On the fiscal side, the authorities can cut taxes or increase spending to support income and demand during the deleveraging phase that follows the financial crisis. But the ability of such stimulus to continue to support economic activity ultimately encounters budgetary limits. For example, the need to keep the long-term fiscal trajectory on a sustainable path limits the size and duration of federal fiscal stimulus measures. For state and local governments, the statutory requirements for balanced budgets meant that fiscal policies turned restrictive relatively quickly once budget surpluses and rainy day funds were exhausted, and this was only temporarily mitigated by federal transfers to the states as part of the initial fiscal stimulus program. Fiscal policy is now a drag rather than a support to growth in the United States, and this will likely continue. BIS central bankers’ speeches  3  Monetary policy I would give each of these four explanations some weight for why the recovery has been consistently weaker than expected. But I would add a fifth, monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances. Now let me be clear. I believe the evidence overwhelmingly indicates that our monetary policy has been effective in easing financial conditions and supporting economic activity.
I believe that we would all be better off if the system evolved toward more flexible exchange rates and greater monetary independence in the EME world. Notwithstanding this, we can and do pursue our monetary policy objectives in the United States ever mindful of how our policy choices affect other parts of the global economic system, recognizing that these impacts will, in turn, influence U.S. economic outcomes. For the Federal Reserve, pursuing the dual mandate of full employment and price stability allows us to make an important contribution to global stability and growth. Ensuring low and stable inflation preserves the purchasing power of the dollar and sustains its attractiveness as a medium of exchange. Supporting maximum sustainable employment means that we have an important growth mandate. This remains the case even when we are at the so-called zero bound with respect to shortterm rates. In this context, I believe that our large-scale asset purchase programs were fully consistent with our global responsibilities. For example, our recent program to purchase $ billion of Treasury securities sought to prevent a relapse into recession and to lessen the risk of deflation – outcomes that would have been very damaging to global economy. I do not mean to dismiss lightly the concerns raised by some EMEs about the program. By removing long-duration Treasury assets from private investors’ hands, we encouraged those investors to purchase other assets, including foreign assets. This eased U.S. financial conditions and, thus, boosted U.S. demand for both domestically and foreign-produced goods.