We also have to be alert to the risk of model drift: that detailed changes initiated by firms, that may each be reasonable in themselves, will have a bias towards reducing rather than increasing capital. Supervisors need to be able to interrogate the overall outcome of accumulated changes, not just the technical merits of individual changes. And it is equally important to remember that insurer resilience depends not just on capital, but also on the accuracy of technical provisions for liabilities, which are themselves inevitably determined by models. At times this has led to time-consuming discussion about the fine details relating to firms’ models: a bit too fox-like, when what is needed is a more hedgehog-like response – a frank dialogue about resilience to big real world risks and shocks. A dialogue that would allow us to respond flexibly to the emergence of new risks and shocks, and to balance modelling with judgment in satisfying ourselves – both regulators and Boards – over capital adequacy. We recognise that modelling is at the heart of the management of insurance liabilities, and of assets too thanks to the interconnectedness of the two sides of the balance sheet. But uncertainty places limits on the reach of quantitative modelling. We should look at a more flexible approach where models sit alongside other 6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  inputs to capital requirements.
In my remarks, I will discuss the U.S. economic outlook and the implications for U.S. monetary policy. I will focus primarily on last month’s Federal Open Market Committee (FOMC) “lift-off” decision – the first increase in the federal funds rate target range in nearly 10 years. I’ll explain what motivated my vote to begin to normalize U.S. monetary policy. I’ll also offer a preliminary assessment of how things are going so far – both with respect to how the U.S. bond market reacted to lift-off and how well our new tools are working as we begin to push up short-term interest rates. Both issues are pertinent, as money market rates have spent a very long time close to zero and we have never attempted to tighten monetary policy with such a large balance sheet and high level of excess reserves. To summarize my conclusions: Generally so far, so good on both fronts. Looking ahead, I’ll talk about what comes next. No surprises here – it depends on the data. As noted in the December FOMC statement, we expect that the normalization of monetary policy will be quite gradual. But, there is no commitment here. The flow of the data – broadly defined – will drive our actions as it influences our assessment of the economic outlook and our view of the stance of monetary policy best suited to achieve our dual mandate objectives of maximum sustainable employment and price stability.