. assuming these firms are unable to fully pass through higher input costs into prices, they will experience some compression in their profit margins, at least in the short run, thereby causing a decline in the marginal return on investment in most forms of equipment and structures. 7 moreover, to the extent that higher oil prices are associated with greater uncertainty about the economic outlook, businesses may decide to put off key investment decisions until that uncertainty subsides. finally, with higher oil prices weighing on household income, weaker consumer spending could discourage business capital spending to some degree. fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades. during the period before the creation of the organization of the petroleum exporting countries ( opec ), cheap oil encouraged households to purchase gas - guzzling cars while firms had incentives to use energy - intensive production techniques. consequently, when oil prices quadrupled in 1973 – 74, that degree of energy dependence resulted in substantial adverse effects on real economic activity. since then, however, energy efficiency in both production and consumption has improved markedly. consequently, while the recent run - up in commodity prices is likely to weigh somewhat on consumer and business spending in coming months, i do not anticipate that those developments will greatly impede the economic recovery as long as these trends do not continue much further. for example, the simulation of the frb / us model that i noted earlier indicates that a persistent increase of $ 25 per barrel in oil prices would reduce the level of real gdp about 1 / 2 percent over the first year and a bit more thereafter. the magnitude of that effect seems broadly consistent with the estimates of professional forecasters ; for example, the blue chip consensus outlook for real gdp growth has edged down only modestly in recent months. monetary policy considerations let me now turn to the stance of monetary policy. as you know, monetary policy has been highly accommodative since the financial crisis intensified. in december 2008, the fomc lowered the target federal funds rate to near zero and started to provide forward guidance concerning its likely future path. as in its statements since march 2009, the committee reiterated last month that “ economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. ” in addition, the fomc has purchased a substantial volume of agency debt, agency mortgage - backed securities,

influence investments in these firms. i have already referred to economies of scale. auctions and chat rooms provide an example of how network effects and scale economies can be mutually reinforcing, making high transaction volumes critical to both the supply and the demand sides of the market. here let me also note that, for those for whom advertising is a key source of revenue, there is a virtuous cycle as a large customer base attracts more advertisers, which in turn finances more and better content and attracts even more users. the need for scale or volume appears to create an advantage for the first business to achieve critical mass in any market in which there are strong network effects. understanding this dynamic and taking advantage of it appears to be another lesson from the early experience with e - commerce. the evolution of investment in e - commerce firms, particularly web - only firms, continues to receive attention in the press. needless to say, rational economic behavior suggests that investors would require a high return to invest in unproven but potentially profitable endeavors. after all, some innovations struggle but succeed, while others arrive too soon for the technology, arrive too soon for the market, or are not commercially successful for a wide variety of other reasons. the rapid reassessment of the business prospects of some e - commerce firms during the course of last year is a reflection of this reality. of course, the equity securities of these firms were revalued to reflect these changing assessments. are stocks today overvalued, correctly valued, or undervalued? i certainly do not know, and i am not aware of anyone who does. as a result, i believe that it would be unwise - - and indeed impossible - - for the federal reserve to target specific levels of valuations in equity markets. however, valuation methods that are appropriately sensitive to the obvious business risks of e - commerce, as opposed to being driven by the assumption of the most optimistic outcomes for every concept, are key. in the long run such approaches should provide a healthy base for maintaining a reasonable and sustainable pattern of growth and investment in the e - commerce segment. costs of capital that reflect risks accurately are critical to a well - functioning economy. therefore, with respect to observations and lessons, it appears that the basic rules of economics, commerce, and finance continue to apply. though some macroeconomic conditions have changed importantly because of the technology investments that underpin e - commerce, the laws of economics have not been repealed