A policy problem arises because policymakers do not know exactly how monetary policy actions are translated to the real economic variables; policymakers must estimate, or guess, the magnitude of the response of such variables to policy changes and how long these effects last.  The only certainty is that effect of policy actions on real variables eventually dissipates.  “Eventually” may cover a period of several years, and may be longer in some circumstances than others.  It is worth noting that these hedges on my part reflect ignorance—mine and the profession’s—and not obfuscations.  We just don’t have precise estimates of the magnitudes and durations of effects of monetary policy on real variables.

Given the lags with which monetary policy affects the economy, however, we cannot rule out a situation in which a preemptive policy tightening may become appropriate before any sign of actual higher inflation becomes evident. If the FOMC were to implement such an action, it would be judging that the risks to the economic expansion of waiting longer had increased unduly and had begun to outweigh the advantages of waiting for uncertainties to be reduced by the accumulation of more information about economic trends.