Also, with an exceptionally large balance sheet there will be considerable attention on the methods that the FOMC will likely use in order to exert control over the level of short-term rates. I can’t tell you yet how we will do it, but I am fully confident that we have the necessary tools to control the level of short-term rates and the credit creation process, and I will share with you some of my own thoughts on the subject. As always, what I have to say here today reflects my own views and not necessarily those of the FOMC or the Federal Reserve System. Turning first to economic activity, the trajectory of economic growth continues to disappoint. Since the downturn ended in mid-2009, real GDP growth has averaged only 2.2 percent per year despite a very accommodative monetary policy. This performance reflects three major factors – the significant headwinds resulting from the bursting of the housing bubble, the shift of fiscal policy from expansion toward restraint, especially in 2012 and 2013, and a series of shocks from abroad – most notably the European crisis. The good news is that all three of these factors have abated. With respect to the headwinds resulting from the financial crisis, they are gradually becoming less severe. In particular, the sharp decline in household wealth due to the decline in housing prices and the weakness in equity prices has been largely reversed.
Deepening economic integration and interdependency Within Asia, economic integration is deepening, and we are becoming more and more interdependent. Intra-Asian trade as a share of the region’s total trade has grown from 34% in 1980 to more than 50% today. Asia is being woven together by trade and investment flows, MNCs spreading their production chains and a growing web of bilateral and multilateral FTAs (Free Trade Agreements) and regional processes. China plays a critical role in quickening the pace of regional integration. China is serving as a production platform for foreign firms. Many manufacture there. Others export intermediate goods to their affiliates in China for assembly and then shipping the finished products to key export markets in the US and Europe. What we are seeing is production sharing and the intensification of an Asian production network. However, both China and other Asian countries also know that due to China’s sheer size and strategic weight, its re-emergence exerts a displacement effect. To use an image, it is like a huge elephant wading into a pond. This will displace the water and reduce the space of others using the pond. What do we do? We cannot live without water. The answer is to enlarge the pond so that there is more space for everybody. China is conscious of its size. It emphasises peaceful development so that while it displaces, it does not threaten. Hence, China is negotiating an FTA with ASEAN so that its growth will translate into more opportunities for ASEAN.