(Indeed, the mere chance that this may occur may be diminishing the degree of accommodation in place today.) The economic thresholds I am proposing put a higher and more predictable standard on the removal of accommodation. Conclusion I would like to conclude by noting that I have undoubtedly generated some discomfort in the room tonight by saying that even with the large degree of accommodation already in place, monetary policy can and should take additional steps to facilitate a more robust economic expansion. Central bankers naturally worry about such statements. We think back to the 1970s, when our failure to appreciate the changing structure of the economy led to over-stimulative policy and eventually to stagflation. It’s in our DNA to have these concerns; and they remind us of the need to continually do our best to calibrate important markers such as the natural rate of unemployment, keep close tabs on inflation expectations and have our eyes open for early warning signs of financial instability. But I believe a greater risk today is that we buy too quickly into thinking that the equilibrium rate of unemployment has jumped 2 or 3 percentage points or that long-run inflation expectations have become so fragile that they are on the verge of spiking well above 2 percent. I just don’t see the evidence out there supporting this view. But if we do buy into it, then we’ll end up following overly restrictive policies that could unnecessarily risk condemning the U.S. economy to a lost decade – or even more.
In August 2011, we added a particular type of forward guidance to our policy, first saying we would likely keep rates low until mid-2013 and then, in January, indicating that sub-par economic performance would likely warrant exceptionally low rates until at least late 2014. Working to complement these efforts and to improve FOMC communications more generally, we also added two major communications initiatives: A statement of our monetary goals and long-run strategies, and publication of FOMC participants’ projections for the federal funds rate. 1  Krugman (1998). 2  See, for example, Bernanke, Reinhart and Sack (2004) and Eggertsson and Woodford (2003). BIS central bankers’ speeches  1  I have strongly supported each of these developments, believing that they improved transparency and also provided welcome further monetary accommodation for the U.S. economy. However, as I have been talking about in public for some time, I think there are additional tools we could use to deliver more effective policy accommodation. In particular, I would like to see our forward guidance take a different form – one that explicitly ties liftoff in the funds rate to observable economic outcomes (You can think of this as a Ulysses-type forward guidance: We tie ourselves to the mast to avoid the siren calls of premature tightening.)