what we might consider “ maximum employment. ” trying to offset these changes in the economy with monetary policy can lead to a dangerous drift in inflationary expectations and ultimately in inflation itself. monetary policy since the great recession as i discussed earlier, the federal reserve is mandated to set policies that promote price stability. with that in mind, how has the federal reserve done in terms of its price stability mandate since the great recession began in december 2007? the answer is : remarkably well. the personal consumption expenditure ( pce ) inflation rate has averaged 1. 8 percent per year from the fourth quarter of 2007 through the second quarter of 2011. i would say that this outcome is essentially consistent with price stability. this admirable performance is not due to luck. since mid - 2006, residential land prices have fallen by over 50 percent. 5 falling land prices were at the heart of the financial crisis from 2007 to 2009 and have generated a persistent fall in wealth and borrowing capacity for households. the associated declines in demand for consumption goods and investment goods pushed downward on prices and inflation. confronted with this enormous shock to the economy, the federal reserve has followed an unprecedentedly and imaginatively accommodative policy. it has kept interest rates near zero. it has provided “ forward guidance ” by explicitly expressing its expectation that interest rates would stay extraordinarily low for an extended period. it has bought over 2 trillion dollars of longer - term government securities. through these actions, the fed has provided an extraordinary amount of monetary stimulus – and so has been able to meet its price stability mandate. but what about the future? there are a number of ways to measure inflationary expectations, which all – unfortunately – come with caveats. last december, a cleveland fed study analyzed several such measures. 6 it concluded that the survey of professional forecasters ’ ( spf ’ s ) projections7 tend to forecast relatively well. the most recent spf survey ( conducted before the august fomc meeting ) predicted that pce inflation would average 2. 1 percent per year for the next five years. thus, in the face of challenging circumstances, the federal reserve has met its price stability mandate and is expected to continue to do so. unemployment does remain disturbingly high. yet, i am sure it would be even higher without the enormous amount of the discussion in this paragraph is largely consistent with the following quote from chairman bernanke ’ s response to a reporter ’ s question in april about the fed ’ s ability to lower

open market committee. fomc objectives let me turn first to a discussion of fomc objectives. congress has mandated that the federal reserve set monetary policy so as to promote price stability and maximum employment. in my view, the heart of implementing the price stability mandate is to formulate and communicate an objective for inflation. the central bank then fulfills its price stability mandate by making choices over time so as to keep inflation close to that objective. of course, the central bank ’ s job is complicated by economic shocks that may lower or raise inflationary pressures. the central bank provides additional monetary accommodation – like lower interest rates – in response to the shocks that push down on inflation. it reduces accommodation in response to the shocks that push up on inflation. by doing so, it works to ensure that inflation stays close to its objective. as i said, though, it is not enough to have an objective – the federal reserve must also communicate that objective clearly. that communication serves to anchor medium - and longterm inflationary expectations. put another way, without clear communication of objectives, the public can only guess at the intentions of the fomc. inflationary expectations and inflation itself will inevitably end up fluctuating – and possibly by a lot. as i ’ ll discuss later, it is possible to undo these shifts in expectations, but only at significant economic cost. the federal reserve communicates its objective for inflation in a number of ways. for example, at quarterly intervals, fomc meeting participants publicly reveal their forecasts for inflation five years hence, assuming that monetary policy is optimal. those forecasts usually range between 1. 5 percent and 2 percent per year. they are often collectively referred to by saying that the federal reserve views inflation as being “ mandate - consistent ” if it is running at “ 2 percent or a bit under. ” but the fed has also communicated its intentions more directly and more broadly. last december, for example, on the television program “ 60 minutes, ” chairman bernanke explained the dangers of letting inflation fall too low relative to this 2 - percent - or - a - bit - under range. in the same interview, he also emphasized that the fomc is unwilling to allow inflation to rise above this range. 2 3 as i ’ ll describe in more detail later in my speech, the economy was hit in the past three and a half years by shocks that had the potential to drive inflation significantly downward. i believe in particular, when asked if keeping