Well, I think part of the {financial market} reaction we've seen, I mean, comes from a number of sources. Part of it comes from improved economic news. And that's part of the reason why rates have gone up in other countries, as well as in the United States. And that -- to the extent that tighter financial conditions reflect a better outlook, that's a good thing. That's not a problem at all.

Part of it reflects views about monetary policy, in that -- that we want to make sure we get straight. And that's why -- to answer the earlier question again -- it's why communication is so important. We need to explain as best we can how we're going to move and on what basis we're going to move. It's much more difficult today than it was 20 years ago, because the tools are more complex, they're less familiar. But that's still very important.

I think the other factor which was at play was an unwinding of excessively risky and leveraged positions in the markets, and insufficiencies of liquidity in some cases meant that those unwindings led to larger reactions in prices and rates than might otherwise have occurred.

Now, the tightening associated with that is to some extent unwelcome, but on the other hand, to the extent that some of the riskier, more levered positions have been eliminated, I think that makes the situation more sustainable and reduces, at least, the risk that there will be an over-strong reaction to further announcements.

So we will do our best to communicate clearly. That is our goal and our objective. The more clearly we communicate, the better the chance that markets will understand our intentions and that we can avoid any -- any sharp movements. But, again, we're dealing with tools that are less familiar, harder to quantify, and harder to communicate about then the traditional funds rate.

A long period of unusually low interest rates is changing investors’ behavior and is reshaping the products and the asset mix of financial institutions. Investors of all profiles are driven to reach for yield, which can create financial distortions if risk is masked or imperfectly measured, and can encourage risks to concentrate in unexpected corners of the economy and financial system. Companies and financial institutions, such as insurance companies and pension funds, and individual savers who traditionally invest in long-term safe assets, are facing challenges earning reasonable returns, and so they may reach for yield by taking on more risk and reallocating resources to earn higher returns. The push toward increased risk-taking is the intention of such policy, but the longer-term consequences are not well understood.

Of course, identifying financial imbalances, asset bubbles or looming crises is inherently difficult, as policymakers were painfully reminded during the financial crisis in 2008. Public transcripts of the FOMC’s discussions from as early as 2006 show participants were clearly focused on issues in the housing market and yet did not fully appreciate the risk to the economy from the financial sector’s exposure to risky mortgages.

Accordingly, I approach policy decisions with a healthy dose of humility when considering the long-run effects of monetary policy. We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances. Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels. A sharp correction in asset prices could be destabilizing and cause employment to swing away from its full-employment level and inflation to decline to uncomfortably low levels.

Simply stated, financial stability is an essential component in achieving our longer-run goals for employment and stable growth in the economy and warrants our most serious attention.

There are a number of reasons that a financial conditions framework is likely to be useful when evaluating the economic outlook and the conduct of monetary policy. Most important, monetary policy works its magic through its effect on financial conditions; it does not operate directly on real economic variables. That is because the level of the federal funds rate influences other financial market variables such as money market rates, long-term interest rates, credit spreads, stock prices and the value of the dollar, and it is these variables that influence real economic activity.