excessive policy accommodation. and it would do so before inflation expectations would be in much danger of becoming unhinged. we would not have the desired reductions in unemployment, but then again, there wouldn ’ t be anything that monetary policy could do about it. we would suffer some policy loss in that a 3 percent inflation rate is above our 2 percent target. but we certainly have experienced inflation rates near 3 percent in the recent past and have weathered them well. and 3 percent won ’ t unhinge long - run inflation expectations. we are not talking about anything close to the debilitating higher inflation rates we saw in the 1970s or 1980s. most importantly, we would also know that we had made our best effort. but let me be clear : there is a natural tendency for policymakers to pull back on accommodation too early before the real rate of interest has fallen to low enough levels. such errors happened in 1937 when the fed prematurely withdrew accommodation. this was documented in milton friedman and anna schwartz ’ s 1971 book, a monetary history of the united states. more recently, the bank of japan made the same mistake. therefore, it is essential that the fed clearly commit to a policy action that is measurable against our goals. policy projections and a monetary policy framework regardless of whether such explicit forward guidance is adopted, the effectiveness of monetary policy can be enhanced by clear communication of the fed ’ s ultimate goals and of the strategies that it will use to achieve those goals. the minutes from the december fomc meeting, which were released last tuesday, noted that the committee discussed two initiatives to enhance our communications about monetary policy. first, we agreed to begin publishing participants ’ projections for the appropriate path for the federal funds rate and qualitative information about their outlooks for the fed ’ s balance sheet in our quarterly summary of economic projections ( or sep ). second, we discussed formulating a consensus statement on the committee ’ s longer - run goals and monetary policy strategies. until now, participants have provided forecasts for real gdp growth, the unemployment rate and inflation, but not the policy assumptions that underlie these projections. the forecasts were made under each participant ’ s unspecified views of appropriate policy, which is defined in true fedspeak as : “ the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the federal reserve ’ s dual objectives of maximum sustainable employment and stable prices. ” bis central bankers ’

the cost of producing goods and services. the cost - minimizing mix will depend on the relative prices and relative productivity of capital and labor and on the rate of interest. if saving is inadequate to meet these investment needs, then interest rates rise, increasing the return to saving and perhaps boosting saving to some extent but also making it worthwhile for firms to reorganize their production methods to use less capital per worker. it is this consequence - operating at a lower ratio of capital to labor - that drives the concern about adequate savings in the economy. over time, reducing the ratio of capital to labor in production reduces the productive capacity of the economy. and critically for the average worker, reducing the amount of capital per worker reduces a worker ’ s marginal productivity, his or her real wage rate, and of course, the sustainable amount of his or her consumption. to get some idea about the importance of saving and investment for future productivity growth, we can look to the past. since the mid - 1990s, productivity growth in the nonfarm business sector has averaged a bit more than 3 percent, roughly double its average from 1973 through 1995. estimates produced by the bureau of labor statistics, augmented by analysis carried out at the federal reserve and elsewhere, suggest that about one - third of the step - up in productivity growth is attributable directly to increases in the amount of capital per worker used in production. 1 this so - called capital deepening has in turn come about because of the sharp decline in the relative price of capital : for example, the price of new high - tech capital equipment has fallen 70 percent relative to the price of business output since the end of 1995, so that increasing the capital intensity of production has become cost efficient. but this estimate may well understate the total contribution from investment to labor productivity growth because of synergies that are difficult to quantify but are significant nonetheless. for example, newer vintages of capital may embody more - advanced technology than older vintages and thus, even without any increase in capital intensity, productivity would rise as new capital replaces old capital in production. so if capital investment is a critical factor behind productivity growth, why have i hedged on the issue of whether the decline in the personal saving rate is something about which we should be concerned? the reason is that, in a country with a well - developed capital market, investment needs of one sector can be met by savings of another sector. in principle, the burden of