variant of the financial - stability argument has some merit, but the case is not as straightforward as it may seem at first. a problem with the argument is that policy gradualism does not necessarily insulate bondholders from capital gains and losses. indeed, we have just seen that, under a gradualist approach, a small change in the policy rate may have a relatively large effect on longer - term rates, because of its implications for private - sector expectations about the future path of short - term rates. large movements in long - term rates translate, of course, into wide swings in bond prices and thus potentially large capital gains and losses. to the extent that the fomc is concerned about stabilizing the bond market, the key is not necessarily keeping changes in the policy rate small but in making policy changes as easy to forecast as possible. of course, complete predictability of policy cannot be achieved because the fomc must react to incoming information in order to achieve its macroeconomic objectives. however, the fomc can attempt to minimize bond - market stress in at least two ways : first, through transparency, that is, by providing as much information as possible about the economic outlook and the factors that the fomc is likely to take into account in its decisions ; and second, by adopting regular and easily understood policy strategies. in the latter respect, gradualism may be helpful to some degree, because it establishes a relatively forecastable pattern of adjustment by the central bank. by varying the pace of policy adjustment, the fomc may also be able to provide additional signals to bond markets about its views and intentions. is the fed really gradualist? in my remarks today i have taken as self - evident that the fomc conducts monetary policy by gradualist principles and have focused on reasons that gradualist policies may help to promote the federal reserve ’ s objectives. although theory and empirical analysis generally suggest that the fed should be gradualist, not everyone agrees, as an empirical matter, that the fed actually has been gradualist in its policies. the alternative view, most closely associated with glenn rudebusch of the federal reserve bank of san francisco, is that slow adjustment is not an intrinsic feature of fed behavior ( rudebusch, 2001, 2002 ; lansing, 2002 ). rather, rudebusch has argued, in practice the fomc responds relatively promptly to changes in the economy. the reason that monetary policy appears to adjust gradually, according to rudebusch, is that

the economy itself evolves slowly, which in turn leads policy to change slowly as well. to illustrate, suppose that the fomc did not adjust policy gradually but set the federal funds rate at each meeting precisely as needed to offset the effects of shocks to the economy. suppose also that shocks to the economy tend to die away slowly or that the economy ’ s adjustment mechanisms lead it to respond only gradually to disturbances. in this scenario, observed interest rates would appear to be adjusting slowly, but in reality the apparent gradualism would reflect only the slow adjustment of the underlying economy that the fed is trying to influence. to support his view, rudebusch has presented evidence that longer - term rates respond to changes in the funds rate less than they would if the fomc were intent on pursuing a gradualist approach. distinguishing “ true ” gradualist policies from policies that respond to gradual changes in the economic environment is difficult, as the two hypotheses imply similar behavior by policymakers. however, recent studies that have taken up rudebusch ’ s challenge have generally found that both an intrinsically gradualist approach to policy and gradual changes in the underlying economic environment are needed to explain the historical patterns of u. s. monetary policy ( english, nelson, and sack, 2003 ; gerlach - kristen, 2004 ). if correct, these more - recent studies confirm that gradualism is an accurate description of actual fed behavior as well as a normative prescription of economic theory. clearly, though, the extent to which the fed has pursued gradualism over its history remains an interesting question for further research. conclusion in my talk i discussed three sets of reasons for gradualist policies : policymaker uncertainty, improved control of long - term interest rates, and the reduction of financial stress. the debate about the sources of gradualism is ongoing and i cannot hope to render a definitive verdict today on the relative merits of these rationales. my sense, though, is that policymakers ’ caution in the face of many forms of uncertainty and their desire to make policy as predictable as possible both contribute to the gradualist behavior we seem to observe in practice. i will close by briefly discussing some implications of the gradualist approach for current monetary policy. before doing so, i remind you once again that the views i express are my responsibility alone. as you know, in reaction to gathering economic momentum and an apparent stabilization in inflation, the fomc at its may 4 meeting characterized the risks to both sustainable growth and