Within the Federal Reserve, we have worked very hard to raise the resilience and security of our own operations. We have made major investments to enhance the back-up facilities for Fedwire. We hold ourselves to very high standards, subject our systems to exacting contingency tests, and coordinate these efforts closely with other U.S. payments systems. We are also continuing to work on ways to improve the security and availability of the telecommunications network that is so vital to the functioning of the financial sector. A private sector group sponsored by the New York Fed, the Payments Risk Committee, has enumerated best practices that financial institutions and payments utilities can adopt to avoid telecommunications outages and to facilitate rapid recovery should an outage occur. We are also working closely with the telecommunications industry, through the Alliance for Telecommunications Industry Solutions, to help improve network diversity and avoid single points of failure for voice and data lines. Payments risk challenges facing system participants The reliability of a payments or securities settlement system depends not just on the system’s design and operation, but also on the quality of the risk management exercised by the participants themselves. The combination of individual and collective efforts to manage exposures, a discipline that must be performed both by the participants and the system operator, is necessary to achieve reliability. The increased specialization of the back office operations of the largest financial institutions makes this challenge more difficult to meet.
That still leaves us with quite enough to worry about - and who ever met a central banker - or a sailor - who didn’t worry about what was coming next - it would be a contradiction in terms. The immediate challenge is to cope with the imbalances within and between the industrial countries, and we have more work to do to improve our defences against volatile international capital flows more generally. But for the time being, the rate of world output growth, which had fallen to only about 2% in 1998, about half its long-term trend rate, and which was widely expected to fall further, is now expected to bounce back to around trend over the next couple of years. And whereas, a year ago, many industrial countries were still in the process of easing monetary policy, to offset the impact on world demand of the interruption of the flow of credit and investment to emerging market countries and transition economies, we have recently seen a quite widespread increase in interest rates, designed to moderate the pace of domestic demand growth. And rising interest rates - I need not remind you - are a reflection of a strengthening economy. Against this backdrop of strong economic growth and official tightening, it is not surprising that bond markets in most developed economies have responded with higher yields over the last 12 months.