, we have maintained our current policy stance even as the labor market has improved appreciably. however, we must also take into account the well - documented lags in the effects of monetary policy. were the fomc to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. moreover, holding the federal funds rate at its current level for too long could also encourage excessive risktaking and thus undermine financial stability. bis central bankers ’ speeches on balance, economic and financial information received since our october meeting has been consistent with our expectation of continued improvement in the labor market. and, as i have noted, continuing improvement in the labor market helps strengthen our confidence that inflation will move back to our 2 percent objective over the medium term. that said, between today and the next fomc meeting, we will receive additional data that bear on the economic outlook. these data include a range of indicators regarding the labor market, inflation, and economic activity. when my colleagues and i meet, we will assess all of the available data and their implications for the economic outlook in making our policy decision. as you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate was at its effective lower bound. we have tried to be as clear as possible about the considerations that will affect that decision. of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative. and it bears emphasizing that what matters for the economic outlook are expectations concerning the path of the federal funds rate over time : it is those expectations that affect financial conditions and thereby influence spending and investment decisions. in this regard, the committee anticipates that even after employment and inflation are near mandateconsistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run. summary in closing, the economy has come a long way toward the fomc ’ s objectives of maximum employment and price stability. when the committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the great recession. in that

the expected rate of increase of aggregate supply, which increase can be more easily predicted. this version of the taylor rule goes back to the spirit of martin ’ s initial remark, where the monetary authority is happy with the cocktail party temperature at present but moves against anything that increases its warmth. should demand growth threaten to outrun supply growth ( the party to warm up ), the seeds of accelerating inflation may be planted and monetary policy should curb the growth of demand by raising interest rates. should demand growth threaten to fall behind supply growth, rising unemployment is probably in the works, and monetary policy should try to boost the growth in demand by lowering interest rates. as long as inflation and unemployment remain in the acceptable band, this change version of the rule simply tries to maintain a good thing, without requiring precise quantification of inflation and unemployment policy goals. this approach has not addressed the question of supply shocks, which are dealt with in the general formulation of taylor ’ s rule. but one can incorporate supply shocks into the change rule as well. if there are temporary supply shocks that do not seem likely to be incorporated into the broader inflation process, they should be ignored. if there are positive or negative shocks that do seem likely to be incorporated, the change rule may not work well, and one may have to go back to the general form of the rule. policy strategies this all amounts to what might be considered a stabilization policy strategy. given the flexible exchange rate regime, fiscal policy should be used to influence overall national saving, which is still lower than it has been for most of the postwar period for the united states. i personally would argue for a rise in national saving, especially in view of the likely increase in future government entitlement spending. but i would not argue for any of the recently suggested changes in budget procedures that are alleged to help in this process. on the monetary side, authorities should try to stabilize the economy without anticipating help from fiscal policy. generally this would involve following the dictates of the taylor rule, assuming that one can choose the equilibrium real funds rate and target values for inflation and unemployment. if not, and if both inflation and unemployment seem to be safely within their target bands, this policy could be simplified to a change form — in which interest rates are used to keep the growth in aggregate demand near the more easily predictable growth in aggregate supply.