s. residents leads to adjustment. even considering heavy purchases by central banks of u. s. treasury and agency issues, we see only limited indications that the large u. s. current account deficit is meeting financing resistance. yet, net claims against residents of the united states cannot continue to increase forever in international portfolios at their recent pace. net debt service cost, though currently still modest, would eventually become burdensome. at some point, diversification considerations will slow and possibly limit the desire of investors to add dollar claims to their portfolios. resistance to financing, however, is likely to emerge well before debt servicing becomes an issue, or before the economic return on assets invested in the united states or in dollars more generally starts to erode. even if returns hold steady, a continued buildup of dollar assets increases concentration risk. net cross - border claims against u. s. residents now amount to about one - fourth of annual u. s. gdp. a continued financing even of today ’ s current account deficits as a percentage of gdp doubtless will, at some future point, increase shares of dollar claims in investor portfolios to levels that imply an unacceptable amount of concentration risk. this situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the u. s. current account deficit and rendering it increasingly less tenable. if a net importing country finds financing for its net deficit too expensive, that country will, of necessity, import less. * * * it seems persuasive that, given the size of the u. s. current account deficit, a diminished appetite for adding to dollar balances must occur at some point. but when, through what channels, and from what level of the dollar? regrettably, no answer to those questions is convincing. this is a reason that forecasting the exchange rate for the dollar and other major currencies is problematic. our analytic difficulty is that the forces driving the current account deficit are more, perhaps far more, visible than those determining the ex ante financing of the deficit. the former are captured by reasonably reliable estimates of income - and price - driven trade imbalances and net interest income ; the latter by the considerably more amorphous assessments of international portfolio choices. the inability to anticipate changes in supply and demand for a currency is at the root of the statistically robust finding that forecasting

steps to more clearly communicate its outlook and longer - run objectives. since the fall of 2007, the federal reserve has been publishing the “ summary of economic projections ” ( sep ) four times a year in conjunction with the fomc minutes. the sep provides summary statistics and an accompanying narrative regarding the projections of fomc participants – that is, the board members and the reserve bank presidents – for the growth rate of real gross domestic product ( gdp ), the unemployment rate, core inflation, and headline inflation over the next several calendar years. since early 2009, the sep has also included information about fomc participants ’ longer - run projections for the rates of economic growth, unemployment, and inflation to which the economy is expected to converge over time, in the absence of further shocks and under appropriate monetary policy. because appropriate monetary policy, by definition, is aimed at achieving the federal reserve ’ s objectives in the longer run, fomc participants ’ longer - run projections for economic growth, unemployment, and inflation may be interpreted, respectively, as estimates of the economy ’ s longer - run potential growth rate, the longer - run sustainable rate of unemployment, and the mandate - consistent rate of inflation. the most recent release of the sep was in june, and i will refer to those projections here, noting that new projections will be released with the minutes of the next fomc meeting, in early november. the longer - run inflation projections in the sep indicate that fomc participants generally judge the mandate - consistent inflation rate to be about 2 percent or a bit below. in contrast, as i noted earlier, recent readings on underlying inflation have been approximately 1 percent. thus, in effect, inflation is running at rates that are too low relative to the levels that the committee judges to be most consistent with the federal reserve ’ s dual mandate in the longer run. in particular, at current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight ( the short - term real interest rate is too high, given the state of the economy ), and the risk of deflation is higher than desirable. given that monetary policy works with a lag, the more relevant question is whether this situation is forecast to continue. in light of the recent decline in inflation, the degree of slack in the economy, and the relative stability of inflation expectations, it is reasonable to forecast that underlying inflation – setting aside the inevitable short - run volatility – will be less than