In these remarks, allow me to highlight a few key themes to helpguide the discussion on the limits of monetary policy, applicable bothat home and abroad.
The Fed’s Credibility
Acknowledging the limits of monetary policy elevates, rather thanrelegates, the authority of the central bank. Fed officials should dotheir level best to burnish the most important asset they possess, which cannot be found anywhere on the Fed’s audited financialstatements. This value resides principally in the Fed’s institutionalcredibility. Consider this credibility a goodwill item of sorts, and it isfar more potent than the value of Treasury and related assets ownedby the Fed. This credibility of the central bank wasn’t granted by statute; it was earned. And each generation of Fed policymakers isrightly asked, however implicitly, to leave the institution with morecredibility than was inherited. In the framework I find most persua-sive, the Fed’s credibility allows it to act powerfully when warrantedand stand aside in other times, when the benefits are overwhelmedby the risks.
Situational Awareness and the Value of Humility
Central banking demands situational awareness. Monetary policy can be considerably more powerful at certain moments, while sorely lacking efficacy in others. Monetary policy aggressiveness can bedemanded in certain circumstances; the utmost modesty is requiredin others.As a result, policymakers must assess the regime in which they find themselves. For example, if you go back to the depths of thefinancial crisis in 2008 and 2009, you may reasonably conclude that apanic was under way—perhaps akin to the panic of 1907 that gavebirth to the Federal Reserve. That conclusion might well give theFed a greater right, even obligation, to act aggressively. Monetary policy is a powerful tool to address financial panics—that is, amongother things, to infuse liquidity to get bid-ask spreads to narrow andmarkets to clear.As we emerged from the financial panic, many commentatorspraised the world’s leading central banks for their efforts in helpingmarkets to function once again. On the rare occasion of financial