On the one hand, if the regulation of the GSEs is strengthened, the market may view them even more as extensions of the government and view their debt as government debt. The result, short of a marked increase in capital, would be to expand the implicit subsidy and allow the GSEs to play an even larger unconstrained role in the financial markets.
We will continue to monitor these developments and assess their implications for U.S. economic activity and inflation. We also continue to monitor risks to the financial system. Over the past year, the overall level of vulnerabilities facing the financial system has remained at a moderate level.