harris, jan hatzius, and kenneth d. west ( 2015 ), the equilibrium real funds rate : past, present and future, working paper for u. s. monetary policy forum, august. see thomas laubach and john c. williams “ measuring the natural rate of interest ”, review of economics and statistics, november 2003, vol 85, no. 4, pp 1063 – 1070. updated estimates available from the federal reserve bank of san francisco. bis central bankers ’ speeches affects economic activity through its impact on financial conditions – including the level of equity prices, bond yields, the foreign exchange value of the dollar and credit conditions. if the relationship between the federal funds rate and other indicators of financial conditions were stable, then one could just focus on the level of short - term rates. 5 but, because financial conditions vary considerably relative to short - term rates, as we have seen in the financial crisis and its aftermath, one needs to consider developments in financial conditions more broadly in setting monetary policy. in fact, at times, when short - term rates have been pinned at the zero lower bound, the federal reserve has taken actions that eased financial conditions without changing shortterm interest rates. such actions have included forward guidance that the fomc was likely to keep short - term rates low for a long time and large - scale asset purchases that led to lower bond term premia. now, as i said at the start, just because i don ’ t want to follow a rule mechanically does not mean that i favor the polar opposite – that is, a fully discretionary monetary policy in which market participants, households and businesses cannot anticipate how monetary policy is likely to evolve as economic and financial market conditions and the economic outlook change. if households and businesses do not have a good notion of how the federal reserve will respond to changing economic and financial market conditions, then this would loosen the linkage between short - term rates and financial conditions. this would also likely lead to greater uncertainty about the outlook and higher risk premia, and it would make it more difficult for policymakers to attain their objectives. instead, what i favor is a careful elucidation of those factors that influence the economic outlook and how monetary policy is likely to respond to changes in the outlook. this includes fiscal policy, productivity growth, the international outlook and financial conditions, as well as how much employment and inflation deviate from the fed ’ s objectives. by conducting policy in a transparent way and communicating what

beneficial, as it brings forward their effects and thus helps to stabilize the economy. for the same reason, providing information about the likely course of the balance sheet could be desirable. in fact, such communication might be particularly important in the current circumstances, because financial market participants have no history from which to judge the fomc ’ s approach and anticipate its actions. fifth, how much flexibility should the fomc retain to change its policy approach? the original asset purchase programs specified the amount and distribution of purchases well in advance. 9 however, the fomc would be learning about the costs and benefits of its balance sheet changes as it implemented a new program. this might call for some flexibility to be incorporated into the program, providing some discretion to change course as market conditions evolve and as more is learned about the instrument. conclusion i hope that my remarks today have offered some insight into the recent balance sheet programs undertaken by the federal reserve. adjustments to the size of the federal reserve ’ s securities holdings are a new policy instrument for the fomc. that presents challenges, both to policymakers in terms of determining how to use the instrument and to market participants in terms of anticipating that usage and understanding its effects. given these challenges, i believe it is important for the federal reserve to communicate effectively about the factors affecting its balance sheet decisions and the implementation of those decisions. in my view, the evidence suggests that the expansion of the securities portfolio to date has helped to foster more accommodative financial conditions, and further expansion would likely provide additional accommodation. of course, whether the fomc decides to take such a step will be determined by its assessment of whether the benefits of additional policy stimulus outweigh the perceived costs of expanding the balance sheet. some flexibility was incorporated into the program because the directives from the fomc specified the amount of purchases “ up to ” the stated thresholds. that flexibility was used to stop the agency debt purchases at around $ 175 billion instead of the originally stated maximum of $ 200 billion. however, this flexibility was not used more broadly.