Taken individually, higher energy costs, increases in labor costs, and stronger import prices are not especially alarming.  Taken together, however, they suggest to me an environment where risks to inflation are increasingly on the upside, especially with an accommodative monetary policy.  Thus, going forward, I think it will be especially important to position US monetary policy so that it can respond if inflation pressures emerge and prevent these pressures, even if temporary, from affecting inflation expectations.

While an accommodative policy is quite appropriate when the economy is operating significantly below its potential, I am sure you would agree that the same policy could be highly inflationary if maintained as the economy approaches its potential.  Ideally, then, we would like to unwind policy accommodation in pace with the rebound in aggregate demand that moves the conomy back toward its potential.

I would not try to manage the yield curve as a policy maker...I think that our goal...is to focus on the real economy and make sure the environment of stable prices stays in place.

Since the fall of 1998, we have not seen the kind of widespread uncertainty about the health of major players in financial markets that has in the past tended to intensify and spread the economic effect of adverse events [such as, excesses of the stock market bubble, including not only the overvaluation of many stocks, but also the lapses in corporate governance.] In my view, two basic reasons account for this relatively favorable outcome. First, risks probably are in fact better diversified and better allocated to those who are prepared to absorb them or to those whose financial distress is less likely to have feed-through effects on the economy. Second, monetary policy in the United States responded very aggressively to incipient declines in activity and inflation that resulted from the emerging problems.

Stable economic environments encourage innovation; indeed fostering a stable economic environment is an important way in which central banks can contribute to public welfare.

These phenomena [the growing current account deficit, dwindling household savings, low level long-term interest rates and the rapid pace of house price increases] could well continue for some time longer, but they are not sustainable indefinitely. At some point, global investors will require higher expected rates of return as their portfolios become increasingly concentrated in dollar assets; house price increases will encounter resistance as they rise relative to income and rents; as housing prices level out, households will recognize that they must increase saving out of income to have adequate resources for retirement; and the Federal Reserve already has been raising short-term interest rates as demand recovers from the shocks of recent years.

I have long been of the view that you really need to think of Fed policy on the whole as being driven by incoming data...I would think it would be misleading to the markets to provide firm guidance about the future of policy.

The fact that the 10-year bond has not exhibited a persistent trend over the past 18 months or so while the Fed has been increasing the target fed funds rate by 200 basis points is not evidence that something is awry with monetary policy.  

The Fed ought not to take risks of inflation going higher on a sustained basis.

We are clearly in the eighth inning of a tightening cycle.  We have the ninth inning coming up at the end of June.

Developments like increasing globalization and financial liberalization have changed, and continue to alter macroeconomic linkages, perhaps in fundamental ways. As a result, there is more uncertainty in the economy, and that’s an environment in which it is even harder for policymakers to determine the appropriate responses to economic events.

Asset price movements that are discontinuous or extreme can affect the policy process...Because they are interest-sensitive, asset prices are primary components of the channels by which monetary policy is transmitted to the real economy. If these transmission channels are disrupted, the reliability and the effectiveness of policy are degraded. In the worst case, policy's room for maneuver may be narrowed or even severely compromised, and risks of a policy blunder are heightened.

Central bankers would benefit from a better understanding of asset price movements--particularly more extreme movements--so that we do not mistakenly facilitate in some way potentially harmful outcomes.

I believe our strategy to act before the appearance of widespread price increases is sound and necessary to keep inflation and inflation expectations firmly in check. The gradual rate hikes at this stage of the economic recovery also reduce the chances that the Fed will later need to take a more painful path of steep hikes. The Fed is not raising rates to stifle economic growth, but to ensure an environment of stable prices and sustainable growth over the long term.

Given my current outlook for the economy, my personal view is that we’ve not yet reached a neutral policy stance.