Last June, U.S. inflation hit a peak of 7 percent as measured by the 12-month change in the personal consumption expenditures (PCE) index. In response, the Federal Reserve has been using its monetary policy tools to restore price stability by bringing demand into line with still-constrained supply.
In these circumstances, I anticipate that financial stability considerations are likely to play a substantial role in the determination of the appropriate level of monetary accommodation. I should stress that the Committee is in a better position to carry out this kind of probabilistic cost-benefit analysis in 2014 than it was in 2007.