charles i plosser : strengthening our monetary policy framework through commitment, credibility, and communication speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the global interdependence center ’ s 2011 global citizen award luncheon, philadelphia, pennsylvania, 8 november 2011. * * * the views expressed today are my own and not necessarily those of the federal reserve system or the fomc. good afternoon. i am deeply honored to be this year ’ s recipient of the gic global citizen ’ s award. for the past five years, i have had the pleasure of observing and participating with the gic in its efforts to foster an international dialogue on economic matters of global importance. i have been very impressed with the breadth and reach of the programs the center has put together. the gic ’ s efforts to promote such a dialogue have been especially timely as the world economy continues to wrestle with the consequences of a financial crisis and a severe global recession. the gic ’ s convening of central bankers, policymakers, and business leaders from different nations and different industries has created opportunities to leverage knowledge and experiences in these challenging times. yet even as the world economy recovers, we all have learned that our economies are increasingly intertwined, and therefore, i believe these gic programs will remain relevant and valuable in the years to come. in the past few years, the global financial crisis has led central bankers around the world into uncharted territory as extraordinary disruptions in financial markets led them to take extraordinary actions. however necessary these actions may have been, unusual and unexpected policy choices do shape the public ’ s views and expectations about future policy, even if policymakers do not intend to do so. this is especially true when policymakers take unusual or highly discretionary policy actions without communicating a clear framework for those actions. for example, the rescue of bear stearns ’ creditors in march 2008 led many investors to expect that other investment banks would receive similar treatment should they run into trouble, even though no such promise was made or intended. this belief probably encouraged investors and firms to take more risks, perhaps excessive risks, which they might not otherwise have undertaken. this likely led to unexpected losses with the failure of lehman brothers in september 2008, adding to the turmoil in the markets. thus, taking highly discretionary policy actions without communicating to the public the implications of those actions for the conduct of future policy can be problematic and destabil

early in the 1980s. thus, increases in inflation in the near term risk creating unemployment in the future – as a result, we end up with less stability, not more. price stability also helps to foster financial stability and moderates long - term interest rates by minimizing the inflation premium that investors demand to hold long - term assets. because moderate long - term interest rates follow so directly from the price stability mandate, many people have come to refer to the fed as having a “ dual mandate ” – price stability and maximum employment. yet, the price stability and the employment goals are materially different in nature. the most significant difference is that the level of prices and thus inflation is a monetary phenomenon over the intermediate to longer term, and so the inflation rate can be chosen and controlled through monetary policy. the same cannot be said for the goal of maximum employment or the unemployment rate. these are largely determined by factors that are beyond the direct control of monetary policy. in the long run, maximum employment depends on such things as demographics, taxes and regulations, labor productivity and skills, unemployment benefits, minimum wage laws, and a host of other factors. this means that maximum employment will fluctuate over time. monetary policy cannot and should not be used to offset these longer - run changes in maximum employment. even in the near term, the modern approach to macroeconomics recognizes that employment will fluctuate with forces that affect supply and demand, such as oil price shocks, earthquakes, or decisions by households to save more, or deleverage, perhaps due to a fall in the stock market or in house prices. in this framework, it is neither desirable nor efficient for monetary policy to try to prevent market forces from making the necessary adjustments to such disturbances, even if they have consequences for employment. instead, monetary policy should be set in a way that allows the economy to efficiently use its resources given the economic disturbances it has experienced – it allows for the best economic outcome given the environment. because monetary policy can deliver price stability, i believe it makes sense for the central bank to be clear in setting a numerical objective for medium - term inflation. but because employment is affected by many other factors in both the long and the short run, it does not bis central bankers ’ speeches make sense for the fed to set explicit numerical objectives for employment or unemployment. by creating an environment of low and stable inflation, monetary policy will make a valuable contribution to maximum employment in the short and long run. a credible commitment