##taking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy action on prospects for achieving our macroeconomic objectives. in that process, economic models can provide valuable guidance to policymakers, and over the years substantial progress has been made in developing formal models and forecasting techniques. but any model is by necessity a simplification of the real world, and sufficient data are seldom available to measure even the basic relationships with precision. monetary policymakers must therefore strike a difficult balance - - conducting rigorous analysis informed by sound economic theory and empirical methods while keeping an open mind about the many factors, including myriad global influences, at play in a dynamic modern economy like that of the united states. amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach while giving due weight to the potential risks and associated costs to the economy should those judgments turn out to be wrong. during the nearly three years that i previously spent as a member of the board of governors and of the federal open market committee, the approach to policy that i have just outlined was standard operating procedure under the highly successful leadership of chairman greenspan. as i indicated to the congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the federal reserve in the greenspan era. i believe that, with this approach, the federal reserve will continue to contribute to the sound performance of the u. s. economy in the years to come.

issues increased only slightly on balance over 2005 even as short - term rates rose 2 percentage points. as previous reports and testimonies from the federal reserve indicated, a decomposition of long - term nominal yields into spot and forward rates suggests that it is primarily the far - forward components that account for the low level of long rates. the premiums that investors demand as compensation for the risk of unforeseen changes in real interest rates and inflation appear to have declined significantly over the past decade or so. given the more stable macroeconomic climate in the united states and in the global economy since the mid - 1980s, some decline in risk premiums is not surprising. in addition, though, investors seem to expect real interest rates to remain relatively low. such a view is consistent with a hypothesis i offered last year - that, in recent years, an excess of desired global saving over the quantity of global investment opportunities that pay historically normal returns has forced down the real interest rate prevailing in global capital markets. inflation prospects are important, not just because price stability is in itself desirable and part of the federal reserve's mandate from the congress, but also because price stability is essential for strong and stable growth of output and employment. stable prices promote long - term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences. experience shows that low and stable inflation and inflation expectations are also associated with greater short - term stability in output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy. similarly, the attainment of the statutory goal of moderate long - term interest rates requires price stability, because only then are the inflation premiums that investors demand for holding long - term instruments kept to a minimum. in sum, achieving price stability is not only important in itself ; it is also central to attaining the federal reserve's other mandated objectives of maximum sustainable employment and moderate long - term interest rates. as always, however, translating the federal reserve's general economic objectives into operational decisions about the stance of monetary policy poses many challenges. over the past few decades, policymakers have learned that no single economic or financial indicator, or even a small set of such indicators, can provide reliable guidance for the setting of monetary policy. rather, the federal reserve, together with all modern central banks, has found that the successful conduct of monetary policy requires pains