But, as we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur, reflecting the inherent uncertainty in measuring r-star. 4 More than that, r-star is just one factor affecting our decisions, alongside economic and labor market indicators, wage and price inflation, global developments, financial conditions, the risks to the outlook… the list goes on and on. I’ve talked a lot about normalizing our policy around interest rates. In addition, about a year ago we started the process of gradually reducing the Fed’s balance sheet as we work to unwind the 2/4  BIS central bankers' speeches  asset purchase policies put in place during the crisis. In the now-standard Fed practice of communicate, communicate, and communicate, we published detailed plans well in advance on how we would gradually and predictably reduce the balance sheet.5 This process has proceeded smoothly without creating undue market disruption or volatility.6 With balance sheet normalization well underway, the Fed is studying the question of what exactly the new normal looks like. We have indicated that we plan to shrink the balance sheet to the smallest size consistent with the efficient and effective conduct of monetary policy—and that, in the long run, the asset side of the balance sheet will consist primarily of Treasury securities. 7 That’s our strategy, but its execution will depend on the operating framework of monetary policy, among other factors. Here, the Fed basically has two choices.
These are vast resources which can be harnessed to finance future growth. Strategic stability within the region Politically, I expect the strategic environment in Asia to be stable. On a bilateral level, the key relationships which underpin the region’s stability – US-China, US-India, China-Japan and China-India – are sound. The major players will compete and cooperate over a range of issues. There will be occasional tensions over trade, history and territorial disputes but these will be managed as the major players want stability and growth, not conflict and instability. They have also taken steps to strengthen their relations. Although slow, progress is being made to resolve the crisis over North Korea’s nuclear programme. Tensions may arise in cross-strait relations should Taiwanese politicians play the independence card as Taiwan heads for elections in 2008. But so long as the US maintains its clear stand that it will not support Taiwan’s independence, the situation will not get out of hand. BIS Review 76/2007  1  I do not expect major military conflicts to break out in Asia. All countries in Asia understand that any such conflict would set themselves and the region back. This will detract from everyone’s focus on economic growth and building cross-national and cross-regional ties. There is strong optimism that Asia can make it in this century and strong determination to succeed. I therefore expect a stable strategic environment to provide the backdrop for the region to grow.