these reasons, federal reserve officials and other policymakers often refer to this aspect of the dual mandate as the goal of maximum sustainable employment, and they place particular emphasis on the word sustainable. similarly, in promoting the goal of price stability, policymakers have generally not taken this goal literally – by aiming at complete constancy of the price level – but instead have pursued policies aimed at maintaining a low and predictable inflation rate. in particular, at a congressional hearing in mid1988, then - chairman greenspan defined price stability as an environment in which households and businesses " can safely ignore the possibility of sustained, generalized price increases or decreases " in making their saving and investment decisions. 2 now let's turn to the practical challenges in conducting monetary policy to achieve the dual mandate. a central element in successful monetary policy is a strong commitment to a nominal anchor, that is, the use of monetary policy actions and statements to maintain low and stable inflation. during the 1980s and 1990s, the federal reserve succeeded in bringing inflation down from double - digit levels to the average rate of about 2 percent that has prevailed over the past decade. moreover, when some measures of inflation were close to 1 percent in 2003, the federal open market committee's official statements specifically noted that any further substantial decline in inflation would be unwelcome, mainly because of the risk that a falling price level ( which has not occurred since the great depression ) could cause a significant disruption to economic activity and employment. in recent years, the federal reserve has been quite successful in maintaining a nominal anchor. not only has the inflation rate remained within a reasonably narrow range, but inflation expectations, as measured by spreads between inflation - indexed and non - inflation - indexed treasury securities and by surveys of professional forecasters and the general public, have also been well anchored. maintaining price stability is also essential for achieving the other element of the dual mandate, namely, maximum sustainable employment. first, as i have already emphasized, a low and predictable inflation rate plays a crucial role in facilitating long - term growth in employment and labor productivity. second, although the economy will inevitably be buffeted by various shocks, in the majority of circumstances the appropriate monetary policy response to stabilize inflation also helps to stabilize employment and output fluctuations around their maximum sustainable levels. in other words, the two elements of the dual mandate are usually complementary. to see how a commitment to price stability leads to appropriate policy actions to stabilize employment and output fluctuations, we need to understand that there are two

turn has adverse consequences for subsequent labor productivity and economic growth. all these symptoms of high unemployment were observed during the economic devastation of the great depression during the 1930s, which is now just a fading memory. but even less severe recessions are associated with painful consequences for many individual workers and their families. with respect to the second objective – that of price stability – there is now a broad consensus among policymakers, academic economists, and the general public in support of the principle that maintaining a low and stable inflation rate provides lasting benefits to the economy. in particular, low and predictable inflation promotes social welfare by simplifying the savings and retirement planning of individual households and by facilitating firms'production and investment decisions. furthermore, an environment of overall price stability contributes to economic efficiency by reducing the variability of relative prices and by minimizing the distortions that arise because the tax system is not completely indexed to inflation. price stability also has important benefits in terms of equity. for example, an elevated inflation rate typically increases poverty because the poorest members of society do not have access to the sorts of financial instruments that would help protect them against inflation. by the way, these are not just theoretical arguments : the experience of the united states in the 1970s, and that of many other economies across a wide range of times and circumstances, demonstrates that high and unstable i want to thank andrew levin, brian madigan, and spencer dale for their extremely helpful comments on and assistance with this speech. inflation generally detracts from the standard of living, hinders the process of capital formation and economic growth, and in some countries has even led to political and social instability. such episodes also show that a full recovery from the adverse effects of severe inflation can take many years. although i could spend all morning extolling the virtues of the dual mandate, let me now turn to describing some of the challenges that the federal reserve faces in implementing this mandate. the first challenge is determining how to interpret the dual mandate. of course, the federal reserve doesn't take a literal approach to the goal of maximum employment. in that case, our policies would need to be directed at getting everyone to work at least one hundred hours a week, and we would have to discourage senior citizens from retiring and young people from attending college instead of entering the labor force. furthermore, every modern economy has a certain level of " frictional " unemployment, which reflects the transitory periods over which individuals remain voluntarily unemployed while searching for a new job. partly for