the central bank should explain the factors that caused the deviation and how it plans to achieve the desired outcomes in the future. in that regard, the federal reserve's enhanced communication strategy will be useful in enabling the fomc to explain its policy decisions and strategies more fully in the context of its medium - term objectives for economic activity and inflation and the risks to those objectives. as a result, the public and the congress can better assess whether our forecasts of the economy are reasonable and whether we are pursuing a policy strategy that is consistent with achieving the dual mandate of price stability and maximum sustainable employment. the result should be increased accountability that is consistent with basic democratic principles. i also hope that the increased prominence given to participants'economic projections will, on the one hand, help focus greater attention on our medium - term objectives and on our progress toward meeting these objectives and, on the other hand, remove some attention from the question of whether the fomc will change its target for the federal funds rate at its next meeting. the near - term path of interest rates is highly uncertain and depends on the implications of the incoming data, which in some cases are evolving right up to the time of the meeting. what is more certain - - and far more important - - is the commitment of the fomc to move interest rates as needed to foster outcomes consistent with our dual mandate of maximum sustainable employment and price stability. conclusion as i have outlined here, i believe that the recent enhancements to the federal reserve's communication strategy are a major advance in achieving greater transparency. moreover, the approach we have taken is consistent with what the science of monetary policy tells us will result in better outcomes for price stability and maximum employment. in addition, this communication strategy can help improve the performance of financial markets and increases the federal reserve's accountability to the public and the congress. over the years, the federal reserve has striven to improve its communication strategy, and our recent enhancements should be seen as an important further step in this direction. we have learned from our earlier experiences with increasing the transparency of our communications, and we expect to continue learning. we will also continue to examine how we can improve our communication with the public and the markets so that we can better achieve our congressionally mandated goals. references benigno, pierpaolo, and michael woodford ( 2003 ). " optimal monetary and fiscal policy : a linear - quadratic approach, " nber macroeconomics annual, vol. 18 (

. similarly, the overall inflation rate of the economy ultimately reflects the pricesetting decisions of individual firms, and expectations have a crucial influence on those decisions as well. as a result, the evolution of aggregate supply also exhibits a significant forward - looking component. however, both aggregate supply and aggregate demand tend to exhibit a substantial degree of inertia, which reflects the significant costs incurred by households and firms in making sudden large adjustments in their consumption, staffing levels, and so forth. largely because of those inertial elements, monetary policy actions have little or no instantaneous effect on the economy ; in fact, the peak effect on aggregate demand may not appear for at least a year, and the peak effect on inflation is subject to even longer lags. therefore, because the variables the central bank wants to influence have a forward - looking component, and because the effects of policy actions are unlikely to appear for at least a year, macroeconomic projections should have a central role in the monetary policy plan and should appear in the public description of that plan. the critical role of expectations in the evolution of the economy elevates the importance of central - bank communication and suggests that it should encompass some discussion of views beyond that of the quantitative projections. broadening the scope of communication by including a description of policymakers'expectations helps households and businesses to make more - informed decisions and can help anchor the private sector's inflation expectations more firmly by clarifying and underscoring the central bank's intention to keep inflation low and stable over the long run. increased communication also enhances the performance of financial markets by providing investors with greater information about policymakers'intentions. in all of these ways, central - bank communication that more fully portrays policy considerations facilitates the effectiveness of monetary policy and contributes to the overall stability and growth of the economy. the enhancements to our communication strategy were developed through a comprehensive process over the past year or so, but they have turned out to be particularly timely in light of recent economic and financial developments. as you are well aware, the u. s. economy has been experiencing a bout of financial instability over the past few months. heightened uncertainty in the credit markets impedes the ability of the financial markets to channel funds to households and businesses that have productive investment opportunities. as i discussed in a speech in early november, the heightened uncertainty flows from an increase in risk, which can be broken down into two components : valuation risk, which arises when the market realizes that the complexity of