growing optimism that may develop with extended periods of economic expansion, asset price values can climb to unsustainable levels even if product prices are relatively stable. the 1990s have witnessed one of the great bull stock markets in american history. whether that means an unstable bubble has developed in its wake is difficult to assess. a large number of analysts have judged the level of equity prices to be excessive, even taking into account the rise in “ fair value ” resulting from the acceleration of productivity and the associated long - term corporate earnings outlook. but bubbles generally are perceptible only after the fact. to spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. betting against markets is usually precarious at best. while bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy. the bursting of the japanese bubble a decade ago did not lead immediately to sharp contractions in output or a significant rise in unemployment. arguably, it was the subsequent failure to address the damage to the financial system in a timely manner that caused japan ’ s current economic problems. likewise, while the stock market crash of 1929 was destabilizing, most analysts attribute the great depression to ensuing failures of policy. and certainly the crash of october 1987 left little lasting imprint on the american economy. this all leads to the conclusion that monetary policy is best primarily focused on stability of the general level of prices of goods and services as the most credible means to achieve sustainable economic growth. should volatile asset prices cause problems, policy is probably best positioned to address the consequences when the economy is working from a base of stable product prices. for monetary policy to foster maximum sustainable economic growth, it is useful to pre - empt forces of imbalance before they threaten economic stability. but this may not always be possible – the future at times can be too opaque to penetrate. when we can be pre - emptive we should be, because modest pre - emptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy. the economic expansion has generated many benefits. it has been a major factor in rebalancing our federal budget. but more important, a broad majority of our people have moved to a higher standard of living, and we have managed to bring into the productive workforce those who have too long been at its periphery. this has enabled large segments of our society to gain skills on the job and the self - esteem

about one point the growth in our working age population. the remainder was drawn from the ever decreasing pool of available job seekers without work. that last development represents an unsustainable trend that has been produced by an inclination of households and firms to increase their spending on goods and services beyond the gains in their income from production. that propensity to spend, in turn, has been spurred by the rise in equity and home prices, which our analysis suggests can account for at least one percentage point of gdp growth over the past three years. even if this period of rapid expansion of capital gains comes to an end shortly, there remains a substantial amount in the pipeline to support outsized increases in consumption for many months into the future. of course, a dramatic contraction in equity market prices would greatly reduce this backlog of extra spending. to be sure, labor market tightness has not, as yet, put the current expansion at risk. despite the ever shrinking pool of available labor, recent readings on year - over - year increases in labor compensation have held steady or, by some measures, even eased. this seems to have resulted in part from falling inflation, which has implied that relatively modest nominal wage gains have provided healthy increases in purchasing power. also, a residual fear of job skill obsolescence, which has induced a preference for job security over wage gains, probably is still holding down wage levels. but should labor markets continue to tighten, significant increases in wages, in excess of productivity growth, will inevitably emerge, absent the unlikely repeal of the law of supply and demand. because monetary policy operates with a significant lag, we have to make judgments, not only about the current degree of balance in the economy, but about how the economy is likely to fare a year or more in the future under the current policy stance. the return of financial markets to greater stability and our growing concerns about emerging imbalances led the federal open market committee to adopt a policy position at our may meeting that contemplated a possible need for an upward adjustment of the federal funds rate in the months ahead. the issue is what policy setting has the capacity to sustain our remarkable economic expansion, now in its ninth year. this is the question the fomc will be addressing at its meeting at the end of the month. one of the important issues for the fomc as it has made such judgments in recent years has been the weight to place on asset prices. as i have already noted, history suggests that owing to the