limit the temptation to use the fed ’ s balance sheet as an instrument of fiscal policy. a road map to the future once we know where we want to go, we can begin to map out a path that will take us there. by articulating a systematic plan that gets us to our objective, we improve communication with the public, reduce uncertainty in the marketplace, and lend credibility to the commitment that policymakers will follow through. bis central bankers ’ speeches any exit plan that is to lead us to a corridor - like operating system has to describe how the fed funds rate or interest rate on reserves will be increased and how the balance sheet will be reduced. there are many ways to do so, but in every case, we must remember that monetary policy decisions should be contingent on the evolution of the economy. in late march 2011, i outlined a proposal for a systematic, rule - based approach that would involve the fed ’ s selling assets from its portfolio as it increased its policy rate, with the pace of sales dependent on the state of the economy. the plan would get us back to a normal operating environment in a timely manner, with the fed ’ s balance sheet reduced to a size that would again allow the federal funds rate to be the primary policy instrument. i also suggested that the first step of the normalization process would be to increase the interest rate paid on reserves and the targeted federal funds rate away from the zero bound, perhaps to 50 basis points. the federal open market committee would also announce its intention to stop re - investing the proceeds from maturing agency and treasury securities. these decisions would initiate the normalization process and begin to raise the funds rate and shrink the balance sheet from the start. how the process evolves from that point will depend on the plan and the state of the economy. the committee would also announce that at subsequent meetings it would regularly evaluate the policy rate based on economic conditions, as it always does. sales of assets between meetings beyond those maturing would also be tied to economic conditions, just as policy rate decisions are. the fed would announce a pace of sales, which would increase when the committee chose to increase the policy rate. since the amount of securities to be sold between meetings would be determined in advance, the public and markets would see the fed shrinking its balance sheet in a predictable manner. for example, the committee might set a sales pace of $ 20 billion of assets between fomc meetings and announce that for each 25 basis points the funds rate target

instead, i believe we should describe how we will respond to the data ; that is, we should describe a reaction function. i frequently consider such reaction functions as i think about policy. these are typically taylor - like rules, named for stanford university economist john see charles i plosser, “ the benefits of systematic monetary policy, ” speech given to the national association for business economics, washington economic policy conference, washington, d. c. ( march 3, 2008 ). finn e kydland and edward c prescott, “ rules rather than discretion : the inconsistency of optimal plans, ” journal of political economy, 85 ( june 1977 ), pp. 473 – 491. bis central bankers ’ speeches taylor who first proposed them in the early 1990s. these policy rules typically call for the targeted funds rate to respond to deviations of inflation from some desired goal and to deviations of output from some measure of potential – sometimes referred to as economic “ slack ” or the “ gap. ” sometimes such gaps are translated into deviations from full employment. such robust rules recognize that data are measured imprecisely and are subject to revision. moreover, they have been shown to perform well in a variety of models and conditions. i believe these robust rules can be useful guideposts for policymakers and the public in assessing the stance of monetary policy and its expected path. communicating about such guideposts would enhance transparency and help make policy more systematic. however, i don ’ t believe that we need to follow rules mechanically. judgment will always be required. yet, policymakers and the public should be very cautious when they call for policy rates to deviate in significant ways from these guideposts. making such judgments should require careful analysis, and the justification for deviating from the guidelines should be clearly communicated to the markets and to the public. thus, policymakers will still be able to exercise discretion, but using rules as guideposts will enhance transparency and effective communication. improving transparency this leads me to my third important principle for monetary policy – communicating in a clear and transparent way. in recent speeches, i have proposed that the fomc could improve communication and transparency by publishing a more comprehensive monetary policy report on a regular basis, perhaps quarterly. 3 this report could incorporate a discussion of such robust systematic rules i referred to a moment ago in its description of the underlying policy framework. the rules could serve as a benchmark for the current stance of policy and the expected path of