to the marginal response under certainty equivalence. monetary policy ’ s adjustment to uncertainty about key parameters is the recent monetary policy response consistent with the lessons i have drawn from the literature on uncertainty associated with noisy observations? the following discussion draws on the evolution of my own thinking, as well as on the policy actions, including the announced tilts in policy and the text of the announcements that accompanied policy actions. i pick up this episode in the middle of 1996, when i joined the board. it seems to me that initially monetary policy was consistent with a backward - looking taylor rule ( although that is sometimes difficult to distinguish from a forward - looking taylor rule ). we were faced with two surprises : faster - than - expected growth ( resulting in a higher - than - expected estimated output gap ) and lower - than - expected inflation. these had offsetting effects on the nominal funds rate, yielding a nearly unchanged policy until the fall of 1998 and a policy that closely tracked the taylor rule prescription, at least allowing for updates of the estimated unemployment or output gaps along the way. alternatively, this policy could be viewed as allowing a passive rise in the real rate that turned out to be well calibrated to the rise in the output gap. as the episode progressed, more questions were raised - both inside and outside the federal reserve about the values of the nairu and trend growth. the staff continually adjusted its estimates of these parameters in response to incoming data. in the fall of 1998, monetary policy responded both to the financial market distress and to the abrupt change in the forecast for growth ( and hence utilization rates ) in the united states. i put more weight on the forecast and less on recent observations in the context of a taylor rule, a stance i thought was justified by the abrupt change in the forecast and by the unusually sharp contrast between the forecast and the still - strong incoming data. once it became apparent that the us economy was maintaining its momentum despite weaker foreign growth and that financial markets had returned toward normal, the growing uncertainty about the output gap - reflecting the continuing contradiction of declining inflation and rising output gaps made monetary policymakers cautious about aggressively reversing their policy actions. but through early 1999 we remained somewhat concerned about the degree of recovery in both financial markets and foreign economies. the net result was that the nominal funds rate remained constant during this phase, instead of tightening in line with the taylor rule prescription. in effect, policymakers could be interpreted as attenuating their response to the unemployment and output gap in

the available evidence, i tend to give less weight to the questions concerning the financial situation of households than i do to the risks of continued uncertainty in the business sector. a third question bearing on the outlook for the u. s. economy regards prospects for a pickup in activity among our major trading partners. concerns about the strength of the global economy remain, and the emergence of sars poses a threat to the economic prospects of several emerging - market economies in asia. to date, however, we have no evidence that the new disease has affected u. s. economic activity. nonetheless, continued slow growth abroad could have a damping effect on our recovery here. to summarize, the recent news from oil and financial markets and about consumer confidence clearly suggests that the reduction in risks associated with the situation in iraq has had a number of favorable effects. at the same time, the available indicators of production and employment suggest that the pace of economic activity may remain slow for a while longer, likely restrained by lingering uncertainty about the timing of economic recovery. looking ahead, however, it seems likely that, at some point the combined effects of a fundamentally solid financial sector, sustained consumer spending power, and improving consumer confidence will demonstrate sufficient demand potential to stimulate increased levels of capital investment.