in inflationary expectations can generate a self - fulfilling mechanism. should inflation expectations become unhinged, it would be difficult and costly for the monetary authority to re - establish price stability. third, communicating an explicit inflation objective will clarify the fed ’ s intentions regarding the level of inflation it considers consistent with its mandate. some economists have suggested that raising our inflation goal above 2 percent would be an effective tool for lowering real interest rates. i am very wary of such a strategy because i don ’ t believe we can control inflation expectations that precisely. it is at least questionable whether we could credibly raise inflation expectations. and were we able to do so, how easily would we be able to bring them back down? trying to manipulate the public ’ s expectations may risk undermining the fed ’ s credibility and the public ’ s confidence in the institution. fourth, we eventually will need to normalize our monetary policy and exit this period of extraordinary accommodation. having an explicit inflation objective will help us maintain our commitment to price stability while we do that and increase the credibility of that commitment in the eyes of the public. as business leaders, you understand the importance of credibility in your own institutions. an institution's reputation is built on its credibility for fulfilling its commitments. once that foundation is compromised, it is very difficult to rebuild. the fed must do all it can to preserve its hard - earned credibility. i believe an explicit inflation goal can help us do that. bis central bankers ’ speeches conclusion in summary, the u. s. economic recovery will continue and gradually strengthen over time. i expect annual growth of less than 2 percent this year to gradually accelerate to around 3 percent next year. as the economy strengthens, prospects for labor markets will continue to improve and the unemployment rate will gradually decline. as we move forward in this time of change, the federal reserve remains committed to its long - run statutory goals of price stability and maximum employment. we remain vigilant on inflation and committed to clear communication of our monetary policy. i believe that this communication, and our accountability to the public, could be greatly enhanced were the fed to adopt an explicit numerical inflation goal. having such an objective in place would prove particularly useful in the current environment in which the fed is providing monetary stimulus using new tools that are not as familiar to the public and the markets. it will also help at a time when some may view the fiscal situation as threatening the independence of monetary policy. and it will help in the future

, the balance sheet of the federal reserve has changed from one made up almost entirely of short - term u. s. treasury securities to one that is mostly long - term treasuries, plus significant quantities of long - term mortgage - backed securities. this concentration of housing - related securities is problematic because it is a form of credit allocation and thus violates the monetary / fiscal policy boundaries i just mentioned. the second aspect is the overall size of the balance sheet. many central banks expanded their balance sheets in an effort to ease monetary policy after their usual policy instrument – an interest rate – had reached the zero lower bound. do central bankers anticipate that their balance sheets will shrink to more normal levels as they move away from the zero lower bis central bankers ’ speeches bound? is it desirable to do so? or should monetary policy now be seen as having another tool, even in normal times? some have suggested that central banks adopt a regime in which the monetary policy rate is the interest rate on reserves rather than a market interest rate, such as the federal funds rate. this would then permit the central bank to manage its balance sheet separately from its monetary instrument, freeing it to respond to liquidity demands of the financial system without altering the stance of monetary policy. in principle, this would take pressure off central banks to shrink their balance sheets from the current high levels and simply rely on raising the interest rate on reserves to tighten monetary policy. the alternative is to return to a more traditional operating regime in which the central bank sets a target for a market interest rate, such as the federal funds rate in the u. s., above the interest rate on reserves. implementing this regime would require a smaller balance sheet. i am very skeptical of an operating regime that gives central banks a new tool without boundaries or constraints. without an understanding, or even a theory, as to how the balance sheet should or can be manipulated, we open the door to giving vast new discretionary abilities to our central banks. this violates the principle of drawing clear boundaries between monetary policy and fiscal policy. when markets or governments come to believe that a central bank can freely expand its balance sheet without directly impacting the stance of monetary policy, i believe that various political and private interests will come forward with a long list of good causes, or rescues, for which such funds could or should be used. economic theory and practice teach us that monetary policy works best when it is clear about its objectives and systematic in its approach to achieving