then subject this model to a series of disturbances that reflect the economy ’ s historical experience. they observe the resulting variability of inflation and output relative to their respective targets. the base model includes a policy rule according to which short - term interest rates are adjusted in response to economic developments. bernanke and gertler examine whether an attempt by policymakers to return equity prices towards their estimate of fundamental value improves macroeconomic performance, judged in terms of inflation variability and output variability. confidence in their conclusion is, of course, affected by how well one believes the model captures the performance of the economy. nevertheless, their methodology is well designed and it is worth considering their conclusions. they find that policymakers cannot improve the outcomes by responding directly to suspected deviations of equity prices from fundamentals, but that a policy focused on achieving price stability and damping fluctuations around full employment will mitigate the adverse consequences of equity market bubbles. that is, a monetary policy focused on price stability and output stabilization will respond to the effects of higher equity prices on aggregate demand, real economic activity, and inflation. this will generally dampen movements in equity prices, while contributing to meeting the broader macroeconomic objectives of monetary policy. however, given the difficulty in distinguishing between changes in asset prices dominated by fundamental forces and those driven by non - fundamental forces, policymakers should not target asset prices or try to guide them to the policymakers ’ estimate of fundamental value. the discussion of the paper by rudy dornbusch and comments by federal reserve chairman alan greenspan added an important additional theme related to monetary policy and equity prices. dornbusch took note of the setting, pointing out that the two sides of the teton mountains are dramatically different. one side slopes downwards gradually and gracefully. the other side drops off quite precipitously. so it is with equity prices. on the way up, they typically move gradually. while they sometimes also move downward gradually, downward movements are occasionally steeper and more discontinuous than upward movements. monetary policymakers sometimes face additional problems in the case of such steep declines in asset values. credit markets may become extremely illiquid and even fail to operate for a period. it is not simply that interest rates on private securities rise, but that virtually all buying and selling may temporarily cease. this can create extreme problems for those who rely on short - term financing and, in the extreme, the resulting financial distress can threaten the solvency of some financial institutions. in such situations

thomas m hoenig : rebalancing toward sustainable growth speech by mr thomas m hoenig, president and chief executive officer of the federal reserve bank of kansas city, before the rotary club of des moines and the greater des moines partnership, des moines, iowa, 30 june 2011. * * * the views expressed by the author are his own and do not necessarily reflect those of the federal reserve system, its governors, officers or representatives. introduction the u. s. economic recovery is under way, but it remains more uncertain and volatile than anyone would like. some believe that the federal reserve can speed up the recovery by keeping the federal funds rate near zero, where it has been for nearly two - and - a - half years, and by promising to keep it there for an extended period. if i judged – or if evidence suggested – that a zero rate would solve our country ’ s unemployment problem or speed up the recovery without causing other adverse consequences, i would support it. however, monetary policy is not a tool that can solve every problem. in today ’ s remarks, i will outline my current views on the economy, and suggest what alternative options and policies our leaders might consider as we search for ways to build a stronger, more resilient economy. u. s. economic conditions first, it is a testament to the u. s. economic system that even as this nation carries a heavy public and private debt burden, the economy is completing its second year in recovery. the level of activity, as measured by gdp, has now surpassed its pre - recession peak after growing at a nearly 3 - percent pace last year. however, i am concerned that in working to offset the effects of this devastating crisis and to restore the economy to health, an extended zero - interest - rate policy is producing new sources of fragility that we need to be aware of and allow for in our future policy choices. governments, businesses and consumers have made financial choices and allocated resources with an understanding that a zero - interest - rate policy will remain in place indefinitely. the longer we leave interest rates at zero, the more asset values will be defined by these low rates and the greater the negative impact will be once the inevitable move up in rates begins. complicating the fragility around monetary policy, fiscal policy as a pro - growth policy instrument also appears to be approaching its limit. the government ’ s stimulus efforts to support the economy, along with lower tax revenues, have resulted in