As a matter of fact, whenever accelerated growth in credit and money aggregates occurs simultaneously with soaring asset prices and loose lending standards, increased inflation becomes very likely over the three years that follow (Roffia and Zaghini, 2007). 8 In this context, one can argue that an increase in lending with inflation prospects can be fought with a tightening of monetary policy. However, if the boom was triggered by lack of regulation or supervision, monetary policy tightening by itself could probably be ineffective – or even counterproductive – if the financial system is weakened because of excessive risk taking. Thus, financial regulation plays a major role in granting financial integrity. At the beginning, regulation focused on the strength of individual institutions. However, the tensions we are seeing now exemplify, once again, how individual fragility may quickly evolve into systemic problems. The interrelationships among financial institutions and the proper operation of the markets where liquidity is traded are essential ingredients of a market economy, but these characteristics are also the channels of financial contagion, as recently seen. So it is crucial to have a systemic vision, not only from the perspective of how the different institutions relate to each other, but also how the different types of financial and operating risks are intertwined, creating potential vulnerabilities. The Financial Stability Reports that many central banks put together periodically – including us – seek to evaluate the resiliency of the system as a whole to large disruptions, by carrying out stress tests.
Taken together, these two sets of actions steadily raising the target range for the federal funds rate and steadily bringing down our securities holdings—should help bring demand closer to supply. In fact, even though we haven’t done either of these things yet, financial conditions have already responded based on the expectation of Fed action. For example, medium- and longerterm Treasury yields and fixed-rate mortgage rates have risen close to their December 2019 levels. Of course, our actions will be driven by the data and a determination to achieve our maximum employment and price stability goals. With these three factors working together to restore balance between supply and demand, I am confident we will achieve a sustained, strong economy and inflation at our 2 percent longer-run goal. For this year, I look forward to continued growth and receding inflation, both for the nation and North Jersey. Specifically, my forecast for the U.S. economy is for real GDP to grow a bit below 3 percent this year, for the unemployment rate to end the year around 3-1/2 percent, and 3/4  BIS central bankers' speeches  for PCE price inflationto drop back to around 3 percent, before falling further next year as supply issues continue to recede. Conclusion Since the onset of the pandemic two years ago, this has an extraordinary time for the economy and monetary policy.