If the central bank uses all relevant information in constructing these forecasts , including the impact of changes in financial conditions on inflation and resource utilisation at any horizon, monetary policy will automatically respond in the best possible way to changing financial conditions (Woodford 2007, 2010a). One lesson from the financial crisis is that financial conditions may in times of crisis have a strong and deteriorating effect on the transmission mechanism, making standard interest-rate policy less effective. This motivates more research on how to incorporate financial conditions and financial intermediation into the standard models of the transmission mechanism used by central banks. Much progress has already been made in understanding these effects (see Adrian and Shin 2010a, Gertler and Kiyotaki 2010 and Woodford 2010a). The relation between monetary policy and financial-stability policy As mentioned, an important conclusion from the financial crisis is that neither price stability nor interest-rate policy are enough to achieve financial stability (Carney 2009, White 2006). Good flexible inflation targeting by itself does not achieve financial stability. Furthermore, the policy rate is an ineffective instrument for influencing financial stability, and policy rates high enough to have a noticeable effect on credit growth and house prices will have a strong negative effect on inflation and resource utilisation, even in sectors that are not experiencing any speculative activity. Specific policies and instruments are needed to ensure financial stability. A good financial-stability policy framework is necessary to ensure financial stability. Monetary policy cannot serve as a substitute.
William C Dudley: Economic opportunity and income mobility Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Association for Neighborhood and Housing Development Annual Community Development Conference, New York City, 11 April 2016. *  *  *  Good morning. I am very pleased to speak at the 6th Annual Community Development Conference. I would like to give a special thanks to the Association for Neighborhood and Housing Development for organizing this conference about issues of importance to the community development industry and to the future of New York City. At the Federal Reserve Bank of New York, we develop a wide variety of research and data products to gain a deeper understanding of regional economic conditions. We track the health of household balance sheets at the state and local level using data from the New York Fed’s Consumer Credit Panel. We also conduct an annual poll of small businesses to understand their credit needs and credit availability. My meeting with you today is part of our continuing efforts to understand what is going on at the grassroots level of our economy and to share insights from the New York Fed. The Federal Reserve has dual objectives, set by Congress, with respect to monetary policy – maximum sustainable employment and price stability. I would like to focus my remarks today on the first of these objectives.