Improvement in economic conditions is a key reason for this sustained decline in problem assets, along with the liquidity and depth of secondary markets for troubled loans and, we believe, better risk management. Fees in some market-sensitive businesses, especially trading, showed renewed strength in the first quarter.
However, if inflation has been near the high end of the acceptable range, and policymakers perceive a significant risk that inflation and inflation expectations may rise further, then stronger action, in the form of a tighter monetary policy, may well prove necessary. In directing its policy toward stabilizing the public’s inflation expectations, the Fed would be making an important investment in future economic stability.