Williams, John

This afternoon, I will aim to make three basic points: First, despite serious reforms to strengthen our financial system, significant risk remains that another asset bubble could develop. Moreover, the financial system and the economy are still vulnerable to such an event. Second, financial stability should not be thought of as a distinct goal from macroeconomic stability and, therefore, inherently separate from traditional monetary policy. Instead, risks to financial stability are first and foremost risks to future economic activity and inflation. Third, the framework used to analyze the relationship between monetary policy, financial instability, and the macroeconomy needs to be revamped. That framework must take more fully into account the life cycles of asset, credit, and leverage bubbles, and it should consider the role monetary policy plays in feeding or restraining these bubbles.