many american families – more than 65 percent – own their homes. the fall in house prices has caused families to cut back on their spending and has prevented them from using their home equity to fund education expenses or start small businesses. the decline in house prices has also impeded families from benefiting from the historically low level of interest rates, as perhaps only half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing. 1 throughout the successive waves in foreclosures that have occurred since 2007, problems in mortgage servicing have emerged and persisted. these problems have included critical weaknesses in mortgage servicers ’ foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third - party law firms and other vendors. collectively, these problems have hampered the ability of the courts and the markets to work through the foreclosure inventory in an efficient manner. significant judicial resources are being expended on resolving the legal problems related to mortgage servicing. indeed, the dockets of federal courts, bankruptcy courts, and state courts include numerous cases involving a wide range of troubling issues, such as claims of missing or forged promissory notes ; claims that mortgage servicers have foreclosed on the houses of active - duty u. s. soldiers who are legally eligible to have foreclosures halted ; sworn affidavits containing false “ facts ” that homeowners were in arrears for amounts not yet due ; claims of falsifications of documents required to transfer ownership of the mortgage ; allegations of false affidavits claiming homeowners owe fees for services never rendered ; and claims of false affidavits overstating how much homeowners are behind on their payments. and this is a sampling of the legal issues related just to mortgage servicing. there is another galaxy of vexing issues surrounding recordation and title issues and claims related to an entity called the mortgage electronic registration system, or mers. significantly, the necessarily slow pace of a judicial response to these legal issues hinders the ability of the housing market to regain function and become a driver of a more - robust economic recovery. see board of governors of the federal reserve system ( 2012 ), “ the u. s. housing market : current conditions and policy considerations ( pdf ), ” white paper ( washington : board of governors of the federal reserve system, january ). bis central bankers ’

that can enable the central bank to update its estimates of r * and u * in order to obtain its best estimate of the destination to which the economy is heading. as i mentioned a moment ago, a challenge for policymakers is that key variables that are essential inputs to monetary policy — such as u *, r *, and expected inflation — cannot be observed directly and must be inferred from observed data. and as is indicated in the summary of economic projections, federal open market committee ( fomc ) participants have, over the past seven years, repeatedly revised down their estimates of both u * and r * as unemployment fell and as real interest rates remained well below previous estimates of neutral without the rise in inflation those earlier estimates would have predicted. i would argue that these revisions to u * and r * indicate that the fomc has been data dependent in this second sense and that these updated assessments of u * and r * have had an important influence on the path for the policy rate actually implemented in recent years. indeed, had the fed not been data dependent in this second sense and remained closed to the possibility that the economy had changed and historical estimates of r * and u * needed to be revised, that stubbornness would have represented a material policy mistake. in addition to u * and r *, an important input into any monetary policy assessment is the state of inflation expectations. one of the robust messages from the dsge ( dynamic stochastic general equilibrium ) literature on optimal monetary policy is that, see john b. taylor ( 1993 ), “ discretion versus policy rules in practice, ” carnegie - rochester conference series on public policy, vol. 39 ( december ), pp. 195 – 214. - 4away from the effective lower bound, optimal monetary policy will not eliminate all inflation volatility — there are always shocks — but will, under rational expectations ( re ), deliver average, and under re, expected, inflation equal to the target. since the late 1990s, inflation expectations appear to have been stable and well anchored in the neighborhood of our 2 percent goal. however, like r * and u *, inflation expectations are not directly observable and so must be inferred from data. but which data? financial data and monetary policy let me now discuss in more detail how i use a form of model averaging to combine financial market data with data from surveys and econometric models to inform my thinking about the evolution of two key inputs to monetary policy : r