be certain of the amount of policy easing that is needed to forestall the adverse effects of disruptions in financial markets, decisive policy actions may, from time to time, go too far and thus produce unwelcome inflationary pressures. that's why i said that flexibility is also an important characteristic of monetary policy during a time of financial turmoil. if, in their quest to reduce macroeconomic risk, policymakers overshoot and ease policy too much, they need to be willing to expeditiously remove at least part of that ease before inflationary pressures become a threat. some may see a monetary policy that actively addresses episodes of financial instability along the lines that i have just described as promoting excessive risk - taking and thus increasing the probability of future crises. in other words, such a policy might appear to create some moral hazard problems of its own. i question, however, the validity of this view. as i pointed out earlier, the federal reserve has a mandate from the congress to promote maximum employment and stable prices, and it will choose its monetary policy actions so as to best meet that mandate. that said, as pointed out recently by chairman bernanke, it is not the responsibility of the federal reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions ( bernanke, 2007b ). indeed, the federal reserve can hardly insulate investors from risk, even if it wished to do so. and the fact that investors who misjudged the risks they were taking lost money over the past few months as well as during most other episodes of financial turmoil, independently of the monetary policy actions taken by the federal reserve, certainly corroborates this argument. the point is that, although the federal reserve can and should offset macroeconomic risk with monetary policy decisions, investors remain responsible for dealing with valuation risk. indeed, monetary policy is and should be powerless in that respect. it is solely the responsibility of market participants to do the hard work of price discovery and to ascertain and manage the risks involved in their investments. the federal reserve's recent monetary policy decisions what i just said should serve as a framework for understanding the recent decisions of the federal reserve to ease policy, first by 50 basis points on september 18 and then by another 25 basis points last week. the first action was larger than markets expected at the time – indeed, quotes from the federal funds futures market as well as survey data indicated that most investors had

( as compared with the united states ’ ” maximum ” employment ) and not to any particular level of unemployment. 3 the other reason to care about resource utilisation is that it serves as an indicator of future inflation. the positive relationship between resource utilisation and inflation is illustrated in figure 3, which shows the correlation between three different measures of resource utilisation and cpif inflation 1 – 12 quarters ahead. 4 the connection is fairly strong 3 – 8 quarters ahead. the connection is stronger and faster for the hours gap than for the gdp gap and the ru indicator. this may be because the development of the labour market usually follows behind output and because it is very important for the development of prices and wages. of course, it is difficult to draw any conclusions from the covariation of two variables, but the same type of relationship also exists in more developed empiricallyestimated models. considering this, we wrote, in monetary policy in sweden, that the riksbank, in addition to achieving low and stable inflation, should also strive to stabilise output and employment around long - term sustainable paths. 5 this means that we also strive to hold resource utilisation at a normal level. we usually say that the riksbank is thereby conducting a flexible inflation - targeting policy. we have also chosen to take a broad approach when it comes to interpreting resource utilisation, instead for only looking at a single measure of resource utilisation. sveriges riksbank, monetary policy in sweden, june 2010. my colleague lars svensson has a different interpretation of our task, namely that, during the forecast period, we should strive to hold inflation measured in terms of the cpif ( the cpi with a fixed interest rate ) as close to two per cent as possible and resource utilisation measured in terms of unemployment as close to an estimate of the long - term sustainable level of unemployment as possible. see, for example lars e. o. svensson, “ for a better monetary policy : focus on inflation and unemployment ”, 8 march 2011. the figure is based on the ten - year period 1997 – 2006. this period is not extended further than 2006 so as not to be affected too much by the period after the outbreak of the financial crisis in the autumn of 2008. however, the differences do not become so great even if the years 2007 and 2008 are included. sveriges riksbank, monetary policy in sweden, june 2010. bis central bankers ’ speeches