The precision of the forecasts, or lack thereof, needs to be kept in mind when setting monetary policy. We must be forward looking, which means we must rely on models to forecast inflation, but there is no one model that forecasts with much accuracy. The best we can do in this situation is to recognize that there is uncertainty around our forecasts. I am in favor of the FOMC providing some type of error band around its projections. Not only will it help the public understand some of the risks around our forecast, but it will also be a helpful reminder to policymakers that we constantly live with uncertainty. This shouldn’t paralyze us. Instead we should cope with it by looking at the outcomes from multiple models and alternative simulations, using techniques like model averaging, and by continually evaluating the forecasts from the models against incoming data. The FOMC has been expanding the models it routinely examines as a part of the policymaking process — these include the Board of Governors staff’s large-scale FRB/US model and two smaller-scale DSGE models called EDO and SIGMA, as well as various models maintained and utilized at the Federal Reserve Banks. Researchers are now building model archives to aid in the systematic comparison of empirical results and policy implications across a large set of economic models as an aid to policy analysis. One such archive, The Macroeconomic Model Data Base (MMB), headed by Volker Wieland of Goethe University Frankfurt, currently includes 61 models. Given the state of our knowledge, this seems to be a promising approach to ensuring that policy actions are robust across the span of plausible models of economic dynamics and economic circumstances.

We have in the past seen sort of false dawns, periods in which we thought our growth would speed, pick up and the labor market would improve more quickly. And later events have proven those hopes to be -- to be, unfortunately, over-optimistic. So we are watching very carefully, especially when short-term, overnight rates are at zero, so we have no ability to lower them further.

We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates. And I think the forward guidance that we have provided and the policies we have -- we have put in place are providing a great deal of accommodation to the economy to make sure that it is on a sound trajectory.

I will conclude that the implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut.

My forecast of rates a year ago when we started raising fed funds, I never came close to the 10-year rate today. My forecast was terrible