inflation has averaged 1. 7 percent per year, not much above what many consider to be an inevitable quality - change bias in the index, implying a true inflation rate of close to zero. the standard deviation is only 0. 12 percent per year. pretty stable prices, and a pretty reasonable indication of an inflation target for a central bank that has never announced one. a second possible distinction between fit and the taylor rule involves the treatment of lags. as is well known, monetary policy works with long lags : a policy change influences aggregate demand in a distributed lag pattern beginning soon after the change and extending as long as eighteen months or two years. this lag pattern places a premium on monetary policy being ahead of the curve, in current jargon. fit is clearly written so as to be ahead of the curve. taken literally, a simple taylor rule, with the central bank responding to current values of inflation and unemployment rates, is not. it could, however, be modified to respond to forward - looking information and thus moved in the direction of fit. most members of the federal open market committee consider the task of staying ahead of the curve to be among their most challenging job requirements. economic data series are released every day, and the usual pattern is that some indicators point upward and some point downward, many have seasonal adjustment problems, and many are significantly revised in subsequent months and years. to ascertain true economic signals from this welter of data is quite challenging. but the lags in policy are there, and we must make the effort. hence, although a strategy for policy response may be articulated in different ways, the differences may not be so large in actual practice. however the policy strategy is articulated, anchoring it on some concept of long - term price stability is important, as is permitting short - term flexibility to deal with shocks ; essentially the same goals most economists have in mind for fiscal policy. it is also important to stay ahead of the curve. with that as a preamble, i now turn to several arguments about this monetary strategy. money versus interest rates for most of the post - world war ii period, monetary economists have vigorously debated whether the fed should target money or interest rates in setting policy. in the academic literature, the issue depends on the nature of the shocks. as william poole has shown, if spending shocks predominate, it makes sense to target money, or monetary quantities ; if money demand shocks predominate, it makes sense to target

underlying inflation running close to 1 percent. although we project that economic growth will pick up and unemployment decline somewhat in the coming year, progress thus far has been disappointingly slow. in this environment, the federal open market committee ( fomc ) judged that additional monetary policy accommodation was needed to support the economic recovery and help ensure that inflation, over time, is at desired levels. accordingly, the fomc announced earlier this month its intention to purchase an additional $ 600 billion of longer - term treasury securities by the end of the second quarter of 2011, a pace of about $ 75 billion per month. the committee also will maintain its current policy of reinvesting principal payments from its securities holdings in longer - term treasury securities. financial conditions eased notably in anticipation of the committee ’ s announcement, suggesting that this policy will be effective in promoting recovery. as has been the case with more conventional monetary policy in the past, this policy action will be regularly reviewed in light of the evolving economic outlook and the committee ’ s assessment of the effects of its policies on the economy. i draw several lessons from our collective experience in dealing with the crisis. ( my list is by no means exhaustive. ) the first lesson is that, in a world in which the consequences of financial crises can be devastating, fostering financial stability is a critical part of overall macroeconomic management. accordingly, central banks and other financial regulators must be vigilant in monitoring financial markets and institutions for threats to systemic stability and diligent in taking steps to address such threats. supervision of individual financial institutions, macroprudential monitoring, and monetary policy are mutually reinforcing undertakings, with active involvement in one sphere providing crucial information and expertise for the others. indeed, at the federal reserve, we have restructured our financial supervisory functions so that staff members with expertise in a range of areas – including economics, financial markets, and supervision – work closely together in evaluating potential risks. second, the past two years have demonstrated the value of policy flexibility and openness to new approaches. during the crisis, central banks were creative and innovative, developing programs that played a significant role in easing financial stress and supporting economic activity. as the global financial system and national economies become increasingly complex recent work at the bank of canada ( see he, 2010 ) suggests that the bank ’ s forward guidance may have pushed back expectations of when policy accommodation would be withdrawn. for a differing view, see chehal and trehan ( 2009 ). for the