If the gap is still significant, lingering slack resources will diminish inflationary pressures, and policy accommodation can be removed at a gradual pace. However, if the output gap has nearly closed and inflation becomes more of a threat, then monetary policy can respond accordingly.

Of course, we will respond appropriately to any indications of a threat to price stability. Price stability, as you well know, is essential for obtaining long run maximum sustainable growth. So, in order to give the current expansion its greatest chance to last for an extended period of time, we must keep inflation under control.

This transition from an expansion supported by accommodative fiscal and monetary policy to one broader-based is essential for the expansion to be self-sustaining.

It is neither usual nor necessary that the Fed, or any other central bank, announces its longer term course in its policy statements.

If people begin to expect higher inflation because of the current impact of oil prices, we could face a kind of scaled down version of the devastating wage-price spiral we lived through in the 1970s. The good news is that evidence from financial market indicators, surveys, and recent patterns of labor compensation all indicate that long-term inflation expectations have been extremely stable. Presumably, this reflects the market’s view that the Fed will continue to demonstrate that it’s willing to do what’s necessary to ensure U.S. price stability.

An accommodative monetary policy stance is appropriate when there is excess slack in the labor market—the current situation—or when inflation is below desirable levels. In my judgment, inflation is now at a level consistent with price stability. With slack in the economy diminishing, the degree of monetary accommodation also needs to diminish over time, toward neutral, for inflation to remain well contained.

If people begin to expect higher inflation because of the current impact of oil prices, we could face a kind of scaled down version of the devastating wage-price spiral we lived through in the 1970s. The good news is that evidence from financial market indicators, surveys, and recent patterns of labor compensation all indicate that long-term inflation expectations have been extremely stable. Presumably, this reflects the market’s view that the Fed will continue to demonstrate that it’s willing to do what’s necessary to ensure U.S. price stability.

Policymakers could be confronted with more difficult choices if output growth and inflation move in opposite directions.

The current level of interest rates in the U.S. is still accommodative.

When productivity grows at a faster rate, the economy can grow faster—resulting in higher incomes and producing more goods and services for all of us to enjoy—without generating inflationary pressures. This ultimately makes our job at the Federal Reserve easier, because our mandate is to set monetary policy to support maximum sustainable economic growth and price stability.

The pace of change in the economy has increased the risks that workers' skills will become obsolete, and they will lose their long-held jobs...This increased rate at which experienced workers have been losing long-held jobs is one of the factors that monetary policy makers have to think about in judging the extent of inflationary pressures currently facing the economy.

A well-timed preemptive increase in the federal funds rate is nothing to be feared. In 1994, it was necessary to take the real federal funds rate...from around zero up to around 3 percent in order to avert the potential build-up of inflationary pressures. And yet real growth picked up and the unemployment rate trended down.

To keep inflation well-anchored, the Fed must be prepared to move the federal funds rate around over the business cycle even though inflation remains stable.

I think both experience and economic theory strongly suggest that the best contribution monetary policy can make to promoting employment and growth is by tying down inflation and inflation expectations. That is, in the long run, employment and growth are maximized by keeping inflation low and stable.

There is widespread agreement among central bankers and monetary economists that although, over the long run, it is feasible for the central bank to control inflation, long-run growth and employment are predominantly determined by forces independent of monetary policy. So it makes little sense for the central bank to adopt a long-run objective for growth or employment.