This is an area where I believe the official sector, industry participants, and researchers can all continue to make progress. Social and Private Perspective A second interesting issue reflects the perspective on risk and return. In traditional portfolio investment problems, it is clearly the risk and return to the private investor. When thinking about policy, however, the appropriate perspective of the official sector is for society as a whole, which likely differs from the perspective of an individual firm. That is, the official sector and private sector might measure the axes differently—particularly the risk axis—because the official sector cares about spillovers, externalities, and other market failures that private actors may ignore.11 This broader perspective is a critical part of the supervisory framework for large banks that was implemented after the financial crisis. In particular, the official sector recognizes the potential impact that stress at a large bank could have on financial markets or the real economy. As a result, the Federal Reserve supervisory program pursues two complementary goals for large bank supervision—one, to enhance resilience to lower the probability of failure or inability to provide intermediation services and, two, to reduce the impact on the financial system or economy in the event failure or material weakness does in fact occur.12 This difference in perspective potentially introduces some divergence in views and assessment of what an efficient policy looks like.
Low inflation is not simply an end in itself. What we are really seeking to do in pursuing low inflation is to keep aggregate demand in the economy more or less continuously in line with the underlying capacity of the economy to meet that demand as a means to the end of sustainable growth. And I think that the facts that I have quoted are more consistent with the view that monetary stability - low inflation - can indeed contribute to sustainable growth. But it may be that some of you voted no on the first ballot for the rather different reason - that with the monetary policy focus so clearly on low inflation we appear to ignore the strength of the pound especially against the euro, which is seriously damaging many of the internationally-exposed sectors of our economy, including most of agriculture, much of the manufacturing industry and also some services sectors, with differential regional effects. No doubt some of you are suffering from the strong exchange rate in your own businesses even here in London. The question is what can we do about it. The problem - and it is our biggest problem in operating monetary policy at present - is not so much the strength of sterling - we have after all been remarkably stable against the dollar for most of the past five years - it is rather the surprising weakness of the euro.