the monetary policy mandates of the federal reserve are clear : we must foster monetary and financial conditions that support maximum employment and price stability. since january bis central bankers ’ speeches 2012, the fed has set an explicit goal for inflation of 2 percent, as measured by the price index for total personal consumption expenditures, or pce. so, how are we doing with respect to this 2 percent target and our zimbabwean risks? despite many earlier predictions of unacceptably high inflation, total pce inflation has been hovering around just 1 percent since early 2013. other inflation measures, notably, the wellknown consumer price index ( cpi ), are also well below their related benchmarks. 1 forecasters often look at core inflation, which excludes volatile food and energy prices, because it is a better predictor of where overall prices are headed than is total inflation. our progress toward the inflation target is not noticeably faster by this metric either. core pce inflation was just 1. 1 percent over the past year and has been at this rate since last spring. most private sector forecasts and survey measures of inflation expectations have remained well anchored and do not ring any alarms of high inflation. expectations embedded in asset prices tell a similar story. sophisticated models that extract inflation expectations from the yield curve show that investors ’ inflation expectations at the three - year horizon are below 2 percent and will be below 2 percent for several years. all told, the risk of high inflation seems very low. in fact, i am concerned that inflation will not pick up quickly enough. as i noted, we have been stuck at 1 percent inflation since early 2013, and there is little indication of a pickup in the recent data. low inflation is just as economically costly as high inflation. when we set an inflation target of 2 percent, we need to hit our target without too much delay. simply put, we need to average 2 percent inflation over the medium term. accordingly, the current 1 percent inflation situation calls for extended policy accommodation. if the fed embarked prematurely on more restrictive monetary policy conditions, these adverse actions would work to reduce inflation to further unacceptably low levels. that ’ s going in the wrong direction. 2 financial stability and monetary policy it is easy and most natural for a fed policymaker to talk about inflation. price stability is one of the explicit goals of monetary policy as mandated by the u. s. congress. financial stability risks are more complicated. how does financial stability dovetail with the fed ’ s dual

since the rational expectations revolution of the 1970s. in the early 1990s, theorists started to model monetary policy as setting the interest rate. 2 central bankers have since had a theoretical woodford, m. ( 2005 ) : “ central bank communication and policy effectiveness, ” nber working paper 11898. see taylor, j. ( 1993 ) : “ discretion versus policy rules in practice, ” carnegie rochester conference series on public policy 39, and henderson, d. and w. mckibbin ( 1993 ) : “ a comparison of some basic monetary policy regimes for open economies : implications of different degrees of instrument adjustment and wage persistence, ” carnegie - rochester conference series on public policy, 39. bis central bankers ’ speeches framework with both forward - looking agents and monetary policy specified in terms of the key interest rate. under this framework, monetary policy becomes more powerful if the agents understand the reaction pattern of the central bank. when a disturbance hits the economy, the policy response required to stabilise the economy is smaller if the central bank can affect the whole term structure than if monetary policy only works through the short - term interest rate. 3 however, the importance of forward guidance depends on the degree to which expectations are forward - looking. in principle, economic agents may be able to calculate how the central bank will respond to changing conditions if they know both the model of the economy and the objectives and reaction pattern of the central bank. expected future interest rates may then align well with the central bank ’ s own interest rate intentions, and there will be no need for the central bank to communicate its policy intentions. in practice, a model description of the economy is just that – a model, which always will be a simplification. the central bank ’ s reaction pattern may also be adjusted over time. judgement is applied when responding to shocks, and a specific reaction function will only provide a simplified representation of the central bank reaction pattern. regular information about policy intentions is therefore necessary for the public to learn and revise their expectations. this is also the rationale for forward guidance. in theory, forward guidance may also work as a commitment device and help the central bank stabilise the economy in a more efficient way. 4 the merits of this are debated, and it may be most relevant in a situation where the interest rate has reached a lower bound. forward guidance about how the central bank plans to reach its targets may nevertheless help establish confidence among agents that the objectives will actually be achieved. forward guidance may