Speech

Coping with Monetary Policy Risks RiskManagementAssociation Memphis,Tennessee January18,2001 Even a casual reader of the newspapers I’mgoingtotalkaboutmonetarypolicyrisks these days knows that the outlook for underfourmajorheadings.First,weneedtobe the U.S. economy is less certain than clearabouttheobjectivesofmonetarypolicy. it seemed only a month or two ago. Second,weneedtoidentifyvarioussourcesof Perhaps the single most visible sign of greater risk.Third,weneedtoexaminevariousoptions uncertainty is the reported decline in auto sales formitigatingtherisksweface.Andfinally,we and production. Also highly visible are declines needtoexaminethecostofriskmitigation. in equity prices since their peaks last March, Beforeproceeding,Iwanttoemphasizethat publicity concerning problems faced by many theviewsIexpressherearemineanddonot of the dotcom companies and power problems necessarilyreflectofficialpositionsoftheFederal in California. ReserveSystem.Ithankmycolleaguesatthe Thosewhodonotfollowmonetarypolicy FederalReserveBankofSt.Louisfortheircomissuescloselyprobablyhavethesensethatevery- ments,butIretainfullresponsibilityforerrors. thingwasgoingsmoothlybefore,whereasjust recentlyeverythinghasinsteadbecomehighly uncertain.Infact,thoseofuswholiveandbreathe OBJECTIVES monetarypolicyknowthattheuncertaintiesare Themostfundamentalobjectiveofmonetary alwaysthere.ThesubjectIwilldiscusstodayis policyistocontributetomaximumsustainable howweshouldthinkabouttheproblemofman- economicgrowthfortheUnitedStates.Theprinagingmonetarypolicyknowingthatvariousrisks cipalcontributionthatmonetarypolicycanmake arealwaysinthepicture. toeconomicgrowthistomaintainlowandstable Aswithmanybusinessproblems,thereare inflation.Highinflationisinevitablyalsovariusefulwaysofthinkingaboutrisksthatcanhelp ableinflation;suchconditionsclearlyinterfere todesignpoliciesthatmakegoodsense.Itwould withtheefficiencyofbusinessplanningandoften beamistaketopushtheanalogytoofar,butthere provokepublicpolicyresponses,suchasprice arecommonelementsinmanagingmonetary controls,thatdamageefficiency.TheUnitedStates policyrisksandmanagingbusinessrisks.For experiencedsuchaperiodduringthe1970s;inflaexample,attheFederalReserveweareacutely tionwasonaveragerisingfrom1965to1980and awareofrisksinourcashoperation,where wasquitevariableyear-to-year.Productivity employeeshandlelargeamountsofcurrency growthwasrelativelylow,andtheUnitedStates andwehavepotentialvulnerabilitiesthatarise experiencedtwosevererecessionsin1973-75 whenarmoredtruckscomeintoFederalReserve and1981-82.Clearly,the1965-80inflationwas buildingstoreceiveordisgorgecash.Carefuland quitecostly;thiswasaperiodduringwhichU.S. continuousmonitoringofriskswhenthingsare monetarypolicydidnotcoveritselfwithglory. goingwellisanimportantpartofassuringthat Maintaininglowandstableinflationisthe thingscontinuetogowell. mostimportantmonetarypolicygoal.Onlythe 1

MONETARYPOLICYANDINFLATION centralbankcandeliversuccessonthisfront; intendedtostrengthenknowledgeoftheeconomy. othergovernmentpoliciescanmakelifemoreor Fedresearchersmayalsocontributetheirexpertlesseasyforthecentralbank,butattheendof iseindesigningnewsurveysanddatacollection thedaysustainedinflationcannotoccurunlessa programstoenableustotrackcurrenteconomic centralbankpermitsit. developmentsbetter. Supposethecentralbankdeliversonlowand Oneoutcomeofeconomicsresearchoverthe stableinflation.Canitalsocontributetoreduced past30or40yearsisthatwehaveamuchclearer fluctuationsofemploymentandoutput?Ibelieve understandingoflong-runrelationshipsthanwe theanswerisyes. didbefore.Weknowenoughnowtosaywith Itisimportanttobeveryclearaboutthis reasonableconfidencethatsustainedlong-run point,andsoI’lldiscussitcarefully.First,both inflationisnotinevitableorbeyondcentralbank economictheoryandactualexperiencemakeclear control.Moreover,weknowthatacceptinghigher thatthecentralbankcannotreducetheaverage long-runinflationwillnotraiseemploymentand rateofunemploymentbyacceptinghigherinfla- economicgrowth,andmaywellcompromise tion.Infact,lowandstableinflationmaycon- successontheseandmanyotherimportantecotributetoanunemploymentratethatisonthe nomicobjectives.However,improvedunderstandaveragelowerthanitwouldotherwisebeata ingofshort-rundynamicshasnotaccompanied higherrateofinflation.Theevidenceisnotclear ourimprovedunderstandingoflong-runrelationonthisissue,soletmeadopttheassumption ships.Infact,whatIthinkI’velearnedfrom thattheaveragelevelofunemploymentisinderesearchonshort-rundynamicsisthatnoclaimed pendentofthemonetarypolicybeingpursued, short-runregularityisreliable.Perhapsthisstateatleastwithinasignificantrange.Thequestion mentistoostrong,butthecommonidea30years athand,then,isthis:Ifthecentralbankcannot agothatwecouldsaywithsomeconfidencewas reducetheaveragelevelofunemployment,can that,forexample,25percentoftheultimateeffect itreducefluctuationsofunemploymentaround ofhighermoneygrowthonGDPwouldappear theaveragelevel?Theanswer,Ibelieve,isthat inthefirstquarter,another20percentinthenext timelyadjustmentsinmonetarypolicycanindeed, quarter,andsoforth,haslargelydisappeared withinlimits,helptostabilizeemploymentand fromdiscussion.Weknowthattheeconomy’s outputgrowth.However,thecentralbankdoes speedofresponsedependsonlotsofthings,and nothavethepowertopreventallfluctuationsin itjustisn’tpossibletobeconfidentabouthow outputandemployment;tryingtoohardcould fastthingswillhappen. leadtodestabilizingtheinflationrate,which InadditiontotheFed’simportantlonger-run wouldcreateadditionalproblems.Mostimporeffortstoimproveknowledge,theFedemploys tantly,risinginflationhistoricallyhasbeenassostaffalloverthecountrytoobtainthelatestposciatedwithsignificantrecessions,aswastruein sibleinformationaboutthecurrentstateofthe 1973-75and1981-82. economy.Forexample,theresearchdivisionat theFederalReserveBankofSt.Louismaintains anextensivelistofcontactsinthebusinesscom- SOURCES OF RISK munityandsurveysthesepeopleintheweeks Tounderstandhowmonetarypolicyresponses justbeforeanFOMCmeeting.Inaddition,Imake canstabilizeemploymentandeconomicgrowth, somephonecallsmyselfandhostluncheonsat weneednowtoturntothesourcesofrisk.One theBankforbusinessexecutivesknowledgeable extremelyimportantsourceofrisktomonetary aboutthecurrentstateofthemarketsinwhich policymakersisincompleteknowledge,includ- theirfirmswork.Theboardsofdirectorsofthe ingespeciallyaninadequateunderstandingof St.LouisFedanditsthreeBranchesinMemphis, howtheeconomyworks.TheFederalReserve LittleRock,andLouisvillearealsoimportant hasalong-standingresearchprogramthatis sourcesofcurrentintelligenceonwhatisgoing 2

CopingwithMonetaryPolicyRisks onintheeconomy.Thisinformationoftenleads gatheringinmitigatingtherisksthatarisefrom thedevelopmentsthatshowuplaterinformal incompleteknowledge.IwouldaddtheobservastatisticalinformationcollectedbytheBureauof tionthattheFederalReserve’sroleisnotbyany LaborStatisticsandothergovernmentstatistical meanstheonlyorthelargesteffortinthisarea. agencies. Economicsresearchinuniversitiesandother Asecondsourceofriskisshocksofvarious governmentagenciesisextremelyimportant. kindsthatsimplycannotbeforeseen.Anexcellent Federalstatisticalagenciesprovidemostofthe recentexamplewastheRussiandefaultinAugust datawerelyon.Unfortunately,theseagencies of1998andthefinancialmarketdisruptionin arealltoooftenaffectedbybudgetpressuresthat manyAsiancountriesthatfollowed.Atvarious donotpayadequateattentiontothepayofftoour times,theU.S.economyhasbeenbuffetedby societyfromafirmerstatisticalbaseuponwhich unpredictableenergypriceshocks,bothpositive tomakepolicydecisions.Thoseofuswithpolicy andnegative,afamiliarstorytoallofusatthis responsibilitiesneedtoexplainhowadequate verytime. resourcesforstatisticalagenciescanhelptoreduce Anothertypeofriskwefacearisesfrommarket therisksweface. misperceptions.TheaggregateU.S.economyis Acriticallyimportantaspectofmitigating thesumofalloftheindividualpartsoftheecon- riskovertimeistounderstandthatmonetary omy.Marketparticipantsmakedecisionsbased policymustbeviewedinthecontextofabehavontheirperceptionsoftheirownsituationsand ioralregularityonthepartofthecentralbank oflikelyfutureevents.Sometimesthemarkets andnotintermsofindividualpolicyactions. developmisperceptionsaboutthesituationand Thatis,wemustviewindividualpolicyactions asaconsequencemakemistakesofvariouskinds. asreflectinganongoingpolicythatinprinciple Thesemistakesareoftenonlyclearinretrospect. isderivedfromrule-likebehavioronthepartof Anothersourceofriskisfinancialinstability. thecentralbank.Themarketsoughttobeableto Adramaticexamplewasthestockmarketcrash predictwithsubstantialaccuracyhowthecenin1987.Lessdramaticinstabilitieshavealsobeen tralbankwillrespondtovariouscircumstances importantfromtimetotimeinthepast.Inthe thatmayarise.Intheabsenceofsuchpredictabilfallof1998,policymakershadtocontendwith ity,centralbankresponsestoeventswilloften significantproblemsintheU.S.securitiesmarkets. takethemarketbysurprise;analystswillthink Historically,theUnitedStateshassufferedfrom thatcentralbankpolicyisrandom,idiosyncratic, financialinstabilityfollowingbankfailures.I unpredictable,mysterious,andanyofavariety wouldnotwanttosaythatmarketeconomies ofotheradjectivesthatmightbeapplied.Clearly, arepronetoinstability,butitiscertainlytrue suchastateofaffairsisnotdesirable. thatinstabilitiesofvariouskindsdoarisefrom Animplicationofviewingcentralbankpolicy timetotime. intermsofrule-likebehavioristhateveryindi- Thereisnoneedtoextendthislistofexamvidualpolicyactionoughttofit,orbeconsistent ples.Themessageshouldbeclear:Policymakers with,thepolicyruleorregularity.Policyactions alwaysfacetheriskthatunexpecteddevelopments thatareirregularinsomesensenecessarilyhave willtendtopushtheeconomyofftrack.Insofar precedentvalue.WhethertheFederalReserve aspossible,weneedtodesignmonetarypolicy actsorfailstoactinanygivensetofcircumstances withtheserisksinmind. notonlyaffectstheoutcomefortheeconomyin theneartermbutalsoaffectsthefuture,asmarket participantsintheyearsaheadwillnaturally MITIGATING RISK lookbackontheFederalReserve’spastbehavior Ihavealreadymentionedbrieflytheimpor- toprovidecluesastolikelypolicyresponses. tanceoflong-runresearchandinformation So,apolicyofmitigatingrisksovertimerequires 3

MONETARYPOLICYANDINFLATION thatthecentralbankviewitspolicyactionsina andyetlegallynosuchguaranteeexistsformost long-runcontextandnotjustcasebycasebycase. oftheseenterprises.Shouldtherebeanunpre- Thisdynamicaspectofmonetarypolicyis dictedshockofsomesorttooneofthesefirms, quitesimilartotheproblemfacedinmanybusi- thelikelyoutcomeissubstantialmarketdisrupnesscontexts.Forexample,indecidingwhether tionasaconsequenceoftheuncertaintyoverthe tosettleacaseoutofcourt,acompanyalways government’srole.Thisvulnerabilityinour mustconsidertheprecedentvalueofthecurrent financialsystemcanbeandshouldberepaired; action.Acompanymightwelldecidetotakea Congressoughttomakecleartheextentofits particularcasetocourteventhoughthecaseat willingnesstounderwriteorguaranteetheoblihandwouldinvolvelegalcostsinexcessofthe gationsoftheGSEs,andiftheguaranteesareto costofsettlingsimplybecausesettlingmightgen- bemadeexplicit,Congressoughttoexamine eratemorecasesinthefutureinvolvingsimilar carefullywhethertheGSEsaremanagingtheir demands.Inconductingmonetarypolicy,as affairsinawaythatisconsistentwiththeinherwithmanybusinessproblemsinvolvingrisk entriskstheyface. analysis,thisdynamicaspectoftheconnection OneofthesourcesofriskInotedearlierconbetweenpresentactionsandfutureeconomic cernsmarketmisperceptionsofvariouskinds. behaviorandexpectationsisacriticalpartof Marketmisperceptionsofthewayinwhichmonegettingtheanalysisright. tarypolicyisconductedarefromtimetotimea Iamoftenstruckbytheassumptionthatmany problem.Inrecentyears,theFederalReservehas seemtohavethattheFederalReservehassome paidconsiderableattentiontotheissueofclarifyspecialinsightintothefuturethatnooneelse ingitspolicy.Ihavedevotedquiteabitofeffort has.Infact,theFedfindsitselfoftensurprised inmyspeechestoexplainhowFedpolicyworks byshocksofvariouskinds.Theseshocksare andwhatthemajorissuesare.Theissueofpolicy simplyimpossiblefortheFedoranyoneelseto clarityisnotonethatcanbefixedpermanently, forecast.However,theeffectsofshocksonthe forconditionschangeandmemoriesfalter.Thus, economydependcriticallyontheextentoffinan- Ibelievethatitisextremelyimportantthatthose cialrobustness.Itisextremelyimportantthatwe ofusinvolvedinmonetarypolicyspendasmuch maintainafinancialsystemthatisabletowith- timeaspossibletalkingwithaudiencestoexplain standtheinevitableshocksandsurprises.Asa whattheFedisdoingandwhy. bankingregulator,theFederalReservehasdirect OneofthesourcesofriskthatImentioned responsibilityinthisareaforthebanksitsuper- wasthatthereareshocksorsurprisesofvarious vises;and,theFedcontributesimportantlytothe kindsthatcausedifficultiesinthemarkets.One overalldesignofbankingregulationandsuper- suchclassofsurpriseisthepolicysurpriseitself. visionthroughitsadvicetotheCongressonbank- IbelievethatFederalReservepolicyshouldbe inglegislationanditscooperativeworkwiththe asregularandpredictableastheinherentuncerotherfederalbankingregulators—theOfficeof taintiesofthesituationpermit.Ithinkitfairto theComptrolleroftheCurrencyandtheFederal saythatinrecentyearsmostpolicysurprises DepositInsuranceCorporation.TheFedalso havereallynotbeenpolicysurprisespersebut workscloselywithstatebankingauthorities. insteadpolicyresponsestosurprisesintheeco- Issuesoffinancialrobustness,however, nomicenvironment.Wheneconomicconditions extendfarbeyondtheareasofdirectFederal appeartobechangingrapidly,apolicyresponse Reservejurisdiction.Forexample,anissueIdis- maywellbeappropriate.Inthissense,thepolicy cussedatsomelengthinalectureinDecember actionmaybeasurprisefromtheperspectiveof concernedtheambiguityaboutfederalsupport whatwasanticipatedseveralmonthsearlier. forgovernmentsponsoredenterprises,orGSEs. Avoidablepolicysurprisesarisewhensudden ThemarketpricesdebtobligationsofGSEsasif policyU-turnsoccurthatwerenotpredictable thereisafederalguaranteeoftheseobligations, onthebasisofanythingobservable.Themost 4

CopingwithMonetaryPolicyRisks significantsuchpolicysurpriseIcanremember MyownviewonthismatteristhattheFed, duringmyprofessionallifewastheimposition tothemaximumpossibleextent,shouldrelyon ofwageandpricecontrolsonAugust15,1971. marketforcestocreatethedesiredeffects.When Almostassurprisingwasthesharpturntowards marketparticipantshaveconfidenceinthelongmonetarypolicyrestraintonOctober6,1979. runoutlookforinflation,astheyhavehadfor Thatpolicysurprise,however,wastheinevitable someyearsnow,thoseparticipantswillmove consequenceofreplacingthefailedmonetary interestratesinresponsetovariouspiecesof policyofthe1970swithafirmcommitmentby informationdaybyday.Thus,theFederalReserve theFederalReservetoanewpolicythatwould canconcentrateonestablishingthestablelongendtheinflation.Ingeneral,whenpolicyison runframeworkofapolicyconsistentovertime track,itwillworkmosteffectivelyifthemarkets withlowinflation,andallowmarketinterest fullyunderstandthesituationandthereforeare ratestoadjustactivelywithoutthecentralbank abletopredictFedpolicyactionswithahigh havingitselftorespondonaday-by-dayoreven degreeofaccuracy. quarter-by-quarterbasis.Eventually,thedevel- Animportantpartofmitigatingriskisfor opingsituationbecomesclearenoughthatthe policymakersthemselvestodevelopathorough FederalReservecanadjusttheintendedfederal understandingofunavoidablerisktradeoffs.Itis fundsratetomaintainapolicystanceconsistent oftenthecase,eventypicallythecase,thatrisk withlong-runpricestabilityandwiththeshorter mitigationcanneverbeabsolute.Reducingone runneedsofeconomicstabilization.However, riskalmostalwaysentailsacceptinggreaterrisk betweentheFederalReservepolicyactions, somewhereelse.Monetarypolicyisnodifferentin marketadjustmentshaveaccomplishedmuchof thisrespectfromanystandardbusinessproblem. thestabilizationwork. Economistshavelongunderstoodthat,all otherthingsbeingequal,amoreexpansionary monetarypolicyhasinitialeffectsofstimulating COSTS OF RISK MITIGATION economicactivityandemploymentanddelayed Asshouldbeclearbynow,intheanalysisof effectstendingtoincreasetherateofinflation. monetarypolicy,theissuesarealmostalways Alliswellifthecentralbankisabletoapply thoseofwhattradeoffsexist—howthemitigation monetarystimulustooffsetotherforcestending ofoneriskmayaddtorisksinotherdimensions. toreduceemploymentandeconomicactivity.If Letmenowtakeupacoupleofspecificitemsnot thedepressingforcesdissipate,themonetary yetdiscussed. stimuluscanbewithdrawn;then,theneteffect Italkedbrieflyearlieroftheproblemoffinanisthatthecentralbankcushionswhatwould cialinstabilityarisingfromshocksofvarious otherwisebeadisturbancetooutputandemploy- kinds.Thefragilityoccurswhenshocksputfinanmentwithoutcreatingalastingeffecttendingto cialfirmsunderstress,perhapseventhreatening raisetherateofinflation. failure.TheUnitedStateshasalonghistoryof Thatisthegeneralprinciple,buttheproblem bankinginstability;themostdramaticsuchcrisis ofidentifyingeconomicforcestendingtomove aroseintheearly1930s,andtheendresultwas theeconomyoffitsdesiredtrackandcalibratinga closureofalargefractionofU.S.banks.Similarly, monetarypolicyresponsetohavetheappropriate overthecourseofthe1970sand1980s,thefinaneffectisbynomeanseasyorwithoutrisk.When cialpositionofmanysavingsandloanassociathecentralbankbelievesthatithasidentifieddis- tions(S&Ls)becameweakerandweaker.The turbancescallingforamonetarypolicyresponse, eventualclosureofalargenumberofS&Lsand theissueishowtocalibratethatresponsetocreate reorganizationofthefederaldepositinsurance thedesiredoutcomewithoutanundueriskof structurewasaconsequenceofasimilarprocess, increasinginflation. whichfortunatelydidnotcreateageneralized 5

MONETARYPOLICYANDINFLATION financialcrisisbutdidendupcostingU.S.tax- withafinancialcrisisbybailingoutfirmsfacing payerssomethingintheneighborhoodof$150 possiblefailure.Abailoutmaycalmaparticular billiondollarstomakegoodonthefederaldeposit situationofmarketturmoil;however,bailouts insuranceguarantee. mustalwaysbeanalyzedwithdueregardtothe Banksandmanyotherfinancialinstitutions moralhazardproblem.Wheneverafirmisbailed operateonafairlynarrowcapitalbase.Inthe out,thedangeristhat,inthefuture,firmsand UnitedStatestoday,regulatedbanksarerequired investorswillexpectsimilartreatment.Expecttomaintaincapitalintheneighborhoodof10 ingbailouts,investorsmaywellassumemore percentofassets.Thatcapitalprovidesacushion riskthantheyshould;today’sbailout,therefore, intheeventthatassetsgobad;shareholdersbear mayincreasefuturefinancialinstability.The thecostofbadbanklendingdecisions.Many issueofpublicpolicytowardbailoutsisreallya othertypesoffinancialinstitutionsmayhave specificexampleofthemoregeneralissuethat capitalthatissomewhatlowerorsomewhat policyneedstobethoughtofintermsofalonghigherthantheapproximate10percentcapital runregularityofgovernmentbehavior,andnot forcommercialbanks.Clearly,foranyofthese justcasebycase. institutions,weruntheriskthatthelosseson Letmefinishmydiscussionofthecostof assetswillerodecapitaltothepointofraising riskmitigationbytalkingbrieflyaboutatopicon doubtsaboutthefinancialviabilityofthefirm. whichrelativelylittleisknownonasystematic Whenahard-pressedfirmisverylarge,orwhen basis.Thequestionisthis:Isthereamoralhazard thereareaconsiderablenumberofsmallerfirms problemtothecentralbankcreatingamorestable inthesamesituation,thentheimpactonthe economy?Thatis,iftheFederalReservecontinfinancialmarketsasawholemaybesevere. uestobeassuccessfulasithasbeenoverthelast Therisksoffinancialinstabilitycanbe decadeinoffsettingdisturbancesofvariouskinds reducedbyrequiringthatfirmsholdmorecapital. andmaintainingacontinuingeconomicexpansion Moreover,lawandregulationcanmoretightly uninterruptedbyrecession,willthemorestable controlwhatfinancialinstitutionsdoandthe economycreategrowingimbalancesthatcreate natureoftheriskstheyassume.However,the evergreatervulnerabilities?Forexample,will greatertheregulatoryintervention,thelesseffi- householdsfreeofconcernsabutunemployment cientthesefirmsarelikelytobeinthelongrun. savelessandaccumulatemoredebt?Willbusi- Thereissubstantialevidencetosupportthe nessesunconcernedaboutrecessionmanagetheir propositionthatcompetitivemarketprocesses operationsinsuchawaythattheybecomeever leadtomoreefficiency,awidervarietyoffinan- morevulnerabletoevenminorsetbacks? cialinstruments,andmoreinnovationovertime Thistopicisactuallyanoldoneineconomics, thanisthecaseinheavilycontrolledmarkets. butithasrenewedinterestnowpreciselybecause Moreover,intoday’sworldwherecapitaland thecurrenteconomicexpansionhascontinued informationflowfreelyacrossnationalborders, forsuchalongtime.AsIamsureeveryoneknows, theprospectisthattightregulationmaysimply thecurrentexpansion,whichbeganinMarch pushcertainfinancialactivitiesabroadoutof 1991,isthelongestexpansiononrecord. reachofU.S.regulators. Iaminclinedtoanswermyquestionbysaying Thisisnottheplacetoenterintoananalysis thatIbelievethatthemoralhazardrisktoconoffinancialregulatoryissues.Mypointissimply tinuingeconomicexpansionisminimal.The toemphasizethatwhatmightseemtobeanobvi- reasonisthatinourdynamicallycompetitive ousmethodofreducingrisk—imposingtighter economythemacroeconomicrisktoindividual regulationonfinancialfirms—haspotentialprob- firmsandhouseholdsissmallrelativetothe lemsthatarenottrivialoreasytoovercome. microeconomicrisk.Everyindividualhousehold Onarelatedissuetopic,weshouldalsobe andeveryindividualfirmisoperatinginahighly awareoftheproblemsthatmayarisefromdealing competitiveenvironmentinwhichtherearerisks 6

CopingwithMonetaryPolicyRisks andopportunitiescreatedbygrowthanddecline whethertoself-insureorbuyfireinsurancefora ofindividualfirms,professions,andindustries. factoryandconcludesthatitwouldbebesttobuy Thus,atleastuntilweknowmoreaboutthis insurancedespitethehighcost.Ifthereisnofire, subject,Ithinkthereisacompellingcaseforthe didthefirmmakeamistake?Theansweristhat centralbanktocontinuetosearchforwaysto itdidnotintherelevantexantesense,ifits improveoveralleconomicstabilitywhileencour- analysiswasascompleteandaccurateasexisting agingafulloperationofahighlycompetitive knowledgepermitted.Similarly,thefirmdidnot marketsystem. necessarilymakeamistakeifitdecidedtoselfinsureandthenhadafire.Businessdecisions shouldnotbejudgedbythestandardofthe CONCLUDING OBSERVATIONS Monday-morningquarterback.Norshouldmonetarypolicydecisionsbejudgedbythestandards Throughoutalmostmyentireprofessional oftheMonday-morningquarterback.Iamnot careerIhaveanalyzedmonetarypolicyasa claimingthattheFedalwaysgetsthingsright, problemofdecisionmakinginthefaceofrisk.I butIdoinsistthattheappropriatestandardfor wrotemyfirstprofessionalpaperonthesubject judgingwhatwedoisthesetofconditionsas in1967,apapereventuallypublishedin1970. thegameisbeingplayedandnotbywhatweall Today,I’veemphasizedtheimportanceofFederal knowhappenedafterthefact. Reservesuccessinmaintainingalong-runenvi- Iclosewiththisobservationbecause,asI ronmentoflowandstableinflation,andrespondnotedinmyopeningsentences,wefaceincreased ingtoshort-rundevelopmentswhenpossible, uncertaintyatpresent.Ithinkalotabouthow butonlytotheextentconsistentwiththelong-run besttorespondtotherisksweface,andI’ve objective.Thatistheway,Ibelieve,thattheFed sharedwithyousomeofmythinking. canminimizerisks. Thereisacorollarytothispropositionthatis sometimesnotappreciated.Considerananalogy: Supposeafirmconductsacarefulanalysisof 7