William C Dudley: Address to the New College Class of 2010 Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New College of Florida 44th Annual Commencement, Sarasota, Florida, 21 May 2010. *  *  *  Congratulations, graduates. And congratulations, even more so, parents and all of you who supported these graduates along the way! Thank you to the graduates and members of the faculty and administration for selecting me as New College of Florida’s 44th commencement speaker. I am very grateful for the opportunity to speak here today in such a beautiful setting. It’s nice to be back. Earlier today, I had the pleasure of meeting a few of you – in a smaller setting – to hear about your plans for after graduation; or should I say, tomorrow. I am very impressed with the high caliber of graduates in your class. I also had a tour of the campus today, which I must say has changed a lot in the past 30 years. One thing that hasn’t changed, however, is the Palm Court – or as you all so affectionately call it, the “center of the universe.” I have very fond memories of my time at New College, aside from those great Palm Court parties. I received a terrific education and made some life-long friends. I hope the same has been true about your New College experience.
Via the effects on inflation, asset prices are thus taken into account in the formulation of monetary policy, although they do not feature explicitly in the target variable. However, the simple use of financial asset prices as indicators is not a panacea for the central banks’ forecasting problems. Asset prices can move for a variety of reasons. Understanding those reasons is important in determining the appropriate monetary policy response. For example, if a rise in share prices stems from increased productivity and thus from expectations of higher future profits, the implications for monetary policy would be very different from a case with no such fundamental reason for the higher share prices. This raises a number of questions. The first pertains to the relative informativeness of different kinds of asset prices. The second is how to integrate the information obtained from asset prices with other macroeconomic information. Notwithstanding the empirical evidence of the indicator properties of asset prices, the causal relationships between asset prices and real macroeconomic variables have 1  BIS Review 51/2000  proved to be more difficult to understand and model. But, as I have just illustrated, the answers to these questions can be very important for monetary policy. It seems quite clear that central banks cannot afford to adopt a view of asset markets as merely “side-shows”. There can be other, sometimes less straightforward, situations where monetary policy has reason to react to movements in asset prices even though the effect on inflation is negligible.