growing optimism that may develop with extended periods of economic expansion, asset price values can climb to unsustainable levels even if product prices are relatively stable. the 1990s have witnessed one of the great bull stock markets in american history. whether that means an unstable bubble has developed in its wake is difficult to assess. a large number of analysts have judged the level of equity prices to be excessive, even taking into account the rise in “ fair value ” resulting from the acceleration of productivity and the associated long - term corporate earnings outlook. but bubbles generally are perceptible only after the fact. to spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. betting against markets is usually precarious at best. while bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy. the bursting of the japanese bubble a decade ago did not lead immediately to sharp contractions in output or a significant rise in unemployment. arguably, it was the subsequent failure to address the damage to the financial system in a timely manner that caused japan ’ s current economic problems. likewise, while the stock market crash of 1929 was destabilizing, most analysts attribute the great depression to ensuing failures of policy. and certainly the crash of october 1987 left little lasting imprint on the american economy. this all leads to the conclusion that monetary policy is best primarily focused on stability of the general level of prices of goods and services as the most credible means to achieve sustainable economic growth. should volatile asset prices cause problems, policy is probably best positioned to address the consequences when the economy is working from a base of stable product prices. for monetary policy to foster maximum sustainable economic growth, it is useful to pre - empt forces of imbalance before they threaten economic stability. but this may not always be possible – the future at times can be too opaque to penetrate. when we can be pre - emptive we should be, because modest pre - emptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy. the economic expansion has generated many benefits. it has been a major factor in rebalancing our federal budget. but more important, a broad majority of our people have moved to a higher standard of living, and we have managed to bring into the productive workforce those who have too long been at its periphery. this has enabled large segments of our society to gain skills on the job and the self - esteem

. assuming these firms are unable to fully pass through higher input costs into prices, they will experience some compression in their profit margins, at least in the short run, thereby causing a decline in the marginal return on investment in most forms of equipment and structures. 7 moreover, to the extent that higher oil prices are associated with greater uncertainty about the economic outlook, businesses may decide to put off key investment decisions until that uncertainty subsides. finally, with higher oil prices weighing on household income, weaker consumer spending could discourage business capital spending to some degree. fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades. during the period before the creation of the organization of the petroleum exporting countries ( opec ), cheap oil encouraged households to purchase gas - guzzling cars while firms had incentives to use energy - intensive production techniques. consequently, when oil prices quadrupled in 1973 – 74, that degree of energy dependence resulted in substantial adverse effects on real economic activity. since then, however, energy efficiency in both production and consumption has improved markedly. consequently, while the recent run - up in commodity prices is likely to weigh somewhat on consumer and business spending in coming months, i do not anticipate that those developments will greatly impede the economic recovery as long as these trends do not continue much further. for example, the simulation of the frb / us model that i noted earlier indicates that a persistent increase of $ 25 per barrel in oil prices would reduce the level of real gdp about 1 / 2 percent over the first year and a bit more thereafter. the magnitude of that effect seems broadly consistent with the estimates of professional forecasters ; for example, the blue chip consensus outlook for real gdp growth has edged down only modestly in recent months. monetary policy considerations let me now turn to the stance of monetary policy. as you know, monetary policy has been highly accommodative since the financial crisis intensified. in december 2008, the fomc lowered the target federal funds rate to near zero and started to provide forward guidance concerning its likely future path. as in its statements since march 2009, the committee reiterated last month that “ economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. ” in addition, the fomc has purchased a substantial volume of agency debt, agency mortgage - backed securities,