Although the trend in Medicare expenditures has flattened out in recent years as healthcare inflation has moderated and utilization growth has slowed, the CBO nevertheless projects that such expenditures will rise from 3.2 percent of GDP in 2016 to about 4.0 percent of GDP in 2026. Consequently, significant pressures on the federal budget are still very much in train. It will be important that fiscal policy be managed so it retains the capacity to be used for macroeconomic stabilization. Structural challenges While we have made steady progress over the past year toward our twin goals of maximum sustainable employment and price stability, significant challenges remain for the economy that lay largely beyond the scope of monetary policy. The three I would highlight are the sharp slowdown in labor productivity growth, the increase in income inequality and the low rate of income mobility. I draw attention to the slowdown in productivity growth for two reasons. First, productivity ultimately drives living standards and how people assess their economic well-being. Second, beyond ensuring a stable macroeconomic and financial environment, monetary policy can do little to improve productivity growth. 4/6  BIS central bankers' speeches  Annual productivity growth has averaged only 0.7 percent during the past five years, near the lowest 5-year pace since the early 1980s. There are a number of competing explanations for the slowdown. These include weak capital investment, a flattening out of educational attainment by new labor market entrants, less new business formation, understatement of quality improvements and, hence, output, and fewer ground-breaking innovations.

As we get greater clarity over the coming year, I will update my assessment of the economic outlook and, with that, my views about the appropriate stance of monetary policy. Monetary and fiscal policy in a low-rate environment I also would like to highlight the limitations of monetary policy. One important factor contributing to such limits is that the real short-term interest rate consistent over the longer run with a neutral monetary policy stance appears to be very low, and is expected to remain so for some time. This has been helping to keep real inflation-adjusted interest rates lower than they have been historically. In part, this reflects anemic productivity growth as well as the slowing of labor force growth due to the aging of the population. An implication of this environment is that there will likely be less scope than there has been historically for the Federal Reserve to cut interest rates when needed in the face of an economic downturn. All else equal, this means a greater risk for short-term interest rates to be pinned at their effective lower bound and for inflation expectations to become unanchored to the downside. Although forward guidance and large scale asset purchase programs have expanded the ways in which the Federal Reserve can provide additional accommodation, these unconventional monetary policy tools also have their own limits. These limits suggest that fiscal policy may need to play a greater role in stabilizing the economy than has been the case in past decades.