have declined in recent years – held down by slower productivity growth and demographic factors that are causing the workforce to grow more slowly. this is the main reason why i have cut my estimate of the longer - run federal funds rate in recent years. and i ’ m not alone. in the fomc ’ s september summary of economic projections, the median projection for the long - run federal funds rate was 3 ½ percent, 50 basis points below the level of two years earlier. my discussion about short - run r * and long - run r * has implications for how i think about monetary policy. the likelihood that we face a situation where the short - run r * is depressed, the economy is growing only slightly at an above - trend pace and inflation is too low relative to our objectives, suggests that we need to think carefully whether the time is right to begin to normalize monetary policy. additionally, the likelihood that long - run r * is lower than it has been historically, suggests that after lift - off the upward trajectory of the short - term rates is likely to be quite shallow. another factor that weighs on the timing and pace of normalization is risk management. what are the relative costs of going too early versus too late? as i see it, there are risks on both sides, and i think this explains why reasonable people can differ as to the appropriate path for the policy rate. consider the two main risks of normalizing too quickly. first, we could just be too optimistic about our growth and inflation forecasts. second, we could be right about our forecasts, but the rise in short - term rates could provoke an outsized tightening of financial conditions that might cause the economy ’ s forward momentum to slow more than we anticipate. in either case, the economy would not be growing fast enough to put increased pressure on resources. in such circumstances, underlying inflation might not rise and inflation expectations could become unanchored to the downside. consequently, not only might the fomc be forced to reverse course and ease monetary policy, but the efficacy of additional stimulus measures could be attenuated by the fall in inflation expectations. avoiding a japan - like experience in which inflation expectations have become unanchored to the downside should be an important consideration in the conduct of monetary policy. on the other side, there are several risks of delaying the start of lift - off and normalizing more slowly. the first one is that the unemployment rate could fall to an unsustain

40 basis points from a year ago. however, i put even less weight on this development than on the survey evidence for two reasons. first, the decline in these forward inflation compensation measures has been highly correlated with the fall in oil prices – a pattern that is hard to explain. second, a careful analysis of the factors behind the decline in inflation compensation suggests that changes in liquidity risk premia and what investors are willing to pay for inflation protection account for most of the decline, rather than the decline reflecting a change in inflation expectations. still, we need to continue to monitor inflation compensation closely, while recognizing that sorting out the allocation of the decline in inflation compensation across the three factors – liquidity risk premia, the price for inflation protection and inflation expectations – is admittedly difficult. and also, the conclusions reached in such models are sensitive to these models ’ assumptions and structures. regardless of how much signal one takes from these recent data, a decline in inflation expectations below levels consistent with our 2 percent inflation objective would be problematic because inflation expectations are an important influence on actual inflation. businesses, for example, make decisions about the size of annual wage increases based, in part, on their expectations of future inflation. and, households base their spending decisions, in part, on how fast they expect their incomes to rise, and inflation expectations play a role in that process. lower inflation expectations also raise the level of real interest rates, all else equal, which can undercut the power of monetary policy to support economic activity. this is particularly relevant at the zero lower bound for interest rates. if the economy continues to grow at an above - trend pace, then i think worries about inflation remaining too low should begin to recede. after all, headline inflation on a year - over - year basis is likely to rise early next year as much of the past year ’ s decline in energy prices falls out of the year - over - year inflation rate calculations. also, some of the factors holding down headline and core inflation are likely to be transitory. energy prices will not go down forever and, as the dollar stabilizes, import prices will likely stop falling. in addition, despite these bis central bankers ’ speeches factors that are weighing on core inflation, the recent trend of core inflation has been very steady, with the 12 - month change in the core pce deflator in a tight range of 1. 2 to 1. 7 percent since the beginning of 2013. this suggests that core inflation should rise once