measured either by interest rates or liquidity provision - is not connected in a direct and simple way to the rate of inflation. individual prices are determined by supply and demand in the markets for goods and services, and the average of those prices by relationships of aggregate supply and demand. monetary policy acts on inflation indirectly by altering the balance among the multiplicity of factors that affect supply and demand. to make well - informed policy decisions, we need to analyze the elements behind the recent increase in inflation and form some judgment about its likely future course. like many economists, i believe the inflation process is influenced by a number of factors, chief among which are : the degree to which the productive capacity in the economy is being utilized ; one - time shifts in product prices resulting from shocks to important supply and demand curves ; changes in productivity growth ; and inflation expectations. this basic model is a rough approximation of a complex and constantly evolving mechanism of price determination, and its track record can hardly be considered flawless. 1 but it does offer a useful framework for the analysis of inflation, and i am going to use it for that purpose here. i want to emphasize that i am speaking for myself today. the analysis and views are my own, and not necessarily those of my colleagues on the fomc. 2 in simulations of the frb / us model, which uses such a framework, the 70 percent confidence interval around the four - quarter forecast of core pce inflation is 1 - 1 / 4 percentage points wide. david wilcox, john roberts, jeremy rudd, and peter tulip of the federal reserve board ’ s staff provided valuable assistance. the data before beginning to examine the determinants of inflation, we need to remind ourselves of the inherently noisy nature of the price data. they are highly variable month - to - month and quarter - to - quarter, and they are imperfect proxies for the true change in general prices. as a consequence, discerning the underlying trend of inflation is no easy task. had i been speaking to you just a year ago, you would have expected me to address the possibility of deflation and what the federal reserve might do either to head it off or to deal with it once interest rates had reached zero. in newspapers and in market reports, you would have read that the integration of china and india into the global trading system meant persistent excess supply of labor and products that would place downward pressure on wages and prices in the developed world for years to come. now the concern has

who receive material nonpublic information in the ordinary course of their normal business activities may need to better control access to that information. specifically, access to material nonpublic information needs to be walled off from personnel who conduct securities and derivatives trading. the potential for conflicts of interest between loan origination and credit derivatives trading activities has been recognized by the industry as well as regulators, and that is a commendable development. in october 2003, the joint market practices forum, a collaborative effort of the bond market association, the international association of credit portfolio managers, the international swaps and derivatives association, and the loan syndications and trading association, issued a statement of principles and recommendations regarding the handling of material nonpublic information by credit market participants. the statement articulates principles and recommendations regarding the handling and use of material nonpublic information by credit market participants that maintain loan portfolios or engage in other activities that generate credit exposures and, in that connection, enter into transactions in securities or security - based swaps, including certain credit derivatives. the statement of principles fulfills a number of objectives. the most critical, in my view, is the promotion of fair and competitive markets in which the inappropriate use of material nonpublic information is not tolerated. at the same time, the statement allows lenders to effectively manage credit portfolio activities to facilitate borrower access to more - liquid and more - efficient sources of credit. this effort recognizes that the liquidity and efficiency of our financial markets are related directly to the integrity of, and public confidence in, those markets. the joint statement describes two models of credit portfolio management : the “ private side ” model and the “ public side ” model. in reality, most banking organizations appear to have adopted a hybrid model that lies at some point along a continuum between pure private and pure public. in general, in a private - side model, credit derivatives traders may have access to material nonpublic information, but traders must pre - clear each transaction they execute. in a public - side model, traders are walled off from private - side information and personnel to prevent their access to material nonpublic information. accordingly, the circumstances in which a transaction is restricted because of the trader's possession of material nonpublic information is limited. the forum's statement of principles also provides several meaningful recommendations, some of which already have been adopted by the major participants in the credit derivatives markets. among other things, the recommendations