mr. ferguson gives his views on exercising caution and vigilance in monetary policy in the united states remarks by mr. roger w. ferguson, jr., a member of the board of governors of the us federal reserve system, on the occasion of the distinguished speaker series, held at the federal reserve bank of atlanta on 9 / 7 / 98. introduction these are fascinating times for monetary policy. as we progress through the eighth year of the current economic expansion, economic growth has continued at a robust pace with unemployment reaching a 28 - year low, while inflation has remained remarkably subdued. to be sure, not all recent developments have been altogether positive, especially considering the current situation in asia. nonetheless, the performance of the american economy in recent years has exceeded expectations in a rather extraordinary fashion. but recent developments have challenged our understanding of the workings of the macroeconomy. although the recent surprises of both low unemployment and well - behaved inflation have been quite favorable, they have been surprises nonetheless and not easily reconcilable with each other based on old relationships and our earlier assessment of the economy ’ s potential. these developments have increased the uncertainty about the economic outlook and about the appropriate response of monetary policy in general to new developments. i want to take this opportunity to discuss some implications of this increased uncertainty for the conduct of monetary policy. before starting, let me remind you that these views are personal and do not necessarily reflect the views of other members of the fomc or the board of governors. objectives and strategy for monetary policy to evaluate the proper strategy for monetary policy, we must first understand the federal reserve ’ s policy objectives and then recognize the parameters within which policy operates in attaining these objectives. the long - run goal of monetary policy is straightforward. the federal reserve act mandates that we promote price stability and maximum employment. sometimes this dual objective is misunderstood, with the misconception that these inflation and employment goals cannot be attained simultaneously - - that there is a tradeoff in the long run between one and the other. it is worthwhile repeating what i am sure all of you already understand well : the long - run goals of price stability and maximum employment are not mutually exclusive. not so long ago, mainstream macroeconomists thought that employment and growth were by and large independent of inflation in the long run. but the evidence accumulating in the 1990s seems to suggest that low inflation contributes to real economic performance in ways not fully appreciated before. if anything, our approach to price

$ 1. 4 trillion in agency mortgage - backed securities ( mbs ) and agency debt securities and about $ 300 billion in longer - term treasury securities ; those purchases were executed during 2009 and the first quarter of 2010. the second round of lsaps – often referred to as qe2 – involved an additional $ 600 billion in purchases of longer - term treasury securities and was completed at the end of june of this year. by purchasing longer - term securities in the open market, the federal reserve can exert downward pressure on longer - term yields, thereby reducing private borrowing rates and raising household wealth. consequently, just as with conventional monetary policy, lsaps help boost consumer spending, business investment, and net exports. and the resulting increase in aggregate demand helps generate a stronger pace of job creation. 5 at last week ’ s fomc meeting, the committee announced that we intend to extend the average maturity of our securities holdings over the coming months by selling $ 400 billion of short - term treasury securities and purchasing an equivalent amount of long - term treasury securities. this maturity extension program – referred to by some as operation twist – should exert downward pressure on longer - term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery. indeed, recent work by an economist at the federal reserve bank of san francisco suggests that a similar policy put in place in 1961 had effects on longer - term interest rates that were roughly comparable to those of qe2. 6 the august and september fomc meeting statements, as well as related fomc information, are available on the federal reserve board ’ s website at www. federalreserve. gov / monetarypolicy / fomccalendars. htm. see janet l. yellen ( 2011 ), “ unconventional monetary policy and central bank communications, ” speech delivered at the u. s. monetary policy forum, new york, february 25, www. federalreserve. gov / newsevents / speech / yellen20110225a. htm. see hess chung, jean - philippe laforte, david reifschneider, and john c. williams ( forthcoming ), “ have we underestimated the likelihood and severity of zero lower bound events? ” journal of money, credit and banking. see eric t. swanson ( 2011 ), “ let ’ s twist again : a high - frequency event - study analysis of