rates – which softened the blow of higher fuel costs on households and businesses – because of the credibility the federal reserve had built since the 1980s. if the public ’ s expectations have always been important, you might wonder how monetary policy had any effect prior to the transparency revolution. as it turns out, with the notable exception of the late 1960s and 1970s, the fomc usually responded in a systematic way to economic conditions. in 1993, economist john taylor documented that fomc policy changes since the mid - 1980s had fairly reliably followed a simple rule based on inflation and output. changes in the federal funds rate were usually made in several small steps over a number of months. in practice, the federal reserve ’ s approach was “ never explain, but behave predictably. ” a close analysis of the fomc ’ s past behavior was a good guide to future policy, but it had two shortcomings as a substitute for transparency : first, it gave an advantage to sophisticated players who studied the fomc ’ s behavior – something that is arguably inappropriate for a government institution. second, while a policy rule such as the one developed by john taylor explained the course of the federal funds rate much of the time, there were cases when it didn ’ t and when even the experts failed to correctly anticipate the fomc ’ s actions. the trend toward greater transparency accelerated during the early 2000s. starting in 2000, the fomc issued information after every meeting about its economic outlook. it also provided an assessment of the balance of risks to the economy and whether it was leaning toward increasing or decreasing the federal funds rate in the future. such information about intentions and expectations for the future, known as forward guidance, became crucial in 2003, when the committee was faced with a stubbornly weak recovery from the 2001 recession. it had cut the federal funds rate to the very low level of 1 percent, but unemployment remained elevated, and the fomc sought some further way to stimulate the economy. in this situation, it told the public that it intended to keep the federal funds rate low for longer than might have been expected by adding to its statement that “ [ i ] n these circumstances, the committee believes that policy accommodation can be maintained for a considerable period. ” 6 let ’ s pause here and note what this moment represented. for the first time, the committee was using communication – mere words – as its primary monetary policy tool. until then, it was probably common to think of

this plausible path will come to pass. instead, it is important to consider the range of possibilities and the appropriate policy responses. for example, if inflation does not moderate or rises further this year, then, in my view, the policy rate will probably need to move well above 4 percent. alternatively, if inflation suddenly decelerates, then, in my view, the policy rate might peak at less than 4 percent. - 10 one thing that is more predictable and has a significant effect on tightening policy over time is the shrinking of the fed ’ s holdings of assets as maturing securities run off our balance sheet. starting this month, the fed is shedding $ 60 billion a month in treasury securities and up to $ 35 billion a month in agency mortgage - backed securities. this action effectively increases the supply of securities in the hands of private investors and will thus put upward pressure on interest rates, as private investors must now be enticed to hold these assets. all told, the fomc has taken unprecedented and decisive policy actions this year to quickly increase the policy rate in response to high inflation. but where we stand now is not good enough. though the labor market is strong, inflation is too elevated. so i support another significant hike in two weeks. after that, the tightening path will continue until we see clear and convincing evidence that inflation is moving meaningfully and persistently down to our 2 percent target. the pace of tightening is uncertain ; it will depend on the data. no matter what, i am ready and willing to do what it takes to bring inflation down.