On the inflation side of ledger, despite sharp rises in energy prices in recent months, overall inflation, as measured by year-over-year changes of the consumer price index, is still around 2 percent – significantly lower than last year. The signals from underlying inflation pressures, compensation trends, and longer-term inflation expectations are all fully consistent with our longer-run inflation objective of 2 percent. As you all know, in September, the FOMC took additional action to promote a more robust recovery in a context of price stability – a decision that was reaffirmed in October. In addition to the $ billion monthly purchases of longer term Treasury securities already scheduled to run through year end, the FOMC commenced buying additional mortgage-backed securities at a rate of $ billion a month. The Committee said: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgagebacked securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”1  1  September 12–13, 2012 Federal Open Market Committee statement, http://www.federalreserve.gov/ newsevents/press/monetary/20120913a.htm. BIS central bankers’ speeches  5  In terms of rate guidance, the Committee said it anticipated that exceptionally low levels for the federal funds rate would likely be warranted “at least through mid-2015” – emphasizing that a highly accommodative stance of monetary policy would remain appropriate for a considerable time after the pace of the economic recovery strengthens.
BIS Review 75/2001  3  The broad use of statistical risk models can have a similar effect. It is, of course, a good thing to use risk models as an aid and we can conclude that they have enabled great progress in the management of financial risks. However, there is an evident problem here. When an increasing number of players are using the same models, they are also likely to react in a similar way when there is unease on the markets, which can reinforce fluctuations and trigger new signals from the models, and so on. What is rational for one individual institute may in this case be irrational as a whole. Increased transparency reduces risk of herd behaviour So is it possible to counteract this type of behaviour? Allow me to begin by emphasising that economic risk-taking in itself is an important factor behind economic growth. However, risk-taking also means that not all investments will bear fruit. This is why we have created national bankruptcy regulations enabling businesses to be liquidated in an orderly manner. For the same reason, we must assume that financial crises will emerge even in the future. On the other hand, we must of course do all we can to avoid such crises spreading unnecessarily. I should also like to stress that I do not believe that different types of taxes aimed at reducing the turnover on the markets are a practicable route forward.