Accordingly, before the Fed raises rates we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period at the zero lower bound. And once we start, at least initially we should raise rates slowly to make sure the economy can weather less accommodative financial conditions. In sum, we should be exceptionally patient in adjusting the stance of U.S. monetary policy – even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives. Let me now explain how I get to this conclusion. Conflicting signs in the labor market To judge the success of policy, you have to know when you’ve actually reached your targets. Knowing when we hit our inflation target is straightforward. After all, a 2 percent increase in PCE prices is an easily identifiable number. But full employment is a far more nuanced concept. As the FOMC’s annual January “Statement on Longer-Run Goals and Monetary Policy Strategy” recognizes, maximum employment can be influenced by a large number of structural factors that can change over time and may not be directly measureable. In light of this uncertainty, the Committee considers many factors in gauging maximum employment. Judging the degree of slack along these many dimensions is a difficult and complex task. But it is one that is critical for the conduct of monetary policy – we must have a good idea of what constitutes achievement of our full employment target.
Some inflation targeting central banks – Norway, New Zealand and Sweden – are now publishing charts which show how they expect to change policy rates to achieve their targets 6 . Should the MPC follow this trend? If you follow press reports of our regular Inflation Report forecasts, you might be forgiven for thinking we already have. But actually no: our forecasts take market expectations for interest rates as their starting point, and we leave commentators to draw their own inferences. We have maintained the position that we do not give hints about future interest rate changes. Naturally we are looking closely at what happens elsewhere and we will want to learn from their experience – though of course, since the MPC is not a consensual body, it would be a significant complication to get it to agree an explicit path for interest rates. 6  In addition, the Bank of Canada now includes text in its monetary policy report which indicates whether or not rates will have to change from their current level to meet the inflation target. BIS Review 20/2007  5  Have we become prisoners of our past success? Let me come, finally, to the biggest, and most difficult of the issues I want to raise tonight – namely the extent to which the stability of the past decade has conditioned expectations of what the MPC can and should do, in ways which may be both helpful and unhelpful to its ability to do its job.