wrong. but i ’ m sure that, by articulating a clear public contingency plan and sticking to it, the fomc can inspire greater public confidence that fomc actions represent the systematic pursuit of its dual mandate objectives. second, i ’ ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest. similarly, i ’ ve heard from consumers that policy uncertainty is curbing their incentive to spend. an fomc public contingency plan can help reduce the contribution of monetary policy to this general background of uncertainty. but how should the fomc formulate this public contingency plan? i believe that it is useful to think of a driver who is trying to maintain a car speed. to do so, he ’ ll vary pressure on the accelerator in response to changes in road conditions, current and expected : hills, valleys, rough pavement, headwinds. in the same way, the fomc varies its chosen level of monetary accommodation in response to changes in current and expected economic conditions. this kind of systematic response to changing economic conditions strikes me as an essential part of good monetary policy for at least two reasons. first, there is a great deal of empirical evidence and theoretical support for the idea that following a policy rule, as economists call it, is what enables the committee to achieve its dual mandate goals. second, and perhaps more importantly, actions speak louder than words. the committee can claim that it intends to make monetary policy so as to fulfill its dual mandate. but the public can and does watch its actions carefully in this regard. if the committee fails to adjust its chosen level of accommodation appropriately in response to changes in economic conditions, the public may well begin to doubt the committee ’ s claims about its goals. what economic conditions are relevant? again, i think that it ’ s useful to think of a car driver who is trying to maintain his speed. to know how much ( or how little ) acceleration to provide, bis central bankers ’ speeches the driver would certainly like to know his current speed. as well, he would like to know how future road conditions – like hills – are likely to affect his future speed. the fomc ’ s problem is quite similar. just like the driver needs to know his current speed, the fomc needs an accurate measure of current inflation and unemployment. just as the driver needs an estimate of his future speed, based on anticipated road conditions, the fomc should have an

##tive. i should underscore one point. like many private sector forecasters, the fomc has overestimated the strength of the recovery over the past two years. thus, in november 2009, the committee expected the unemployment rate in the fourth quarter of 2011 to be 8. 4 percent instead of around 9 percent. this observation does imply that the committee ’ s current level of accommodation should be larger than what the committee expected it to be two years ago. it does not imply that the committee ’ s current level of accommodation should be higher than what the committee had in place two years ago. how should an outside observer interpret this inconsistency between the evolution of the mandate dashboard ’ s readings and the committee ’ s actions? earlier in my speech, i set forth what i see as a key trade - off involved in the making of monetary policy. there is a benefit to adding monetary accommodation : it reduces unemployment. there is a cost to adding monetary accommodation : it increases the risk of inflation running above the committee ’ s objective of 2 percent for multiple years. the fomc ’ s actions in 2011 suggest that the committee is now more concerned about high unemployment, and correspondingly less concerned about the possibility of higher - than - target inflation. just to be clear : i view the committee ’ s current resolution of the trade - off between inflation and unemployment as being justifiable. i also viewed the committee ’ s resolution of this trade - off in 2009 as being justifiable. however, what i see as problematic is that the committee ’ s resolution of this trade - off seems to be changing over time. in particular, the committee ’ s actions in 2011 suggest that it is now more willing to tolerate higher - than - target inflation than it was in 2009. if this possible drift in inflation tolerance were to persist, or were expected to persist, it could give rise to a damaging increase in inflationary expectations. undoing such an increase in inflationary expectations, as americans discovered in the early 1980s, requires drastic policy steps that have extremely painful consequences for employment. it is exactly in this sense that i have said in earlier speeches that the committee ’ s actions in 2011 served to weaken the committee ’ s credibility. i believe that it is critical for the committee to avoid further drift in its resolution of the key trade - off between inflation and unemployment. it can accomplish this goal by formulating and following a public contingency plan that is explicitly grounded in metrics like