policy can play an important role in determining economic outcomes, such as real economic growth and inflation. for example, today ’ s decision to save or to spend is influenced by the current interest rate as well as tomorrow ’ s expected future consumption. in turn, tomorrow ’ s expected future consumption is influenced by next period ’ s interest rate and next period ’ s expected future consumption. therefore, the entire expected path of interest rates, not just the current interest rate, influences today ’ s consumption. this is not only true bis central bankers ’ speeches for personal consumption, but also business investment decisions, and the setting of prices and wages. an element of communication that has received a good deal of attention is forward guidance. forward guidance relates to the communication about the future course of monetary policy, both the likely path of the short - term policy rate as well as path of balance sheet actions associated with quantitative easing. of course, one reason for this increased focus on future policy actions is that the current short - term policy rate conveys little information, as it has been constrained by the zero lower bound. thus, forward guidance in the u. s. has evolved to include information about the future pace and duration of asset purchases, as well as under what conditions, and how quickly, the policy rate might eventually lift off from the zero lower bound. however, forward guidance is not a separate or independent tool of policy. its effectiveness is intimately related to other features of monetary policy. for example, a credible, systematic approach to policy and the general openness and transparency of the policy process are essential elements in shaping expectations and thus must be considered when formulating forward guidance. for forward guidance to be successful, it must be credible. and it is difficult to make it credible if it is inconsistent with other features of the policy framework. one of the most important ways to support credibility and thus the effectiveness of forward guidance is to practice it as part of a systematic policy framework. i believe that indicating how the evolution of key economic variables systematically shapes current and future policy decisions is critical to such a policy framework. indeed, a commitment to a policy framework that is systematic and rule - like provides the foundation for establishing expectations for the future path of policy and thus forward guidance. if we only had a reaction function the appropriate way to make policy systematic and rule - like is to make policy history dependent and base policy decisions on the state of the economy. doing so does not commit the policymakers to particular future values of the policy rate

charles i plosser : a credible commitment to normalization speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the conference “ capital markets in the post - crisis environment ”, hosted by the global interdependence center and the bank of finland, helsinki, 6 june 2011. * * * the views expressed today are my own and not necessarily those of the federal reserve system or the fomc. introduction good morning. it is indeed a pleasure for me to be with you today. this is my first visit to finland and it has proved to be more beautiful than i imagined. so i want to thank the global interdependence center and the bank of finland for their hospitality and the opportunity to participate in this conference. it is also a pleasure to join my central bank colleagues from france, sweden, and, of course, finland at such an event. the theme of this session, central bank policy after the crisis, is both timely and extremely important. the financial crisis and arguably the worst global recession of the post - war era have challenged policymakers around the world. while for most of the hardest hit countries, the recession trough has passed and a moderate recovery is underway, the actions by fiscal authorities and central banks, intended to mitigate the damage from the crisis, have left a legacy of governments with huge budget deficits and central banks with record - low shortterm interest rates and balance sheets of unprecedented magnitudes. yet even though the policy responses by central banks were similar and extraordinarily accommodative, a few have already moved toward normalization. as we are likely to hear shortly from stefan ingves, the riksbank has raised its policy rate to 1¾ percent from just 25 basis points since the middle of last year. this tightening of policy was accompanied by a reduction in its lending to the swedish banking system, which reached more than 300 billion swedish krona at the depth of the crisis. other central banks, including the federal reserve and the bank of england, face some daunting challenges as they try to unwind from their extraordinary actions and seek to restore confidence and credibility in their monetary policy frameworks. today i would like to share with you my perspective on how i think about the normalization of monetary policy in the u. s. i should note the usual disclaimer applies in that i speak for myself and not necessarily for the federal reserve system or my