and inflation deviations in the setting of our policy rate. however, the taylor rule is a rule - of - thumb, whose claims of empirical validity are based on its ability to track policy during periods of relatively modest volatility. 2 the current recession is outside of the empirical experience of taylor rules calibrated to describe federal reserve actions. we need to look beyond heuristic descriptions like the taylor rule to a more complete analysis of optimal monetary policymaking within a dual mandate framework. this topic has been studied extensively in the macroeconomic literature. interestingly, one of the first the committee ’ s interpretation of its mandate often is expressed as inflation of “ 2 percent, or a bit less. ” this does not mean keeping inflation in a narrow band capped by 2 %. the “ 2 percent, or a bit less ” interpretation of our price stability mandate comes from the responses to the survey of economic projections which fomc participants submit four times per year, and in which the majority of participants have said 2 % is their long - run forecast under conditions that include appropriate monetary policy. because inflation is determined in the long run by monetary policy, it follows that these long - run forecasts can be interpreted as participants ’ views on the level of inflation most consistent with the committee ’ s mandate. the “ or a bit less ” is added because a minority of participants submit long - run forecasts that are below 2 %. the exercise is described in taylor, john b. 1993. “ discretion versus policy rules in practice, ” carnegierochester series on public policy 39, pp. 195 – 214 ; and taylor, john b. 1999. “ an historical analysis of monetary policy rules, ” in john b. taylor ( ed. ) monetary policy rules, university of chicago press. bis central bankers ’ speeches modern treatments is due to john taylor in an article published in econometrica in 1979. 3 this framework continues to be a mainstay of optimal policy analysis, as evidenced by a large literature that includes work by michael woodford in recent years. 4 taylor expresses the central bank ’ s dual - mandate objective as monetary policymakers attempting to minimize the weighted sum of squared deviations of inflation and the level of output from their goal values. that is, a central bank attempts to minimize a simple quadratic loss function like the following : l = ( π – π * ) 2 + λ * ( y – y * ) 2 here π and y are inflation and the ( natural

cutting the fed funds rate to near zero by december 2008. once at the zero lower bound, we then turned to unconventional measures, such as large - scale asset purchases and forward guidance about the federal funds rate, to provide further accommodation. in the fall of 2012, with the unemployment rate hovering stubbornly at around 8 percent and core inflation steadily drifting lower than our 2 percent target, the fed introduced open - ended asset purchases and, later, forward guidance that related federal funds rate actions to thresholds explicitly expressed in terms of our policy goals. these efforts have helped the economy make impressive progress toward our employment mandate and appear to be moving us closer to our 2 percent inflation target as well. given this progress, it is natural to ask if it is time to return to business as usual. are we close enough to our policy goals – and do we have enough confidence in our ability to achieve those goals within the foreseeable future – that policy can return to operating according to more traditional guidelines? bis central bankers ’ speeches as i will discuss in more detail, i think the answer is no. first, inflation remains stubbornly low. second, i believe that substantial slack persists in labor markets and that some remaining and slowly dissipating headwinds could weigh on our progress toward full employment for some time. chair yellen pointed to a few of these headwinds in her press conference after the september fomc meeting : tight mortgage credit for some borrowers ; depressed household expectations for their income prospects ; and modest productivity growth. 1 and, third, there is my weighing of risk - management considerations. to me, the risks imposed on an economy forced to operate at the zero lower bound on policy rates are paramount. in an economy mired at the zlb, interest rates cannot fall low enough to equate the supply of saving with the demand for investment – a constraint that then significantly impedes consumer spending, capital formation, and employment expansion. accordingly, before the fed raises rates we should have a great deal of confidence that we won ’ t be forced to backtrack on our moves and face another painful period at the zero lower bound. and once we start, at least initially we should raise rates slowly to make sure the economy can weather less accommodative financial conditions. in sum, we should be exceptionally patient in adjusting the stance of u. s. monetary policy – even to the point of allowing a modest overshooting of our inflation target to appropriately balance