As I mentioned earlier, there have

As I mentioned earlier, there have been at least six major areas where there has been significant learning, which has influenced the evolution of policy. Let me turn to them.
The importance of managing expectations
Managing expectations is always central to monetary policy. However, at the zero bound this is even more critical than usual.
There are two aspects of this. First, keeping inflation expectations anchored at levels consistent with the central bank’s medium-term inflation objective—2 percent on the personal consumption expenditures deflator in our case—is vitally important. Once deflation expectations become well entrenched, it is very difficult to change them. And, because inflationary expectations are an important driver of actual inflation outcomes, deflationary expectations can be self-fulfilling in driving actual deflation outcomes. Also, if inflation expectations were allowed to fall, this would raise the level of expected real interest rates, making monetary policy less accommodative.
Conversely, a central bank does not want medium-term inflation expectations to climb above levels consistent with its inflation objective. If inflation expectations were to become unanchored to the upside, that could damage credibility and result in higher risk premia for financial assets and tighter financial market conditions. Thus, a policy that maintains medium-term inflation expectations in line with our inflation objective is most consistent with our mandate.8
Second, at the zero bound, the ability to provide credible forward guidance—both in terms of the future path of the policy rate and the future path of the balance sheet— becomes the predominant vehicle by which a central bank’s actions affect financial market conditions. If this expectations channel did not work, then it would be very difficult to provide additional monetary accommodation because short-term rates cannot be reduced materially.
In the U.S., in recent months we have communicated that short-term rates are likely to stay very low for a long time; our balance sheet is likely to increase further in size and then stay large for a long time; and that we will not be overly hasty in tightening monetary policy once the recovery gets well established. By doing this, we are influencing expectations about the likely future path of short-term rates and the interest rate term premium. By utilizing the expectations channel in this way, we have been able to make policy more accommodative and generate easier financial market conditions.
Good communication is essential
To manage expectations well, both credibility and good communication is essential. This means explaining clearly the policy framework, the relationship between the use of tools and the central bank’s mandated objectives at the zero bound, and how the use of these tools will evolve with changes in the outlook.
In this regard, a central bank’s credibility is crucial. Only if a central bank does what it promises to do will expectations be solidly anchored. Of course, this does not mean mechanically following a set policy trajectory regardless of how the outlook changes, but it does mean that the stance of policy over time must evolve in ways consistent with the criteria established in the guidance.
It is important to communicate how policy will respond to changing economic circumstances over time. This is particularly important when the outlook changes, because expectations about how policy will respond can be an important self-stabilizing element of monetary policy. In this regard, a framework that ties the use of policy tools explicitly to economic outcomes has many advantages.
Good public communication is also important. For example, press conferences offer an opportunity to ground the policy actions and stance in a framework that is explicit about how the central bank plans to achieve its mandated objectives.