expansion need not trigger inflation now or in the future, because the federal reserve can now pay interest on bank reserves. with all that said, i ’ ve dissented from the fomc ’ s decisions in the past two meetings. as i mentioned earlier, i believe that the fomc ’ s ultimate effectiveness relies critically on its communication and the credibility of that communication. i ’ ve dissented at the last two meetings because i believe that the committee ’ s decisions at those meetings diminish that requisite credibility. i ’ ll close my remarks today by explaining my thinking on this matter. the fomc ’ s dual mandate, as i ’ ve said, is to keep inflation at 2 percent or a bit under and to promote maximum employment – that is, to keep unemployment low. over the past few years, the fed has quite appropriately provided a historically unprecedented level of monetary accommodation. however, as inflation rises and unemployment falls, the fomc should respond by lowering the level of accommodation. this kind of systematic response to changes in economic conditions is an essential part of good monetary policy for at least a couple of reasons. first, there is a great deal of empirical evidence and theoretical support for the idea that following a systematic policy rule, as economists call it, is what enables the committee to achieve its dual mandate goals. second, and perhaps more importantly, actions speak louder than words. the committee can claim that it intends to make monetary policy so as to fulfill its dual mandate. but the public will watch its actions carefully in this regard. if the committee fails to reduce its immense amount of accommodation in a timely fashion, the public will begin to doubt the committee ’ s claims about its goals. in november 2010, the fomc undertook a second round of purchases of long - term government securities – an action that has become known as qe2. this was a controversial move in some quarters, but i supported it – and i believe that it played a valuable role in reducing what seemed at the time to be a large risk of deflation. let ’ s look back at economic conditions at that november 2010 meeting. the unemployment rate was 9. 8 percent and was expected to be 9 percent a year later. the year - over - year core pce inflation rate was less than 1 percent and was expected to rise to 1. 3 percent over the course of 2011. now, fast - forward to october 2011. the unemployment rate is 9. 1 percent and is expected to

) series. bis central bankers ’ speeches confronted with this enormous shock to the economy, the federal reserve followed an unprecedentedly and imaginatively accommodative policy. it kept interest rates near zero. it provided “ forward guidance ” by explicitly expressing its expectation that interest rates would stay extraordinarily low for an extended period. it bought over $ 2 trillion of longer - term government securities. through these actions, the fed provided an extraordinary amount of monetary stimulus – and so was able to meet its price stability mandate in the face of challenging circumstances. unemployment does remain disturbingly high – over 9 percent. however, i am sure that it would be even higher without the enormous amount of monetary stimulus being provided by the fed. moreover, i believe that the fomc could only have systematically lowered the unemployment rate further by generating inflation rates over a multiyear period that were higher than its communicated objective of 2 percent. such an outcome could potentially lead the public to lose faith in the credibility of the fomc ’ s communicated objective and thereby increase the probability that the fomc would lose control of inflation. as i discussed earlier, this scenario would require a policy response that would generate substantial losses of employment. i want to close my discussion of fomc performance by explaining why there is no longer an intrinsic connection between the size of the fed ’ s balance sheet and inflation. i ’ ve mentioned how the federal reserve has bought over $ 2 trillion of government securities. it has funded that purchase by tripling the amount of deposits held by banks with the fed – what are called bank reserves. the standard reasoning is that this kind of reserve creation is inflationary. banks are only allowed to offer checkable deposits in proportion to their reserves. economists view checkable deposits as a form of money because, like cash, checkable deposits make many transactions easier. in this sense, bank reserves held with the fed are essentially licenses for banks to create a certain amount of money. by giving out more licenses, the fomc is allowing banks to create more money. and if you took any economics in school you learned : more money chasing the same number of goods – voila, inflation. indeed, i think i ’ m pretty safe in saying that after four years in economics grad school, i ’ ve uttered this phrase – more money chasing the same number of goods creates inflation – more often than anyone else in this room. but this connection between bank reserves and inflation is simply not operative right now