In terms of neutrality or equilibrium or whatever...[p]resumably there is a range, and we're close to and likely within the range of where it should be in my opinion.

Looking ahead, the path of far-dated futures prices for oil indicates that markets are not expecting prices to rise significantly further. However, given strong global demand for energy resources and the ever-present risk of supply disruptions, additional increases in energy prices cannot be ruled out. Such increases would boost the overall inflation rate and might put additional upward pressure on production costs and inflation expectations, which in turn, could create forces that would tend to push core inflation up. If that were to occur, the Fed would need to be particularly vigilant to ensure that inflation remained under control.

Some may see the trend toward output growth of 3 percent as a failure of policy. But if the estimates [of labor productivity] above are correct, it is not. The economy must be allowed to move along its path of potential growth if we are to achieve monetary policy’s dual mandate of sustainable growth and price stability. Attempts to maintain consistently higher growth than this will only produce inflationary pressures and erode the price stability that is monetary policy’s most important contribution to macroeconomic stability.

I anticipate that the adoption of a formal inflation objective would result in some, probably modest, further reduction in the level and variability of nominal long-term bond yields.  Adopting a formal inflation objective, and success in achieving that objective, will also enhance policymakers’ ability to pursue other policy objectives, such as conducting countercyclical monetary policy.

Today, we see oil prices going up, but we see very little response in wages and prices. We see overall inflation relatively stable. We don't have to have the same aggressive monetary policy response we had in the '70s. And that's a direct benefit of the improvement in inflation expectations that we've gotten in the last 30, 35 years.

But if the federal funds rate path becomes less predictable than it has been over the last 14 FOMC meetings, does that mean that the Committee must retreat to saying little beyond announcing its rate decisions when they are made? In my opinion, no. My sense is that there will still be room for forward-looking communications that entail more conditional statements about how policy is likely to react to evolving economic fundamentals, in contrast to the less conditional statements common since 2003.

If [the recent slow employment growth] is defined as a demand condition, perhaps poor job prospects have discouraged people from even attempting to find work. Will another year like 2005 reverse the recent trend? And does that mean that monetary policy should be accommodative until the economy is once again generating substantially more than 2 million new jobs per year? Alternatively, if the lower labor-force participation rate is defined as a supply condition, then it may be driven by younger workers' deferring entry into the labor force - perhaps to obtain more schooling and skills. If that is the correct explanation, then potential employment will be calculated much differently from the number we saw in the 1990s. In that case, attempting to spur more rapid job growth with an accommodative monetary policy is exactly the wrong thing to do. It will not accomplish the goal of maximum sustainable growth in the long run, and it may threaten our goal of price stability.

Monetary policy itself cannot sensibly be directed at reducing imbalances, but the past and future evolution of global capital flows will of course matter for monetary policy by virtue of their impact on the outlook for output and inflation.

Because technology feeds into various macroeconomic aggregates--including household and business spending, productivity, and inflation--its implications for the U.S. economy will continue to necessitate careful observation, improved measurement, and study...A significant slowing in the pace of technological change could have inflationary consequences. Accordingly, monetary policy makers will remain alert, carefully monitoring technological developments that have the potential to mitigate inflationary pressures as well as developments that could raise the risk of overheating.

This uncertainty surrounding the current behavior of asset values complicates the task of assessing the future trajectory of asset prices, and the impact of alternative monetary policy paths on asset values. And by widening the already substantial degree of uncertainty that surrounds estimates of the equilibrium real rate of interest, these developments complicate the task of assessing the appropriateness of a given stance of monetary policy against the objectives of the Federal Reserve.

Monetary policy does not today and is unlikely in the future to offer us an effective tool for directly reducing the incidence of large or sustained deviations of asset values from what might turn out to be their fundamental values, what some call bubbles.

Successfully integrating asset prices into monetary policy formulation is also hard to do because of the difficulty of assessing how potential alternative paths for monetary policy will feed through to overall financial conditions and thereby for output and inflation—in other words it is difficult to forecast how changes in current or expected policy will affect asset values.

In circumstances where the central bank observes a large realized movement in asset prices and is confident in its knowledge of the impact of those moves on the path of aggregate demand, monetary policy may need to follow a different path than might have seemed appropriate in the absence of those developments.

This leaves us with no simple or clear doctrine for the role of asset prices in monetary policy regimes. Asset prices probably matter more than they once did, but what that means for monetary policy necessarily depends on the circumstances.

Looking ahead, I expect the favorable performance of the economy to continue.  Most private forecasters expect the momentum from the solid growth in 2005 to continue into 2006.  Although monetary policy has become less accommodative, it will continue to support economic activity.  Because of the lags with which monetary policy affects the economy, monetary policy accommodation over the past year will continue to act as an economic stimulant, though clearly far less so than in the past several years...My own view is that we will see growth in the 3 1/4 to 3 1/2 percent range, which encompasses the consensus estimate.