##balances, most notably the large current account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more - wrenching changes in output, incomes, and employment. the more flexible an economy, the greater its ability to self - correct in response to inevitable, often unanticipated, disturbances. that process of correction limits the size and the consequences of cyclical imbalances. enhanced flexibility provides the advantage of allowing the economy to adjust automatically, reducing the reliance on the actions of monetary and other policymakers, which have often come too late or been misguided. in fact, the performance of the u. s. economy in recent years, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence that we have benefited from an enhanced resilience and flexibility. we weathered a decline on october 19, 1987 of a fifth of the market value of u. s. equities with little evidence of subsequent macroeconomic stress - an episode that provided an early hint that adjustment dynamics might be changing. the credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post - world war ii period. and the economic fallout from the tragic events of september 11, 2001, was limited by market forces, with severe economic weakness evident for only a few weeks. most recently, the flexibility of our market - driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for crude oil and natural gas that we have experienced over the past two years. * * * this morning i have tried to outline my perceptions of the key developments that have influenced the conduct of monetary policy over the past eighteen years. i acknowledge that monetary policy itself has been an important contributor to the decline in inflation and inflation expectations over the past quarter - century. indeed, the federal reserve under paul volcker's leadership starting in 1979 did the very heavy lifting against inflation. the major contribution of the federal reserve to fashioning the events of the past decade or so, i believe, was to recognize that the u. s. and global economies were evolving in profound ways and to calibrate inflation - containing policies to gain most effectively from those changes. for reasons that may not be too obscure, i will pay close attention to, and hope to learn from, the deliberations of the next

the debt that supported higher asset prices. this is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums. * * * broad economic forces are continuously at work, shaping the environment in which the federal reserve makes monetary policy. in recent years, the u. s. economy has prospered notably from the despite the two - year bear market following the stock market collapse of 2000, equity prices have risen at an annual rate of 10 percent since 1995. capital gains do not add to gdp. the higher prices of plant and equipment and homes are reflected in an economy's cost structure, which directly or indirectly increases prices of goods and services, leaving real output largely unaffected. capital gains, of course, cannot supply any of the saving required to finance gross domestic investment. increase in productivity growth that began in the mid - 1990s and the enhanced competition engendered by globalization. innovation, spurred by competition, has nurtured the continual scrapping of old technologies to make way for the new. standards of living have risen because depreciation and other cash flows generated by industries employing older, increasingly obsolescent technologies have been reinvested to finance newly produced capital assets that embody cutting - edge technologies. but there is also no doubt that this transition to the new high - tech economy, of which expanding global trade is a part, is proving difficult for a segment of our workforce that interfaces day by day with our rapidly changing capital stock. this difficulty is most evident in the increased fear of job - skill obsolescence that has induced significant numbers of our population to resist the competitive pressures inherent in globalization from workers in the major newly emerging market economies. it is important that these understandable fears be addressed through education and training and not by restraining the competitive forces that are so essential to overall rising standards of living of the great majority of our population. a fear of the changes necessary for economic progress is all too evident in the current stymieing of international trade negotiations. fear of change is also reflected in a hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems. the developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset : the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks. if we can maintain an adequate degree of flexibility, some of america's economic im