. the fed was able to respond to the deterioration of conditions in the fall of 2008 by sharply increasing the size of its term auction facility program and removing the limits on the size of many of the foreign exchange swap programs. these programs, along with the increased use of the fed ’ s standing liquidity facilities and the start - up of the commercial paper funding facility in late october, led to a sharp growth in the federal reserve ’ s balance sheet beginning in late september. the third phase is marked by the launch of the fed ’ s purchase programs, starting with the agency debt program that began in december 2008 and extends through to the present. during this phase, the fed ’ s overall balance sheet has actually declined slightly. the demand for the fed ’ s special liquidity programs has diminished more quickly than the purchase programs have been ramped up. although this shrinkage was not anticipated or targeted, it is a welcome indication that there has been improvement in the functioning of the short - term funding markets. 1 as market function has improved and credit spreads have narrowed, many of the fed ’ s liquidity facilities have become less attractive and there has been a corresponding decline in usage. for example, outstanding foreign exchange swaps have declined from a peak of $ 586 billion last december to about $ 110 billion currently, and outstanding commercial paper held by the cpff has fallen from a peak of about $ 350 billion last fall to around $ 110 billion currently. despite the recent dip in the size of the balance sheet, the size of the purchase programs underway makes it likely that balance - sheet growth will resume as assets acquired in conjunction with these programs overwhelm any further declines in the funds advanced via the shorter - term liquidity facilities. the size of the federal reserve ’ s balance sheet seems likely to grow to roughly $ 2. 5 trillion, somewhat above the peak reached last december. however, it was anticipated that the attractiveness of the fed ’ s facilities would decline as market conditions improved. in fact, it was a key element of the exit strategy that was deliberately built into the design of most of the facilities. it is no coincidence that the growth of the federal reserve ’ s balance sheet since last fall has been accompanied by a sharp rise in the amount of excess reserves. when the federal reserve extends a loan or purchases a security, this automatically adds reserves to the banking system unless the fed undertakes an offsetting reserve draining operation. although some of the excess reserves that have been generated by the balance

interest rates constrain the ability of monetary policy to offset negative shocks to the economy. this effect has been seen most clearly in the behavior of inflation. over the past decade, inflation in the united states has been below our 2 percent longer - run target most of the time, and measures of inflation expectations have drifted down. these declines in trend inflation and inflation expectations can create a pernicious feedback loop of reduced policy space and even lower inflation expectations. again, this experience is not unique to the united states, indicating that it stems from factors common across countries, rather than issues unique to our economy. indeed, most inflation - targeting advanced economies have struggled to achieve their inflation goals on a sustained basis over the past decade. this brings us to last week ’ s announcement and the issuance of a new consensus statement of our policy framework. it is a culmination of extensive outreach and conversations with communities and stakeholders across the country, careful and thorough analysis, and active 1 / 2 bis central bankers'speeches discussion and debate among committee participants. 4, 5 we took important lessons from the experience of the past decade, reassessed the evidence, and looked at the challenges ahead of us. all this effort was worth it : this new statement means we are better positioned to achieve our goals. in fact, the process worked so well, we ’ ve committed to repeating it roughly every five years! the new framework statement directly and effectively addresses the problems caused by a low neutral rate and persistently low inflation. first, it stipulates that, following periods when inflation has been running persistently below 2 percent, a temporary overshooting of the longer - run inflation target will likely be desirable to keep inflation and inflation expectations centered on 2 percent. second, it makes clear that we seek inflation that averages 2 percent over time, consistent with our longer - run target. finally, the statement makes unequivocally clear that we seek maximum employment and will aim to eliminate shortfalls from this broad and inclusive goal. these changes are mutually reinforcing and will meaningfully improve our ability to achieve both of our dual mandate goals in an environment of a very low neutral rate. i ’ ll conclude with this : the new framework represents both an important evolution in our thinking about how to achieve our goals and another step toward greater transparency. it reaffirms key aspects of the original statement that have stood the test of time and refines others in line with experience and evolving practices. it also makes