. what all this means, in turn, is that the most monetary authorities can hope to achieve is to maintain overall macro - economic stability ; we cannot pretend that this means stable conditions for every sector of the economy, still less every individual producer. now let me be clear, i'm not pleading impotence! monetary policy can have very powerful effects on overall macro - economic stability. but it is important that the limitations of monetary policy - what it can and what it can't hope to achieve - are clearly understood. otherwise expectations are likely to be disappointed, and disappointed expectations may lead to building pressure for alternative policy actions, which may not in the event be in our longer - term economic interest. against that - rather long - winded - background i turn to the uncertainties in the present world economic situation. the major uncertainty, of course, relates to the situation in the united states - the world's largest economy - which had experienced a period of exceptionally strong economic growth with relatively low inflation until the latter part of last year, which itself played a vital part in buoying up the whole world economy through the asian financial crisis. briefly - and no doubt oversimply - this very strong performance was made possible by developments on the supply side of the us economy in the form of exceptional productivity gains, as the application of new information and communications technologies spread through the economy. this development - though extremely difficult to quantify promised a higher sustainable rate of growth in the us economy and higher corporate earnings growth. that expectation in turn contributed to a rapid rise in equity prices, especially in the " high tech " sectors, which helped stimulate both business investment in the us and consumer demand causing the private sector to move into financial deficit. it also attracted massive direct and portfolio investment inflows from abroad which over - financed an increasing current account deficit in the us and caused the dollar to strengthen against other currencies. but by the first half of last year the us economy was expanding at a rate of around 5 %, which even on the most optimistic view of underlying productivity growth was clearly unsustainable. the pace of demand growth in the us needed to slow down - as of course it has, dramatically, to the point where growth in the us in recent quarters has pretty well come to a halt. the big questions now are whether we are at the low point, and what might we expect in terms of the strength of a recovery. and the reality is that no - one

moderate rather than aggravate cyclical fluctuations in the economy, and to remove much of the nominal uncertainty and related short - termism from economic decision - making. to that extent we can help indirectly to improve the supply - side performance of our economies. this is essentially the thought that underlies the universal central banker's mantra that " price stability is a necessary condition for sustainable growth ", not to mention sustainable high levels of employment and rising living standards, which are, of course, the really good things of macro - economic life. now it is relatively easy to explain in these terms what we are trying to do. actually doing it is a good deal harder! for a start we cannot directly observe or measure what is happening in an underlying sense on the supply side with any great precision. we may become aware of short - run shocks relatively promptly, and we are able to draw inferences from partial information over time. but we can't be confident we know just where the " target " is, and we will often need to approach it somewhat tentatively. and there are equally uncertainties on the demand side as to just what is happening currently, or even more as to what is likely to happen in the period ahead. nor can we know at all exactly just what the size of the impact of monetary policy action will be, or the timescale over which it will have its full effect, in the particular circumstances of any given situation. it has often been said that monetary policy is more of an art than a precise science even though we all bring to bear as much economic science as we can muster. there are particular difficulties in interpreting movements in asset prices, including exchange rates, let alone seeking to manage them through monetary policy. and even if we have a view about the asset prices we might like to see in the broader context of our monetary policy objectives, it is often very hard to predict even the direction in which they might move, over even relatively long periods, in response to changes in interest rates. we necessarily take asset prices into account, both in our forecasts and in our policy decisions, but insofar as we cannot influence them directly we have to be satisfied with seeking to offset their effects on demand and inflation through other channels of the transmission mechanism. and the same is true, in a broader sense, of external demand shocks, which national or regional central banks cannot themselves directly affect, so that they must try to compensate for them through offsetting changes in domestic demand growth