Between 1990 and 1997, the annual flow to Asia alone was equivalent to around 25% of the affected countries’ aggregate GDP. This was a combination of bank lending and portfolio investments; 60% of the lending from international banks was shortterm. That capital moves from one part of the world to another if the yield is seen to be higher is, of course, positive in itself. The problem lay in the conditions for productive investments being less good than  had been hoped. Later, when the Asian economies ran into problems, the capital flows reversed and serious financial turbulence broke out. A further way of achieving a high return was to take increased risks by debt financing and complex financial instruments. This created a starting point for so-called highly leveraged institutions. Long Term Capital Management was one extreme example. International banks engaged in lending directly to countries where the returns were high. At the same time, they lent capital to hedge funds that invested in the same countries. In some cases, moreover, the banks owned shares directly in these funds. There are grounds for saying that risk-taking was high in many cases. The good profits created a culture of deceptive security and stimulated further risk-taking. To this can be added the false sense of security that the new mathematical models imparted. They were seen to function well under normal circumstances but failed to do so when they were most needed, i.e. in turbulent times.
FOMC Actions Against this backdrop, the FOMC has taken decisive actions to curb demand, restore balance to the economy, and bring inflation down. Last month, the FOMC raised the target range for the federal funds rate to 4-3/4 to 5 percent, its ninth consecutive increase. In its post-meeting statement, the FOMC said it "will closely monitor incoming information and assess the implications for monetary policy. "4  2/4  BIS - Central bankers' speeches  The Committee also said it "anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time." According to the median projections in the FOMC's March Summary of Economic Projections, the stance of monetary policy remains restrictive this year and next year.5 In addition, the FOMC said it will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities, according to the framework announced last May.6  Economic Outlook Because of the lag between policy actions and their effects, it will take some time for the FOMC's actions to bring inflation down to our 2 percent target. With inflation expectations well anchored, I expect inflation to decline to around 3-1/4 percent this year, before moving to our longer-run goal over the next two years. Turning to GDP, the data flow for the first quarter indicates that the economy continues to expand at a solid pace.