We have had a very accommodative monetary policy stance. And as the expansion continues, we have been moving toward a more neutral one.

We know that neutral rates have traditionally in the U.S. economy been positive. And they have changed as technology changes, as savings change, as government deficits change. So we really have to look at the dynamics of the economy and try to move monetary policy in a manner that allows us to get the potential growth and allows us to sustain this price stability era.

As we are in the fourth year of recovery, we have to be vigilant. And as long as the Fed is, people are aware that we are watching closely, I think the expansion can move in a very constructive way through 2005.

Recognizing how difficult it is to know when policy is truly neutral, I think it is prudent to move the federal funds rate up to a position that gives me more confidence that monetary policy is no longer accommodative. I would prefer this strategy to finding out the hard way—for example, through a deterioration in inflation expectations or in the inflation picture itself—that we had maintained an overly accommodative stance for too long.

The momentum in the inflationary process has clearly shifted away from disinflation. And, unfortunately, it is not always possible to distinguish short-term movements in the price indexes from the emergence of an inflationary trend until after the fact...Monetary policy makers have to anticipate the potential for inflation to creep up over time if the policy rate does not move up as well—in other words, if policy unintentionally becomes accommodative.

We still see signs that the current level of the real federal funds rate target remains below the level that is most likely needed to keep inflation stable and economic output at its potential.

Interest rates are clearly not at restrictive levels...If we keep inflation low, I don't see any reason why interest rates should reach particularly high levels.

Market participants, I think, are confident, and I hope they are correct, and I believe they are, that inflation is going to stay low in this country.  It's going to stay low, in part, in large part, because we in the Federal Reserve are committed to maintaining low inflation.

I think the economy is fundamentally sound, fundamentally resilient.  It doesn't require policy-makers getting things precisely correct, indeed it has a great ability to absorb shocks and surprises, positive and negative, and continue to advance.

We need to preserve confidence that policy will move toward a positive real fed funds rate at a pace sufficient to keep inflation expectations stable at a low level. How far policy moves and the pace at which it moves will depend on how the outlook evolves. Preserving the credibility of our commitment to price stability is vitally important, not least because of the flexibility it affords us to confront future shocks that have the potential to cause damage to the financial system and the economy.

By pursuing fiscal prudence and price stability during booms, policymakers greatly enhance their ability to take swift, effective countercyclical action when it is needed most.

The movement back toward a more neutral interest rate environment should contribute to a more sustainable and balanced economic environment. I might describe our recent policy actions as a form of preventive maintenance that helps to ensure low inflation in the future while facilitating a transition toward other desirable outcomes such as less borrowing and more saving.

The FOMC like everyone else can be surprised by events. And it is vital that we maintain the flexibility to respond with the best policy action that comes from each FOMC discussion, even if sometimes that has the potential to surprise some in financial markets.

My personal view is that if the economy stays on the present path of solid growth, then rates have not yet returned to equilibrium. As I noted earlier, I do not see an imminent threat of inflation, and I am comfortable with our gradual monetary policy adjustments—at least for now.

Although the basic direction of policy has been more obvious than usual for the last year or so, it will likely become less clear and perhaps more difficult to communicate as we approach the equilibrium or neutral interest rate that is consistent with economic activity at its potential and with low and stable inflation.