including, of course, economic and financial developments, at our meeting in september and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability. conclusion let me conclude with just a few words on the longer - term prospects for our economy. as monetary and fiscal policymakers consider the appropriate policies to address the economy ’ s current weaknesses, it is important to acknowledge its enduring strengths. notwithstanding the trauma of the crisis and the recession, the u. s. economy remains the largest in the world, with a highly diverse mix of industries and a degree of international competitiveness bis central bankers ’ speeches that, if anything, has improved in recent years. our economy retains its traditional advantages of a strong market orientation, a robust entrepreneurial culture, and flexible capital and labor markets. and our country remains a technological leader, with many of the world ’ s leading research universities and the highest spending on research and development of any nation. thus i do not expect the long - run growth potential of the u. s. economy to be materially affected by the financial crisis and the recession if – and i stress if – our country takes the necessary steps to secure that outcome. economic policymakers face a range of difficult decisions, and every household and business must cope with the stresses and uncertainties that our current situation presents. these are not easy tasks. i have no doubt, however, that those challenges can be met, and that the fundamental strengths of our economy will ultimately reassert themselves. the federal reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability. bis central bankers ’ speeches

condition for the economy to realize its full potential for sustained increases in living standards. i doubt that high inflation was the proximate cause of the 1973 productivity slowdown, which persisted for a decade after 1983 to 1986, the period the authors give for the end of the great inflation. and i agree with them that low inflation was not the only cause of the great moderation, but i am confident that we would not have experienced more than two decades of nearly uninterrupted growth if the federal reserve had not brought inflation down in the early 1980s and kept it low thereafter. low inflation reduces distortions from signals in market prices and facilitates longer - term planning. low and stable inflation also anchors inflation expectations ; in turn, anchored expectations make it easier for the central bank to control inflation with smaller variations in real activity. that brings me to my second major lesson : expectations are critical to policy success. expectations about future policy help to determine the financial conditions that affect spending and inflation. in most situations, policy will need to be conducted so that expected real interest rates are positive ; a policy that pushes expected real rates below zero would be appropriate only in special circumstances, such as when real activity is expected to be persistently weak and inflation undesirably low. likewise, inflation expectations are critical : increases in expectations of inflation elevate the cost of returning to price stability, and unanchored expectations make it very difficult to understand where the economy is and where it is going. as a consequence, i do not agree with the authors ’ assertion that central banks pay too much attention to inflation expectations. those expectations may not be as much of a leading indicator of the inflation trend as i would like – although i am not sure that i find the paper ’ s conclusion, that the trend leads expectations, all that persuasive. indeed, if i accept the authors ’ assertion that post - 1984 expectations have been a lagging indicator of the trend, then, when expectations rise and stay elevated, i should weight that observation heavily, not lightly. policy cannot be conducted based solely on such a lagging or coincident indicator of inflation, but, of course, it is not. we pay close attention to those factors that are influencing the outlook for inflation, as for example, the level of resource utilization highlighted in our recent announcements. but a clear lesson of the 1970s is that a central bank must keep a very close eye on sustained movements in inflation expectations. i think a third lesson is hum