Rosengren, Eric

The likelihood of further weakening of labor markets, and a reluctance of consumers or businesses to increase spending until economic conditions are more certain, together imply a continued difficult environment for banks.  There are several conditions necessary for financial markets to resume a more normal state, and I would like to briefly discuss each.

First, we need short-term credit markets to return to normalcy. 

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Second, we need to see some improvement in the housing market before financial markets will resume a more normal state. 

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Third, officials must take into account – and develop policies and actions that reflect –  the degree to which monetary policy tools are currently deployed.   The stance of U.S. monetary policy reflects our rate reductions, with the Federal Funds rate target currently at 100 basis points.  Given that interest rates cannot be negative, further monetary-policy actions are limited by the zero lower bound for interest rates.  While other monetary policy tools can be employed, increasingly many observers and commentators are suggesting that fiscal stimulus will be an important element of economic recovery.