a much stronger rise in inflation than i am forecasting. this risk calls for more aggressive rate hikes. how do i think policy should balance these divergent risks? how should these risks affect my views about how to follow the fomc strategy of pursuing a balanced approach to achieving our policy goals? in my mind, current circumstances and a weighing of alternative risks mean that a balanced policy approach calls for being patient in reducing accommodation – that is, being patient about when we first increase the federal funds rate and being patient about setting the pace of rate increases once we have begun to move. let me explain how i get there. proceed cautiously in normalizing policy to say the least, conducting monetary policy at the zlb has been a difficult experience that we all want to avoid repeating unnecessarily. in the winter of 2009, with the unemployment rate soaring to double digits, the fed would have very much liked to lower the nominal federal funds rate an additional 300 basis points ; but we couldn ’ t because the rate was already at zero. faced with a pressing need to provide additional accommodation, we were forced to turn to innovative, but controversial, unconventional monetary policies. these policies have been extremely helpful. but there is no denying that they were second - best options ; the zlb had made lowering the fed funds rate, which is our first - best interest rate tool, infeasible. everyone will welcome a return to more normal times and a reliance on the traditional policy framework of adjustments to the federal funds rate. but the decision about when to begin to see, for example, hansen and sargent ( 2008 ). bis central bankers ’ speeches raise rates shouldn ’ t be made prematurely. rather, the decision for policy liftoff has to be made for the right reasons – that is, it should be dictated by economic conditions. i have said many times that i agree with minneapolis fed president narayana kocherlakota : policy at all times must be goal - oriented. 14 our experiences since the crisis began and current economic conditions are highly unusual. the fomc should not simply set its policy instruments by mechanically aligning them with historical norms if those norms are not relevant harbingers for the attainment of both of our dual mandate goals. rather, our policy instruments should be set to achieve our ultimate goals as efficaciously as possible given current and prospective economic conditions, all the while with an eye on managing against important risks to the outlook. what does that mean now

it applies, for instance, to methods for estimating such central variables as how many unused resources there are in the economy and how great the potential growth can be. different methods then produce different results. the ecb is an example of a central bank that builds up its analysis from the real side and from the financial side - monetary policy rests on two pillars. there are partly historical reasons for monetary policy strategy being conducted in this way. their strategy is perhaps not the best way to take financial trends into consideration. the risk with such a clear division is that the fact that it is actually about mirror images is disregarded and that the consistency between the real and financial analysis is lost. the advantage is that financial trends can clearly be taken into consideration when monetary policy decisions are made. in the second place, we can make different appraisals of the risk picture for the price trend during the forecast period. as there is normally great uncertainty in the inflation assessment of the main scenario, the riksbank also produces risk scenarios ; we also publish estimates of the probability distribution of different inflation outcomes. the distribution around the probable outcome is taken into consideration when decisions on the interest rate are taken. in the third place, we can make different assessments as to how monetary policy is to be conducted to strike a reasonable balance between fluctuations in growth and inflation. as i mentioned earlier, the executive board has agreed that we can decide not to bring inflation back to target within one to two years if cpi is affected by temporary factors or if the economy is affected by extensive disturbances. making assessments and evaluating when - within these frameworks - there are sufficient reasons for avoiding output variations by extending the control horizon is far from self - evident, however. to maintain the credibility of monetary policy aimed at price stability, it is important therefore to justify such departures. in the fourth place - and i am now starting to sound as if it is not at all possible to conduct monetary policy with a demand for clarity - we do not know exactly the stimulation or tightening produced by a particular interest rate. this depends on our, like everybody else ’ s, limited knowledge of the “ transmission mechanism ”. it is also due to it being difficult to exactly define at what real interest rate, monetary policy has a neutral effect on demand. the difficulty is increased by the “ neutral ” real interest rate changing, for instance when the productivity growth in the economy changes. on the basis of experience, simple rules of thumb and rough calculations, everyone can per