supply. john taylor devised a rule that depends on a measure of inflation relative to a target and some measure of resource utilization. other versions of the taylor rule involve a degree of smoothing to minimize sharp swings in the policy rate. a policy rule is also called a reaction function or response function because it describes how policy will evolve as key economic conditions evolve. i believe that the fed should provide more information about its reaction function. the practice of using systematic rules as guides to monetary policy imposes an important discipline on policymaking and improves communication and transparency. this is because systematic rules make policy more predictable and therefore helps the public and markets make better decisions. moreover, if policymakers choose to deviate from the guidelines, they are forced to explain why and how they anticipate returning to normal operating practices. systematic policy also reduces the temptation to engage in discretionary policies. i believe the committee is still some way from agreeing on one systematic policy rule or reaction function. such choices will involve elaborate discussions and agreement on the appropriate class of models and an agreed - upon loss function. one way to move toward more systematic policy would be to describe the variables that are important for our response function. the academic literature suggests using rules that respond aggressively to deviations of inflation from the central bank ’ s target and less aggressively to deviations of output from some concept of “ potential output ”. research has found that such rules perform fairly well in a variety of models and frameworks. 3 thus, it is reasonable and feasible for the fed to describe policy in terms of the variables in a rule that is robust across models. we would not have to articulate a precise mathematical rule but would provide the key variables and then communicate policy decisions in terms of changes in these key variables. if policy were changed, then we would explain that change see orphanides and williams ( 2002 ). bis central bankers ’ speeches based on how the variables in our response function have changed. if we choose a consistent set of variables and systematically use them to describe our policy choices, the public will have a greater ability to form judgments about the likely course of policy. this would reduce uncertainty about policy and promote stability. there is one more item on my list of things to do. at the beginning of my remarks, i stressed the importance of maintaining the independence of the central bank. that independence is now under attack. last week, i gave a speech on the fraying boundaries between monetary and fiscal policy. 4 i noted that while monetary policy and fiscal

different conceptual definitions, most of which are not directly observable. so, monetary policy should not seek to achieve an explicit objective for something it does not directly control and cannot accurately measure. fourth, the statement notes that, in general, price stability and maximum employment are complementary. price stability promotes economic efficiency by giving individuals and businesses more confidence that the purchasing power of the dollar will not erode. conversely, the failure to maintain price stability can often lead to greater instability in employment and output. when inflation rises to unacceptable levels, as it did in the 1970s, monetary policy will be forced to react to restore price stability. this, in turn, could lead to increased instability in employment and output, as it did in the recession in the early 1980s. but the fomc ’ s consensus statement of principles also acknowledges that in the short run, the maximum employment and price stability parts of the fed ’ s mandate could be in conflict. in such circumstances, monetary policy will seek to follow a balanced approach in promoting its statutory mandate. the consensus statement does not provide answers for all the hard policy choices. how best to implement this balanced approach requires judgment and may well differ across policymakers who may have different models of the economy even as they work to promote the same long - term goals for monetary policy. improvements in the summary of economic projections the second important step the committee took in january toward increased transparency involved the economic projections that the fomc releases four times a year. the summary of economic projections, or sep for short, summarizes the individual fomc policymakers ’ views on the economy as reflected in several key economic variables, including output, bis central bankers ’ speeches inflation, and unemployment. yet, these projections are not forecasts in the usual sense. each policymaker ’ s projections are conditioned on the policymaker ’ s assessment of “ appropriate policy ”, that is, the policy path that he or she views as the most likely to yield the best outcomes for the economy in the absence of further shocks. this policy path isn ’ t necessarily the most likely path ; instead, it is the path viewed as being the best policy. thus, the projections should not be compared with the forecasts of private - sector forecasters who try to predict what the fed ’ s next move might be. instead, each policymaker makes economic projections based on an assessment of the best policy path to achieve the most desirable outcomes. until january, the sep did not reveal any information about the appropriate