Some have asserted that our accommodative policy stance in recent years, made necessary by the macroeconomic situation, itself has tended to drive down risk premiums as investors "reached for yield." Notably, however, most risk spreads have remained narrow even as we have been removing policy accommodation.

Risk premiums are certainly relevant for monetary policy deliberations, and we do pay attention to our best estimates of them…Neglecting or grossly misestimating risk premiums will lead to misperceptions of the market's outlook and thus potentially to market moves that we did not anticipate…We are also interested in risk premiums as indicators of uncertainty and not solely as inputs into accurate readings of investors' mean economic outlook.

Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures.  In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation.  This generally favorable outlook, however, is attended by some significant uncertainties that warrant careful srutiny.

We seem to be on a fairly solid growth path and inflation expectations seem well-contained, and in that kind of situation, following through is probably the order of the day.

If you look at any one of those factors [rising energy prices, higher import prices, and increases in labor costs] you are able to deal with it without any issue.  But when you start seeing them combine, then I think you have to be even more sensitive to the kinds of inflation pressures that might be out there...And remember that that is in a context where we have had monetary policy very accommodative over the last several years.  That is being removed, but we have that effect that's being carried through that we have to be aware of.

In recent years, market confidence has been so great that only a string of poor policy decisions would have changed inflation expectations.

In the years ahead, should there be further crises, I believe it is reasonable to expect properly calibrated responses by the Fed. The lessons of experience have been thoroughly institutionalized in Federal Reserve practice.

Providing guidance on likely future policy actions is a significant departure for the Federal Reserve. Historically, the Fed and other central banks have been reluctant to provide forward guidance out of a concern that doing so would limit freedom of action in the event of new information indicating that changed circumstances called for a change in policy direction.

Experience to date with forward guidance has been successful but in my opinion it is too early to tell whether this departure will be successful in the long run. The matter will be tested when changed circumstances require policy action that differs from forward guidance.

A casual examination of the target funds rate series will show long strings without change and long strings with changes in the same direction. Short-run reversals have been relatively rare. I believe that this pattern of adjustment probably enhances market understanding of the direction and purpose of policy actions, helping to improve the predictability of policy. When the central bank is predictable, it can be somewhat inactive as market responses carry much of the stabilization burden.

Market confidence in the Federal Reserve’s ability and willingness to maintain a low trend rate of inflation has been a core characteristic of the Greenspan regime...Examination of current survey data and the spread between the yields on conventional and indexed Treasury bonds indicates that market confidence in continuing low inflation extends well beyond Greenspan’s tenure as Chairman. Institutionalizing market confidence in the Federal Reserve is a great accomplishment.

In the years ahead, maintaining and extending improved predictability of policy will be a major challenge for Federal Reserve chairmen.

The evolution to greater transparency proceeded step by step during the Greenspan years.  The most important single change was that the Fed began to disclose its decisions on the target fed funds rate in 1994.

I will highlight the Board’s three highest priority proposals. These three proposals would allow the Federal Reserve to pay interest on balances held by depository institutions at Reserve Banks, provide the Board greater flexibility in setting reserve requirements, and permit depository institutions to pay interest on demand deposits. These amendments would improve efficiency in the financial sector, assist small banks and small businesses, and enhance the Federal Reserve’s toolkit for efficiently conducting monetary policy.

I wouldn't want a pause in tightening, if it ultimately occurs, to reduce the sensitivity of expected interest rate policy to incoming data.