##ciable accommodation should the ongoing expansion falter in the near term. in addition to taking the federal funds rate back down to nearly zero, the fomc could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly – although with long - term interest rates already quite low, the net stimulus that would result might be somewhat reduced. despite these caveats, i expect that forward guidance and asset purchases will remain important components of the fed ’ s policy toolkit. in addition, it is critical that the federal reserve and other supervisory agencies continue to do all they can to ensure a strong and resilient financial system. that said, these tools are not a panacea, and future policymakers could find that they are not adequate to deal with deep and prolonged economic downturns. as shown in figure 2, the 10 - year treasury yield in the simulation starts out at just over 4 percent, well below its level pre - crisis, suggesting that there may be less room to push down long - term interest rates in the future than in the past. another potential source of overstatement could be the frb / us assumption that changes in long - term interest rates, whether driven by shifts in term premiums or shifts in the expected path of short - term interest rates, have the same influence on real activity, as there is some empirical evidence that the estimated sensitivity of spending to movements in term premiums alone may be relatively small ; see michael t. kiley ( 2014 ), “ the aggregate demand effects of short - and long - term interest rates, ” international journal of central banking, vol. 10 ( december ), pp. 69 – 104. on the other hand, the effectiveness of forward guidance in the frb / us model is materially less than it is in some other models, implying that the frb / us simulation results could potentially understate the stimulus provided by the announcement of a lower - for - longer policy. see hess chung ( 2015 ), “ the effects of forward guidance in three macro models, ” feds notes ( washington : board of governors of the federal reserve system, february 26 ). in principle, the federal funds rate in the longer run could also turn out to be lower than currently predicted if inflation were to remain persistently below 2 percent. however, because a higher rate of inflation can arguably be achieved over time through a sufficiently tight labor market, this risk seems low to me as

a good out - of - sample forecasting model. economists in r & s and other divisions, as well as academics, have made progress on this front, but there is room for further improvement. in addition to the challenge of how to best use these tools and data at the fed, r & s faces the challenge of understanding what these new technologies mean for labor productivity and the economy. the other challenge i want to highlight is that of making decisions under uncertainty. this is not a new challenge, of course. john maynard keynes and frank knight provided book - length treatments of the subject a century ago ( keynes, 1921 ; knight, 1921 ). in addition, in 2003, alan greenspan observed, " uncertainty is not just an important feature of the monetary policy landscape ; it is the defining characteristic of that landscape " ( greenspan, 2003 ). the fact that uncertainty has been a challenge for so long makes me think that it will continue be a challenge going forward, and in the wake of the pandemic, it is highly salient. in 1967, william brainard argued that uncertainty about the power of monetary policy implied that policy should respond more cautiously to shocks than would be the case if this uncertainty did not exist ( brainard, 1967 ). brainard's attenuation principle is a classic example of what has come to be known as the bayesian approach to uncertainty and is often cited as the foundation for the gradualism in the adjustment of monetary policy. that said, methods based on theories of ambiguity aversion led to antiattenuation. in other words, to protect against uncertainty, the appropriate response may be a quick and strong monetary policy response. of course, the right response to uncertainty is probably context specific and thus varies over time. as chair powell mentioned in a speech in 2018, there are two particularly important cases in which doing too little when there is high uncertainty comes with higher costs than doing too much ( powell, 2018 ). the first case is when attempting to avoid severely adverse events such as a financial crisis. in this situation, words like " we will do whatever it takes " will likely be more effective than " we will take cautious steps. " the second case is when inflation expectations threaten to become unanchored. if 2 / 4 bis - central bankers'speeches expectations were to begin to drift, the reality or expectation of a weak monetary policy response would exacerbate the problem. 4 how to respond to uncertainty is a matter that