In the long run, a central bank supplying more money cannot create more energy resources, but a credible monetary policy will help smooth economic adjustments that higher energy prices might require.

The sharp rise in oil prices over the past year has no doubt boosted firms' costs and may have weighed on production...However, the share of total business expenses attributable to energy costs has declined appreciably over the past 30 years, which has helped to buffer profits and the economy more generally from the adverse effect of high oil and natural gas prices.

Today’s economy can endure periods of sharply higher energy prices that, in earlier periods, might have caused considerable economic disruption. Indeed, one of the remarkable aspects of last year’s economic performance was just how well the economy performed in spite of a sharp run-up in energy prices. Unfortunately, many of those in the business of discussing the U.S. economy seem to underestimate our economy’s resilience.

In a market-based economy like ours, the pricing mechanism eventually allocates resources to their most productive uses. Hence, higher oil prices will stimulate both increased production and active energy conservation measures, both of which will tend to limit further price increases and perhaps reduce prices over time.

The global economy has weathered the oil price shock quite well. If the long term futures prices are right, we need to be prepared to live with the possibility of a sustained period of higher oil prices, and perhaps more volatility in oil prices, and the world seems to be getting itself more prepared for that prospect.

There are good reasons to believe that the impact of last year’s oil and gas price increases will be transient...It is unlikely that we will experience the pace of oil price appreciation this year that we did last year.

Let’s keep in mind that many of our oil supplies and future oil reserves are found in parts of the world that are not the most politically stable. All of these factors suggest we continue to keep a wary eye on energy as a pivotal economic issue and potential source of risk.

I have outlined several risk factors that could alter the short-term dynamics of the economy - oil prices, the trade balance and the federal budget. The course that these factors take will figure into the precise path the Fed follows.

Although traders expect the price of oil to decline somewhat from recent highs, they also believe that a significant part of the recent increase in prices will be long lived.

So far this year, the rise in the value of imported oil--essentially a tax on U.S. residents--has amounted to about 3/4 percent of GDP.

Inflation also seems to have been boosted by transitory factors such as the surge in energy prices. Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived.

As we learned from previous episodes, rising energy prices could engender risks to both inflation and economic activity. If accommodated by monetary policy, the jump in energy prices could spill over into general inflation and inflationary expectations, as was so evident in the 1970s. At the same time, the hike in the price of imported energy has acted, in effect, as a tax equivalent of roughly one percent of national income. Although there is as yet little evidence of the type of destabilizing inflationary pressures observed in the aftermath of previous oil price spikes or of exceptionally large restraint on consumer spending, Middle East tensions have heightened such risks.