has led to actual declines in nominal production costs, which reduce current and future inflationary pressures. finally, the labor market remains soft, reflecting the fact that growth in aggregate demand has been so far insufficient to absorb the increases in aggregate supply afforded by higher productivity. a soft labor market will keep a lid on the growth in the cost of employing workers. an accommodative monetary policy is needed, in my view, to support the ongoing recovery, particularly in the labor market. at the same time, the risks of policy accommodation seem low, as inflation is low and inflation pressures seem quite subdued. these arguments notwithstanding, i realize that some remain unconvinced that the fomc is pursuing the right course. citing factors such as the rise in commodity prices and the decline of the dollar, a number of observers have warned that the federal reserve ’ s policies risk re - igniting inflation. i would like to address these concerns briefly. naturally, i will try to show why these arguments are not of immediate concern, given the three points i made earlier in support of the current accommodative policy. before i do that, though, i would like to emphasize to those uncomfortable with the fed ’ s policy stance that, speaking for myself at least, their views are being heard and taken seriously. achieving price stability in the united states was an historic accomplishment, and preserving that legacy is crucially important. i say that not only because i think that price stability promotes long - run growth and efficiency, which i do, but also because i believe that low inflation and well - anchored inflation as employment begins to pick up and the recovery matures, productivity growth is likely to decelerate, perhaps markedly. nevertheless, slow growth in wages and the return to normal of price - cost markups should help keep inflation low. of course, all else is not necessarily equal. in general, one would expect strong productivity growth to expand aggregate demand, for example, by stimulating capital formation. however, the stimulative effect of productivity growth on demand appears to have been weaker than normal in recent years ( kohn, 2003 ). also, the conclusion that productivity growth has contributed to weak job growth in the short run is in no way inconsistent with the view that productivity growth raises wages and living standards in the long run, when full employment has been restored. expectations are critical to maintaining economic stability in the short run. price stability is of utmost importance to the nation ’ s economic health

ben s bernanke : monetary policy and the economic outlook - 2004 speech by mr ben s bernanke, member of the board of governors of the us federal reserve system, at the meetings of the american economic association, san diego, 4 january 2004. the references for the speech can be found on the board of governors of the federal reserve system ’ s website. * * * the turn of the year is the traditional time to review the high and low points of the year just past and to contemplate the challenges that lie ahead in the year just begun. in that spirit, i will provide a brief progress report on the economic recovery, as well as some remarks on the evolution of monetary policy. as always, the views i will express are my own and are not to be attributed to my colleagues on the board of governors or the federal open market committee. 1 it is beginning to appear that 2003 was a watershed year for the american economy, following what had been, on many dimensions, a subpar performance for the better part of three years. though officially the recession lasted only eight months, from march to november 2001, a period of economic underperformance began with the sharp decline in stock prices and business investment in mid - 2000 and continued through the months leading up to the iraq war this past spring. to a degree that is unusual for postwar recessions, the economic weakness of the period was most apparent in the business sector, even as consumer spending and residential construction remained robust. businesses radically pared their spending on new capital goods and cut the ratio of inventory stocks to sales to historical lows. in an effort to restore profitability in an environment of weak demand and nonexistent pricing power, businesses also worked hard to improve efficiency and cut costs. these efforts have paid off in terms of remarkable increases in productivity, but, together with insufficient growth in aggregate demand, they also contributed to a significant decline in employment. like the aftermath of the 1990 - 91 recession, the two years since the recession trough in november 2001 have been described as a “ jobless recovery. ” indeed, the lag between the recovery in output and the recovery in employment has been significantly greater this time than it was after the 1990 - 91 downturn. monetary policy was deployed to support the weakening economy, as the federal open market committee ( fomc ) aggressively cut rates in 2001 and has continued its policy of accommodation since then. fiscal policy, including two rounds of tax cuts, has also