the broader issue of stock price bubbles. if a change in margin requirements were taken by investors as a signal that the central bank would soon tighten monetary policy enough to burst a bubble, then there might be the appearance of a causal effect. but it is the prospect of monetary policy action, not the margin increase, that should be viewed as the trigger. in a similar manner, history tells us that “ jawboning ” asset markets will be ineffective unless backed by action. op. cit. some have argued that, as a consequence of the 1995 - 2000 speculative episode, long - term imbalances remain, having been only partly addressed since early 2001, the peak of the post - bubble business cycle. for example, large residues of household and external debt are perceived as barriers to future growth. but in the past, imbalances that led to business contractions were rarely fully reversed before the subsequent economic upturn began. presumably they were fully reversed in later periods, or they continued to fester, but not by enough to halt economic growth. even if imbalances still persist in our current environment, the business decline that began in march 2001 came to an end in november of that year, according to the national bureau of economic research. we experienced tepid recovery until the second half of last year, when gdp accelerated considerably. hence, when the next recession arrives, as it inevitably will, it will be a stretch to attribute it to speculative imbalances of many years earlier. risks when possible, and assessing the costs associated with each of the risks. in essence, the risk management approach to monetary policymaking is an application of bayesian decisionmaking. this framework also entails devising, in light of those risks, a strategy for policy directed at maximizing the probabilities of achieving over time our goals of price stability and the maximum sustainable economic growth that we associate with it. in designing strategies to meet our policy objectives, we have drawn on the work of analysts, both inside and outside the fed, who over the past half century have devoted much effort to improving our understanding of the economy and its monetary transmission mechanism. a critical result has been the identification of a relatively small set of key relationships that, taken together, provide a useful approximation of our economy ’ s dynamics. such an approximation underlies the statistical models that we at the federal reserve employ to assess the likely influence of our policy decisions. however, despite extensive efforts to capture and quantify what we perceive as the

, with outsized adverse feedback to the performance of the u. s. economy. the product of a low - probability event and a potentially severe outcome was judged a more serious threat to economic performance than the higher inflation that might ensue in the more probable scenario. that possibility of higher inflation caused us little concern at the time, largely because increased productivity growth was resulting in only limited increases in unit labor costs and heightened competition, driven by globalization, was thwarting employers ’ ability to pass through those limited cost increases into prices. given the potential consequences of the russian default, the benefits of the unusual policy action were judged to outweigh its costs. such a cost - benefit analysis is an ongoing part of monetary policy decisionmaking and causes us to tip more toward monetary ease when a contractionary event, such as the russian default, seems especially likely or the costs associated with it seem especially high. see minutes of the fomc meeting of september 29, 1998. the 1998 liquidity crisis and the crises associated with the stock market crash of 1987 and the terrorism of september 2001 prompted the type of massive ease that has been the historic mandate of a central bank. such crises are precipitated by the efforts of market participants to convert illiquid assets into cash. when confronted with uncertainty, especially knightian uncertainty, human beings invariably attempt to disengage from medium to long - term commitments in favor of safety and liquidity. because economies, of necessity, are net long - that is, have net real assets - attempts to flee these assets cause prices of equity assets to fall, in some cases dramatically. in the crisis that emerged in the autumn of 1998, pressures extended beyond equity markets. credit - risk spreads widened materially and investors put a particularly high value on liquidity, as evidenced by the extraordinarily wide yield gaps that emerged between on - the - run and off - the - run u. s. treasuries. the immediate response on the part of the central bank to such financial implosions must be to inject large quantities of liquidity - or as walter bagehot put it, describing such policies of the bank of england more than a century ago, in a panic the bank should lend at very high rates of interest “ to all that bring good securities quickly, freely, and readily. ” 11 this was perhaps an early articulation of a crisis risk management policy for a central bank. * * * the economic world in