rate is only slightly lower. however, i am concerned about the downside risks. inflation outlook under 2 percent what about inflation? large increases in energy prices pushed headline inflation – as measured by the 12 - month change in the total personal consumption expenditures price index – up from about 1. 25 percent last fall to almost 3 percent this summer. one - time events that were well beyond the control of monetary policy – such as the arab spring – drove prices higher and took a bite out of households ’ budgets. but they did not result in a permanent ratcheting up of inflation. prices for energy and many other commodities have softened of late, and the earlier increases did not pass much into core inflation, which excludes the volatile food and energy components. notably, recent numbers show core inflation is now lower than last summer. keep in mind, this is a better predictor of future overall inflation than total inflation itself. and with the unemployment rate still high and capacity utilization low, resource slack will continue to exert downward pressure on prices. in addition, measures of longer - run inflation expectations are at the low end of the range they have been running since last november. putting these factors together, i would argue that the outlook for inflation is likely to remain low for the foreseeable future. the november fomc forecasts for core inflation in 2012 were concentrated near 1. 8 percent, and the forecasts for total inflation in 2013 and 2014 were in the range of 1. 5 percent to 2. 0 percent. my own assessment is that inflation will be at the lower end of these ranges. fed performance given the high unemployment rate and low job growth, i think it is clear that the fed has fallen short in achieving its goal of maximum employment. as for the price stability component of our dual mandate, the majority of fomc participants – including me – judge that our objective is for overall inflation to average 2 percent over the medium term. with my own view that inflation is likely to run below this rate over the next few years, i believe we will miss on our inflation objective as well. what is the right course for policy? the traditional course of action when inflation is below target and real output is expected to be below potential is to run an accommodative monetary policy. i support such accommodation today. and i believe the degree of accommodation should be substantial. i believe that the disappointingly slow growth and continued high unemployment that we confront today reflects the fact that we are in

what economists call a “ liquidity trap. ” let me explain. in normal times, real interest rates – that is, nominal interest rates adjusted for expected inflation – rise and fall to bring desired savings into line with investment and to keep productive resources near full employment. this market dynamic is thwarted in the case of a liquidity trap. that is, when desired savings increase a great deal, nominal interest rates may fall to zero and then can go no lower. real bis central bankers ’ speeches interest rates become “ trapped ” and may not be able to become negative enough to equilibrate savings and investment. that is where we seem to be now – short - term, risk - free nominal interest rates are close to zero and actual real rates are modestly negative, but they are still not low enough to return economic activity to its potential. a liquidity trap presents a clear and present danger of a prolonged period of economic weakness – today that means a risk of repeating the experience of the u. s. in the 1930s or that of japan over the past 20 years. but we need not resign ourselves to such an outcome. because of the dire implications of liquidity traps, economists have studied them over the years in rigorous analytical models. importantly, variants of these models have successfully explained past business cycle developments in the u. s. these studies conclude that economic performance can be vastly improved by employing monetary policies that commit to keeping short - term rates low for a prolonged period. a balanced policy approach as i weigh the evidence, i believe we are in a liquidity trap and favor the prescription of continued accommodation. but i recognize that i could be wrong. central bankers have incomplete information, and sometimes are confronted with very different views of the forces driving the economy. this is especially true in the difficult circumstances we currently face. instead of a liquidity trap, some have posited that we are in an economic malaise that reflects “ structural factors ” ( such as a job skills mismatch ) and that the economy today is actually functioning close to a new, more dismal productive capacity. i have discussed this very pessimistic “ structural impediments scenario ” in other forums. 1 if this scenario is true, then further monetary accommodation will only lead to rising inflation without much improvement in unemployment. those subscribing to this view warn of repeating the mistakes of the 1970s. at that time, the fed did not understand that the changing structure of the economy had caused the