As Confucius put it: “When people feel safe, danger will arise.”5 In addition, there is ample evidence that the monetary policy landscape has changed to an extent that warrants even more intensive research into risks although monetary policy performance has not been too bad over the past decade. The major change I should like to refer to is the increasing role of financial markets.
A considerable body of research suggests that, in normal times, the evolution of the federal funds rate target can be reasonably well described by some variant of the widely known Taylor rule.14 Rules of this type have been shown to work quite well as guidelines for policy under normal conditions, and they are familiar to market participants, helping them judge how short-term rates are likely to respond to changing economic conditions.