In such a world, by adjusting the level of the federal funds rate, the FOMC could be fully confident that it could generate the appropriate financial conditions necessary to support achievement of full employment and price stability. In fact, the response of financial conditions to changes in short-term interest rates is not rigid and predictable. Instead, as we shall see shortly, the linkage between the federal funds rate and financial conditions changes over time, as it is influenced by a whole host of other factors. Recent evidence suggests that even the relation between short-term and long-term rates has shifted substantially over the past 15 years.4 Moreover, at times, we have observed cases in which financial conditions did not move in the same direction as the monetary policy stance. Let me highlight two recent divergences which indicate that we need to keep a separate eye on the evolution of financial conditions. The first occurred in the mid-2000s. In June 2004, the FOMC decided to begin raising the federal funds rate target in order to remove policy accommodation. It raised the target in 25-basis-point increments at 17 consecutive meetings, pushing the rate up from a starting point of 1.0 percent to a peak of 5.25 percent. Despite this tightening of monetary policy over two years, financial conditions failed to tighten in a similar manner. This can be seen by looking at the behavior of well-known measures of financial conditions during this period (Exhibit 1).
Therefore, in strengthening the effectiveness of institutions, it is about putting such institutions in an environment in which they are able to rise to the demands for performance and discipline. This therefore places emphasis on following a certain order, rules and regulations that would bring value to society. While mature and developed economies have benefitted from effective institutions, the changing global and national landscape that is becoming increasingly more interconnected now demands for new institutional arrangements for the way in which engagements or interface takes place. Equally important are the arrangements for the management of the new emerging challenges. Experience has shown us that this can be highly challenging when it involves changes in relationships when the structures of institutions have not changed. Such institution building is particularly important for public policy decision making. This is particularly  BIS central bankers’ speeches  1  relevant when coordination arrangements for inputs from the different parts of the public sector become necessary. For the economies in the emerging world that are at a different phase of development, the creation of strong and effective institutions is even more pressing. Not only do existing institutions need to be strengthened but new institutions need to be built to facilitate the effective functioning of the economy. We have heard this morning in the tribute to Dr. Puey, his tremendous role in institution building in Thailand and his role in the Asian region.