More people could be put to work on a sustainable basis, enabling them to gain opportunities not just to earn greater income, but also to develop their skills and grow their human capital. Before I go further, let me say a few words about the impact of Hurricane Harvey. The massive flooding in Texas has been a tragedy for countless people. My heart goes out to all who have suffered and face a long and difficult recovery. While the human toll of such a storm is immense, past disasters such as Hurricane Katrina and Superstorm Sandy have shown that the impact on the national economy tends to be modest and transitory. At first, activity dips as normal commerce is disrupted. But later, when rebuilding gets underway in earnest, economic activity receives a modest boost. Although I expect that the Texas floods will make it more difficult to assess the economic data in the months ahead, I do not expect it to fundamentally alter the underlying trajectory of the national economy. Of course, for parts of Texas, sadly, the consequences will be immeasurably greater. Monetary Policy Outlook As I noted earlier, I still anticipate that above-trend growth will lead to higher utilization of the economy’s resources, and that, over time, this will help push inflation higher. Thus, even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually.
In general, credit terms should be calibrated to the quality of the information provided by the hedge fund counterparty. To the extent this is done generally across those funds that are less transparent, have weak risk management disciplines and/or inadequate operational infrastructure, they will be able to take on less leverage, which would limit the potential risk they may pose in a disruptive event. As these points suggest, it is not enough to simply manage the firm’s direct potential future credit exposure to hedge funds within prudently low limits. This has to be complimented with a more exacting approach to the evaluation of a firm’s overall vulnerability to market risk that includes full consideration of the potential impact of a large shock, including one that involves hedge funds. Alongside these enhancements to risk management practices, we believe that market participants should also intensify their efforts to improve the underlying infrastructure of the markets in which hedge funds are important. Weaknesses in close-out procedures for OTC derivatives were among the areas singled out by the CRMPG for collective action in the wake of LTCM, and important progress has been made in this area since. In addition, there are potentially valuable efforts underway to standardize documentation and improve the confirmation and execution process in these markets.