clarity of our communications. for example, as noted in the minutes of our september meeting, we have been discussing potential approaches for providing more information – perhaps through the sep – regarding our bis central bankers ’ speeches longer - run objectives, the factors that influence our policy decisions, and our views on the likely evolution of monetary policy. 7 fiscal policy turning now to fiscal policy, since the onset of the recent recession and financial crisis, the federal budget deficit has widened significantly. as a result, federal debt held by the public has increased relative to our national income to a level not seen in the past half - century. these budget developments have reflected both the weak economy, which has depressed revenues and pushed up expenditures, and the fiscal stimulus that was implemented to help ease the recession and support the recovery. so long as the economy continues to recover, the deficit should narrow over the next several years as a growing economy boosts revenues and reduces expenditures and as the policies put in place to provide economic stimulus continue to wind down. even so, the federal budget is on an unsustainable path over the longer run, in large part because of the aging of the u. s. population and fast - rising healthcare costs. if current policy settings are maintained, the ratio of federal debt held by the public to national income would continue to rise in coming decades. it is crucial that the federal budget be put on a sustainable long - run trajectory, and we should not postpone charting that course. a failure to put in place a credible plan to address our long - run budget imbalance would expose the united states to serious economic costs and risks in the long term and possibly sooner. timely enactment of a plan to eliminate future unsustainable budget gaps will make it easier for individuals and businesses to prepare for and adjust to the changes. in addition, the sooner our longer - term budget problems are addressed, the less wrenching the adjustment will have to be and the more control that policymakers – rather than market forces or international creditors – will have over the timing, size, and composition of the necessary adjustments. at the same time, it is important to recognize that too much fiscal tightening in the near term could harm the economic recovery. significant near - term reductions in federal spending or large increases in taxes would impose an additional drag on the economy at a time when aggregate demand is already weak. we need, and i believe we have scope for, an approach to fiscal policy that puts in place a well - timed and

of recent developments can drive equity prices to levels that are unsupportable even if risks in the future become relatively small. such straying above fundamentals could create problems for our economy when the inevitable adjustment occurs. ” testimony of alan greenspan before the committee on banking and financial services, u. s. house of representatives, july 22, 1999. for example, stock prices rose following the completion of the more than 300 basis point rise in the federal funds rate in the twelve months ending in february 1989. and during the year beginning in february 1994, when the federal reserve again raised the federal funds target 300 basis points, stock prices initially flattened. but as soon as that round of tightening was completed, prices resumed their marked upward advance. from mid - 1999 through may 2000, the federal funds rate was raised 150 basis points. however, equity price increases were largely undeterred during that period despite what now, in retrospect, was the exhausted tail of a bull market. stock prices peaked in march 2000, but the market basically moved sideways until september of that year. such data suggest that nothing short of a sharp increase in short - term rates that engenders a significant economic retrenchment with all its attendant risks is sufficient to check a nascent bubble. certainly, 300 basis points proved inadequate to even dent stock prices in 1994. been calibrated to prevent the late 1990s bubble while preserving economic stability is almost surely an illusion. 7 instead of trying to contain a putative bubble by drastic actions with largely unpredictable consequences, we chose, as we noted in our mid - 1999 congressional testimony, to focus on policies “ to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion. ” 8 * * * during 2001, in the aftermath of the bursting of the bubble and the acts of terrorism in september 2001, the federal funds rate was lowered 4 - 3 / 4 percentage points. subsequently, another 75 basis points were pared, bringing the rate by june 2003 to its current 1 percent, the lowest level in 45 years. we were able to be unusually aggressive in the initial stages of the recession of 2001 because both inflation and inflation expectations were low and stable. we thought we needed to be, and could be, forceful in 2002 and 2003 as well because, with demand weak, inflation risks had become two - sided for the first time in forty years. there appears to be enough evidence, at least tentatively, to conclude that our strategy