Luck as well as structural changes in the economy may have had a lot to do with the current low level and apparent stability of US inflation.  If so, and if our luck turns and we experience a series of adverse shocks, our ability to formulate policies that deliver sound performance may depend upon a much better understanding of the inflation process and of expectations formation.

Relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic.

The FOMC knew [in the 1990s] that tools were available to choke off the stock market boom, but those tools would only have been effective if they undermined market participants' confidence in future stability. Market participants, however, read the resilience of the economy and stock prices in the face of monetary tightening as an indication of undiscounted market strength.

While other countries have suffered sluggish growth to achieve lower inflation, the US did not.  This is because our disinflationary monetary policy could be made against the backdrop of a step up in productivity growth.  We were also successful because monetary policy did not adhere to a rigid mechanical rule, but adapted to the incoming evidence on inflation and output.

In some instances, the injection of liquidity ran counter to the inflation risks that the Committee perceived just before the crisis.  But as events bore out, such flexible monetary policy responses did not jeopardize the pursuit of our long-run goal of price stability.  An important element in this disciplined approach to flexibility is that our long-run policy goals generally have been clearly articulated and are understood by the public.

The Fed thinks that the price index for personal consumption expenditures excluding food and energy is the best measure of underlying trends in consumer inflation.  But does that mean it's the best index for a guideline?  For example. the total CPI is used in many pricate contracts as well as the inflation adjustments in many tax and transfer programs.  So should we be concerned about the CPI as well?  Also, in a period of rapidly rising energy costs--such as the present--will the public have confidence in an inflation guideline that excludes energy prices?  Would such a guideline achieve its claimed advantage of reducing risk premia?

Suppose a central bank successfully adopted a formal inflation guideline that respects a dual mandate by flexibly adjusting the time horizons for achieving the guidelines.  Would this policy look any different from current Fed policy?

Even before Hurricane Katrina and all that has followed, I would have said that the conduct of monetary policy had reached a challenging phase. We had gone through a period in which inflation was well contained but the economy had a lot of slack. In that phase, it was obvious that policy needed to be highly accommodative. Then, as slack diminished, it seemed equally obvious that the Fed needed to gradually remove policy accommodation—"normalizing" the stance of monetary policy.

As for the impact of the situation in the Gulf Coast on policy...In my view, the greatest contribution monetary policy can make is to keep the national economy on an even keel. Monetary policy, unfortunately, has little scope to cushion the immediate economic fallout from such a severe and sudden blow to a region...It is fiscal policy—government spending and transfers—that is necessary to address the immediate needs of the affected areas.

Over time...as slack in resource use diminished—that is, jobs have grown and capacity utilization has risen—the FOMC has gradually been able to lift its foot off the accelerator, removing policy accommodation.

If the economy evolves as I expect, then my sense is that the policy path upon which we embarked just over a year ago — a movement toward neutrality at a measured pace — will continue to be appropriate.  If the economy evolves as I expect, it is likely that we can continue to move the federal funds rate toward neutrality at what we have described as a measured pace, steadily converging to a level of interest rates that supports the current expansion into 2006 and beyond. 

So the Fed's best strategy is to keep careful watch on economic developments, approach each policy decision with an open mind, and communicate the rationale for its decisions as clearly as possible.

Policy still appears to be somewhat accommodative, and given the recent inflation performance and the dwindling of slack, it makes sense to continue the process of removing that accommodation.

The Fed had to keep interest rates exceptionally low for a long time just to get respectable, but not stellar, economic growth.

To separate signal from noise, we try to look not only at the persistence of movements but also at their correlation across markets.