Yellen, Janet

An extensive literature and some recent experience suggest that central bank communications may also play a helpful role in addressing the constraints relating to the zero-bound... [T]he FOMC can work around the zero lower bound on the overnight interest rate by lowering interest rate expectations in the future, thus pushing down longer-term interest rates to stimulate private spending. The Fed employed such an approach between 2003 and 2005, and has taken an important step along the same path in its December announcement by stating that "exceptionally low levels of the federal funds rate" are likely to be warranted "for some time" due to "weak economic conditions." I believe that such statements can play a useful role in more clearly indicating to markets the Committee's own expectations concerning the federal funds rate path, conditional on the Committee's economic forecast.

Communication also can be important in the Fed's efforts to anchor long-term inflation expectations. As I mentioned at the outset, the odds are high that over the next few years, inflation will decline below desirable levels. It is especially important in such circumstances for the Fed to emphasize its commitment to returning inflation over time to the higher levels that are most appropriate to the attainment of its longer-term objectives. A decline in inflationary expectations when economic conditions are weak is pernicious, especially so when the federal funds rate has reached the zero bound, because any downdrift in inflation expectations leads to an updrift in real interest rates and a tightening of financial conditions.