growth or higher productivity growth, then we would observe that rapid growth does not raise utilization rates. second, we have to worry about whether nairu may be declining or, at least, may be lower than currently estimated. if nairu is lower than we expect, then the current unemployment rate is less likely to be associated with excess demand in the labor market and therefore poses less risk of higher inflation. checks and balances are essential here. for example, it is important to confirm that utilization rates are rising before continuing very long to tighten policy to damp presumed above - trend growth. this will prevent a persistent mistake in the face of an unexpected shift in the economy ’ s trend rate of growth. monetary policy usually avoids this mistake by focusing on utilization rates and not growth. the second check is to confirm that, following a decline in the unemployment rate, wage change is moving higher, consistent with increased excess demand in the labor market. in addition, we have to take into account temporary forces related to, for example, minimum wage, health care costs, and exchange rates. finally, we have to make allowances for the dynamics of the process, including the tendency for inertia to result in only a very small initial increase in inflation once excess demand has developed and the tendency of the initial rise in wages in excess of productivity to be tempered by a decline in profit margins before leading to higher prices. the outlook context now let me summarize the key features of recent macroeconomic performance. the economy advanced at a 3. 1 percent rate over 1996, including a 3. 8 percent rate in the fourth quarter. growth in the first quarter appears to have been at least as strong as the pace in the fourth quarter, and the economy seems to have solid momentum in the current quarter. in short, the economy appears to be growing at an unsustainable above - trend rate. by the way, is the prevailing trend rate of growth both historically low and disappointing? yes. would it be desirable, therefore, to raise the trend rate of growth? yes. can monetary policy accomplish this worthy task? no. can the congress and the administration, through judicious combination of deficit reduction and saving and investment incentives, raise trend growth ( at least for a while )? yes. are there opportunities for monetary policy to contribute to steady growth? yes. first, to the extent that policy can avoid a cyclical rise in inflation, it can avoid the subsequent monetary policy response to limit and then reverse

as if it has an aversion to making sudden large changes in the federal funds rate. however, such a reduced - form description of the committee ’ s behavior does not answer the question of why this kind of inertia might be optimal. why should the committee act as if it is averse to making sharp changes in the funds rate? at one level, the answer is clear : this behavior is in the service of our mandate, and nothing more. for if we were to make an unexpectedly abrupt adjustment at any time, it would likely have a large effect on long - term rates and credit conditions more generally, which in turn might compromise our ability to reach our goals for employment and inflation – for example, a large bond - market move of this sort might nip a nascent recovery in the bud, which is why it is to be avoided. digging deeper, though, it is important to recognize that part of the reason that the bond market would react so strongly to a sharp change in the short - term policy rate is that we have settled into a self - sustaining equilibrium in which the fed tends to act gradually, and the market has come to expect that gradualism. in other words, the market has learned that a given increase in the federal funds rate at the beginning of a tightening cycle is typically followed by many more moves in the same direction, so there is naturally a multiplier effect on long - term rates of a given change in short - term rates. and that multiplier depends on the expected degree of gradualism : the more inertia there is in fed policy, the more significant is any small move, and hence the larger is the multiplier. thus, an expectation of gradualism on the part of the market makes it all the more important for the fed to adjust the policy rate gradually, thereby fulfilling the market ’ s beliefs. this line of reasoning can be thought of as a piece of positive economics – that is, it may shed some light on why the world is as it is. but what, if any, are its normative implications? on the one hand, as i have emphasized, a gradualist approach to monetary policy is likely to be the best way for us to deliver on our mandate at any point in time, taking as given the market ’ s expectations for fed behavior. as such, it would probably not make sense, in the short run, for the committee to deviate from this approach – with an unpre