I expect that it will be widely read throughout the Federal Reserve System as we continue our effort to evaluate potential long-run monetary policy implementation frameworks. The remarks that follow are my own personal views and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. As good and comprehensive as Ulrich’s paper is, it cannot cover everything. In my discussion I want to highlight topics on which we need additional insights, in the hope of encouraging further discussion and research that will help us make good decisions regarding monetary policy implementation. Three questions I will discuss are: •  Are some types of money market activity superior to others? •  How should we think of broad-based liquidity provision by central banks given the issue of stigma and taking into account the new liquidity regulations? •  How can we reconcile a desire for a “short” or “lean” balance sheet with asset purchase programs that derive their accommodation from holding assets for a long period of time? For each of these topics, I will try to bring a U.S. perspective that can hopefully complement Ulrich’s approach. While I commend Ulrich for seeking to identify universal principles, I believe he would agree that some features of monetary policy implementation frameworks can be dependent on country-specific factors, such as legal restrictions or the organization of the financial system.
An important development, which researchers should take into account when thinking about liquidity provision and moral hazard, is new liquidity regulation. 16 Ulrich is not an optimist when it comes to the ability of regulations to mitigate moral hazard. As exhibited in Figure 6, he notes that “…managing liquidity risk is a core activity of banking, and it seems unlikely that centralizing this subtle activity through liquidity regulation can be done without efficiency costs. Therefore liquidity regulation must not be overburdened, and central banks providing some well-designed and rule based economic counterincentives to an excessive reliance on the [lender of last resort] is an important contribution to reduce the burden put on regulation.” I agree with Ulrich there, and would emphasize that banks’ core functions can be strengthened through the aims and standards set by regulation. 17 But the task is not just calibrating the combination of well-designed regulation and appropriate incentives for taking recourse to the lender of last resort. Ulrich seems to ignore the importance of prudential supervision and its potential contribution to mitigating moral hazard. 18 Regulation involves the development and promulgation of the rules under which banks and other regulated financial intermediaries operate. Prudential supervision involves the monitoring and oversight of regulated institutions to assess whether they are in compliance with law and regulation and whether they are engaged in unsafe or unsound practices, and it ensures that firms are taking corrective actions to address any such practices. 19 Regulation cannot be subtle, although its implementation, through supervision, likely can be.