major issue facing the fomc is whether to change its strategic framework to mitigate the risk of a return to the effective lower bound for interest rates. once the federal funds rate is close to zero, the fomc is constrained in its ability to lower short - term interest rates further, and the other available policy options to provide monetary policy stimulus may be less effective. if the fomc were unable to provide sufficient stimulus, the economy could have difficulty recovering. in turn, inflation and inflation expectations could fall — and thus raise real interest rates — effectively tightening monetary policy and making the task of generating a sustainable recovery even more difficult. some have argued that a desirable way to reduce this risk would be to raise the fomc ’ s inflation objective from 2 percent to perhaps 3 or 4 percent. their reasoning is that if the inflation objective were somewhat higher, nominal interest rates at the later stages of the business cycle would also tend to be higher, which would provide greater scope for the fomc to cut short - term interest rates to stimulate the economy, if necessary. 4 / 7 bis central bankers'speeches while recognizing that there is a legitimate effective lower bound risk, i do not support the option of raising the inflation objective, for three reasons. first, i doubt that a higher inflation target would be viewed as consistent with the federal reserve ’ s congressional mandate to pursue price stability. our employment and inflation mandates have been established by congress, not by the federal reserve. second, the risks of being pinned at the effective lower bound for interest rates may be overstated. only once in the postwar period have we reached the zero lower bound. upending several decades of effort to anchor inflation expectations around 2 percent might be too high a price to pay to reduce the effective lower bound risk by what might prove to be a small amount. in this vein, it is important to recognize that the fomc now has a more credible set of tools available to use at the effective lower bound than it did in 2008, when those tools were largely unproven. forward guidance about the path of short - term interest rates and quantitative easing have been effective in providing monetary policy stimulus in the post - crisis period. because this is now more broadly appreciated, households and businesses should be more confident that the federal reserve has sufficient tools available at the effective lower bound to generate a sustainable economic recovery. this greater confidence, in turn, should help keep inflation expectations from declining — which should also mitigate the risks associated

implications for the performance of the u. s. economy — and, by extension, for u. s. monetary policy. by increasing uncertainty around the economic outlook, these shifts in fiscal and trade policy could make it more difficult for the fomc to achieve its dual mandate objectives in the years ahead. longer - term monetary policy issues over the longer term, the fomc will also need to address a number of other important issues. these include : 1 ) determining the appropriate long - term implementation framework for u. s. monetary policy, and 2 ) deciding whether the strategic framework underlying monetary policy decisions needs to be adjusted to mitigate the risks associated with getting pinned at the effective lower bound for short - term interest rates. 9 for the first issue, i see two options : return to the “ corridor ” - type system that was in place prior to the financial crisis, or remain with the framework that has been in place since the crisis — namely, a “ floor ” system. in a corridor system, reserves in the banking system are scarce, and the federal funds rate is set by adjusting the supply of reserves through open market operations to balance demand and supply at the fomc ’ s target range. in contrast, in a floor system, reserves are abundant, so that the interest rate the federal reserve pays on excess reserves, or ioer, is the primary tool used to control the federal funds rate. in my view, the case for retaining the current floor system is very compelling for a number of reasons. first, it is operationally much less complex than a corridor system. in the current regime, the setting of ioer is largely sufficient to maintain the federal funds rate within the 3 / 7 bis central bankers'speeches fomc ’ s target range, as we have seen over the past few years. 10 in contrast, a corridor system requires forecasting the many exogenous factors that affect the amount of bank reserves outstanding, and then engaging in open market operations on a near daily basis to keep reserves at a level consistent with the fomc ’ s target range. 11 this task would likely be more difficult now because of greater fluctuation in these exogenous factors relative to when the corridor regime was last in place. second, a corridor system constrains the federal reserve ’ s ability to provide the types of lenderof - last - resort backstops that can help support financial stability. prior to gaining the authority to pay interest on reserves in the fall