With that background, I would like to comment on some of the criticism of Fed policy decisions. Some of the commentary surrounding the FOMC’s June decision to raise the federal funds rate 2/6  BIS central bankers' speeches  target by 25 basis points illustrates the current tension between “too low” inflation and “too buoyant” financial conditions. On one hand, some observers question the decision to reduce policy accommodation given that inflation has fallen somewhat further below our objective. I would respond to these concerns by noting that monetary policy is still accommodative and that financial conditions have eased. In addition, the long and variable lags between monetary policy adjustments and their impact on the economy imply that the FOMC may need to remove accommodation even when inflation is below its goal. In particular, if the unemployment rate were already below its longer-run natural rate, as may be the case currently, the impact on wage growth and price inflation would still likely take some time to become evident. This would be particularly true if inflation expectations were well-anchored at or slightly below our 2 percent objective, as is the case currently. On the other hand, some Fed watchers have argued that we are helping to create financial asset bubbles by not removing accommodation more quickly. My view is that asset valuations are not particularly troublesome given the economic environment in which we’ve been—that is, a long period of moderate growth, low inflation, low interest rates, and low recession risks.
The element that marks a growing concern with regard to restrictiveness relates to the capital of banks. Clearly, the considerations in respect of the need to replenish capital are starting to exert a strong influence on the decisions of banks to grant new credit. This dynamic is worrying. It indicates that the banking system is interpreting the new regulations restrictively for credit. This approach is undesirable and out of line with the objectives so far followed by the economic policy authorities of supporting the financial system, not as an end in itself but as an essential function of savings intermediation. The outcry surrounding the effects that future capital standards and risk management – the so-called “Basel 3” – will have on credit developments in the short term seems unjustified. The new rules are specifically intended to ensure a more orderly and sustainable flow of credit, not a reduction. Moreover, as I said earlier, a gradual process of adaptation to the new requirements is foreseen. The new capital requirements may be attained in two different ways, although they have opposite effects on banking activities: reduction in banking activities, particularly in credit to firms, on the one hand, and capital increase on the other. The alarm that seems to be widespread in the banking sector concerning the new rules seems to mask the intention of adapting to them via a reduced exposure to the real economy, rather than via a capital increase.