. in addition, many businesses have been reluctant to hire. this has limited income growth. slow income growth, and along with caution in the face of economic uncertainty, has also restrained spending. although so - called “ soft - patches ” are quite common during the early stages of an economic expansion, this soft patch is a bit different. first, it looks like it will last somewhat longer because the deleveraging process is not yet complete. second, the current weakness is somewhat more concerning because it is occurring at a time that the central bank has already cut interest rates to near zero. in fact, this failure of the recovery to “ catch fire ” has occurred despite aggressive monetary and fiscal policy steps to stimulate the economy. on the monetary policy side, short - term interest rates have been nearly zero for a year and a half ; the fed purchased $ 1. 7 trillion of long - term assets, and the proceeds from maturing securities are being reinvested to keep the balance sheet from shrinking unduly. on the fiscal side, a series of measures has provided support to a broad range of activities. the sluggish nature of the recovery in the face of very substantial stimulus reflects the dynamics at work during the expansion that preceded it. beginning around 2003, underwriting standards for residential mortgages were significantly relaxed, leading to a sharp rise in household borrowing and in home prices. the two trends were inextricably linked. the rise in home prices helped to support additional demand for credit as households used the collateral represented by their homes to borrow large sums of money via home equity lines of credit and second mortgages. chart 1 illustrates how the growing proportion of nonprime first mortgage loans helped fuel the sharp rise in home prices. as home prices rose and the stock market performed strongly, household net worth rose sharply. households responded by borrowing more and saving less. after all, why save when the rise in home prices was adding to your wealth and the housing equity created by the rise in home prices could be easily tapped for funds as needed? the use of home equity as a source for funds to support consumption is evident in the fact that the homeowners ’ equity as a share of home values was essentially flat over this period ( chart 2 ). this indicates that homeowners were borrowing against their accumulated gains. the surge in home prices pushed up the ratio of household net worth to disposable income to nearly 640 percent and the personal saving fell below 2 percent ( chart 3 )

the size of the balance sheet, the more likely it is that the fed would ultimately sell assets back into the market, potentially at prices that could result in losses. although some fear that such losses could compromise the federal reserve ’ s independence, there is no reason why this should be the case, providing we stick closely to our mandate at all times. to date, the fed ’ s actions in responding to the crisis have resulted in abnormally large profits that might reasonably be set against any subsequent losses. but much more importantly, our dual mandate does not state that we should do what is necessary to promote full employment and price stability only at times when we are virtually certain that in doing so we will make a profit. it directs us to promote full employment and price stability at all times. profits and losses in any given year are much less important than getting the u. s. economy back to the highest level of employment consistent with price stability. in making our assessments about next steps, we need to be a bit humble about our capacity to forecast how market participants would respond to our actions. we do not control their behavior nor have much historical experience that we can draw on to easily assess how they are likely to behave. even viewpoints that turned out to be incorrect could persist for a long time and generate adverse consequences. it is not enough for us to be right in theory. we also have to be convincing in practice and in explaining why concerns we think are misplaced are indeed unwarranted. as chairman bernanke indicated at jackson hole, the fomc ’ s decision with respect to providing additional accommodation will be made by weighing the costs against the benefits. this is a dynamic process, which depends on the evolution of the economic outlook and our own ability to learn how to become more effective in improving the cost / benefit trade - offs. and, at its last meeting in september, the fomc said it is “ prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. ” currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. in addition, the longer this situation prevails and the u. s. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives