, and the Federal Reserve has invested considerable resources to establish new surveillance programs to assess risks in the financial system. In the aftermath of the crisis, regulators here and around the world are also implementing a broad range of reforms to mitigate systemic risk.  With respect to the large financial institutions that it supervises, the Federal Reserve is using a variety of supervisory tools to assess their exposure to, and proper management of, interest rate risk.
To the extent that investors are reaching for yield, I see the low interest rate environment and not the FOMC's asset purchases, per se, as a contributing factor. It is true that asset purchases put downward pressure on the term premium component of longer-term rates, and that discontinuing purchases would likely cause term premiums to rise. But ending asset purchases before observing a substantial improvement in the labor market might also create expectations that the amount of accommodation provided would not be sufficient to sustain the improvement in the economy. This weakening in the economic outlook might bring down the expected path of the federal funds rate, with the result that longer-term interest rates might not rise appreciably, on net. Moreover, a weakening of the economic environment could also create significant financial stability risks. That said, financial stability concerns, to my mind, are the most important potential cost associated with the current stance of monetary policy.
Conclusion In these remarks, I have reviewed recent FOMC policy actions--actions I have supported because I believe they will help foster a stronger recovery and keep inflation close to the Committee's longer-run target. I recognize that the Federal Reserve's highly accommodative policy entails some costs and risks. It will be important both to monitor them and to continue strengthening our financial system.
However, insufficiently forceful action to achieve our dual mandate also entails costs and risks. There is the high cost that unemployed workers and their families are paying in this disappointingly slow recovery. There is the risk of longer-term damage to the labor market and the economy's productive capacity. At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment.

Thank you for inviting me to speak to you today at NABE's spring conference.