’ s end in 2009, more than once the fomc ’ s projections have proved too optimistic, and the u. s. economy has been unable to achieve escape velocity for returning to stronger, selfsustaining growth. but instead of doing nothing, the fomc took further policy actions to support stronger growth in the context of continued price stability. these actions have provided a credible counterweight to the forecast errors and maintained steadfastness with our medium - term policy objectives. i ’ m not so sure how well we will do going forward. my recent speech in london on dual mandate arithmetic was meant to clarify the challenges we face in describing the federal reserve ’ s policy objectives. the upshot i take from that analysis is this : if we sit on our hands as the economy withers relative to our mandate, then we could take a huge hit to our credibility, akin to what happened to our credibility following the devastating mistakes of the 1930s. two examples of enormous credibility hits to monetary policy : the 1970s and 1930s the federal reserve ’ s policy actions during the 1970s and 1930s stand out as two exemplary cases of poor monetary policymaking. in the post - war era, most critics of expansionary monetary policy cite the 1970s fed chairmen, arthur burns and william miller, as writing the playbook for high inflationary outcomes. by most accounts, the burns - miller fed failed to understand that growth in the productive capabilities of the u. s. economy had slowed. in addition, changes in labor markets made it harder to allocate workers to new jobs bis central bankers ’ speeches in quick order. as a consequence of these structural shifts in the functioning of the economy, the fed policymakers failed to realize that output was higher than they thought relative to its potential. as a result, additional monetary stimulus couldn ’ t bring about stronger growth and lower unemployment, but only exacerbated inflation, higher inflationary expectations and an accelerating wage – price spiral. in fact, inflation rose to double digits, wages chased these prices higher in order to minimize reductions in living standards, and unemployment remained high. the burns - miller fed failed, but where was the failure greatest? with regard to my earlier description of the policymaking process, the burns - miller fed did not properly understand the changing evolution of the u. s. economy in the 1970s, nor how monetary policy interacted with the new structure. to be fair, the burns - miller fed was not alone – other experts at that time

##sarily. in the winter of 2009, with the unemployment rate soaring to double digits, the fed would have very much liked to lower the nominal federal funds rate an additional 300 basis points ; but we couldn ’ t because the rate was already at zero. faced with a pressing need to provide additional accommodation, we were forced to turn to innovative, but controversial, unconventional monetary policies. these policies have been extremely helpful. but there is no denying that they were second - best options ; the zlb had made lowering the fed funds rate, which is our first - best interest rate tool, infeasible. everyone will welcome a return to more normal times and a reliance on the traditional policy framework of adjustments to the federal funds rate. but the decision about when to begin to raise rates shouldn ’ t be made prematurely. rather, the decision for policy liftoff has to be made for the right reasons – that is, it should be dictated by economic conditions. i have said many times that i agree with minneapolis fed president narayana kocherlakota : policy at all times must be goal - oriented. 16 our experiences since the crisis began and current economic conditions are highly unusual. the fomc should not simply set its policy instruments by mechanically aligning them with historical norms if those norms are not relevant harbingers for the attainment of both of our dual mandate goals. rather, our policy instruments should be set to achieve our ultimate goals as efficaciously as possible given current and prospective economic conditions, all the while with an eye on managing against important risks to the outlook. what does that mean now? i believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions. in this scenario, the fomc could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. if we were to presume prematurely that the u. s. economy has returned to a more business - as - usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the zlb environment. such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives. this risk consideration means that the decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return to a sustainable 2 percent rate. we