Currently, I believe long-term inflation expectations remain anchored, and measures of current inflation have decelerated during the year from elevated levels in 2006. ...  Going into the Sept. 18 FOMC meeting, my opinion was that the balance of risks to the economy had shifted from higher inflation toward slower real growth. I believed, and still do, that the factor weighing most heavily on this change in the outlook has been the potential negative ramifications of the financial turmoil.  

Another director said, of the current financial turmoil, "When you swim in the ocean, you don't know who's naked 'til the tide goes out."

My guess is that a great deal of the potential dislocation resulting from corrective reactions to the subprime boom will be resolved by regulatory initiatives rather than by monetary policy...

Any new regulations that might now be crafted to prevent future recurrences must be well thought out, for two reasons. First, financial institutions will quickly adapt to defeat any regulation that is poorly designed, morphing into new, vaccine-resistant strains. Second, heavy-handed regulations are sometimes worse than the disease against which they are meant to protect. I would be wary of any regulatory initiatives that interfere with market discipline and attempts to protect risk takers from the consequences of bad decisions for fear of creating a moral hazard that might endanger the long-term health of our economic and financial system simply to provide momentary relief.  

In determining the appropriate course for monetary policy, we must recognize that most of the data available now reflect conditions before the disruptions began and, therefore, tell us less about the appropriate stance of policy than they normally would. In addition to data lags, appropriate policy decisions must also, I believe, entail consideration of the role of policy lags--that is, the lag between a policy action and its impact on the economy. Addressing these policy complications requires not only careful and vigilant monitoring of financial market developments, but also the formation of judgments about how these developments will affect employment, output, and inflation. In other words, I believe it is critical to take a forward-looking approach—gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook.  

As you know, I'm a new central banker and policymaker. But I bring to this new role experience in the financial sector touching on a wide range of business lines, asset classes, and types of institutions. I know during a feast there is a strong incentive for market participants to meet the competition and seek competitive advantage by pushing the risk-reward envelope.

Some of this pushing of limits amounts to sustainable innovation. Many of these innovations served desirable ends and allocated greater risk to those investors who had an appetite for it. The subprime mortgage market has brought the American dream of home ownership to many people who previously could not qualify for mortgage loans. These developments, on balance, have been a good thing. But some pushing of limits, in my view, will prove to have been imprudent excess.

So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy.

The markets are indeed experiencing a significant information deficit. Market participants are struggling to discover 1) the true performance of subprime pools, 2) where exposure to these and other structured instruments ultimately rests, 3) the risk, therefore, associated with trading and borrowing counterparties, and 4) the linkages between asset classes, funding markets, and institution-to-institution exposures.

The opaque nature of our current financial world is the result of a long trend of replacing direct bank lending with less transparent investment vehicles in securities markets. In the coming weeks we will see more disclosure of gains and losses on exposure as well as performance trends of portfolios and securities, but I believe clarity will take some time to develop.

Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view. Interest rate policy needs to be guided by the outlook for real spending and inflation. Financial turbulence has the potential to change the assessment of the appropriate rate if it induces a sufficient revision in growth or inflation prospects.

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.