notwithstanding these hopeful signs, with output growth likely to be moderate in the next few quarters and employers reportedly still reluctant to add to payrolls, considerable time likely will be required before the unemployment rate has returned to a more normal level. persistently high unemployment, by damping household income and confidence, could threaten the strength and sustainability of the recovery. moreover, roughly 40 percent of the unemployed have been out of work for six months or more. long - term unemployment not only imposes exceptional hardships on the jobless and their families, but this testimony was submitted before this morning ’ s employment report for december, which will provide an important update on the state of the labor market. average job gains for 2010 are through november. bis central bankers ’ speeches it also erodes the skills of those workers and may inflict lasting damage on their employment and earnings prospects. recent data show consumer price inflation continuing to trend downward. for the 12 months ending in november, prices for personal consumption expenditures rose 1. 0 percent, and inflation excluding the relatively volatile food and energy components – which tends to be a better gauge of underlying inflation trends – was only 0. 8 percent, down from 1. 7 percent a year earlier and from about 2 – 1 / 2 percent in 2007, the year before the recession began. the downward trend in inflation over the past few years is no surprise, given the low rates of resource utilization that have prevailed over that time. indeed, as a result of the weak job market, wage growth has slowed along with inflation ; over the 12 months ending in november, average hourly earnings have risen only 1. 6 percent. despite the decline in inflation, long - run inflation expectations have remained stable ; for example, the rate of inflation that households expect over the next 5 to 10 years, as measured by the thompson reuters / university of michigan surveys of consumers, has remained in a narrow range over the past few years. with inflation expectations stable, and with levels of resource utilization expected to remain low, inflation is likely to be subdued for some time. monetary policy although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the federal reserve ’ s statutory objectives of maximum employment and stable prices is expected to remain slow. the projections submitted by federal open market committee ( fomc ) participants in november showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from

now. at this rate of improvement, it could take four to five more years for the job market to normalize fully. fomc participants also projected inflation to be at historically low levels for some time. very low rates of inflation raise several concerns : first, very low inflation increases the risk that new adverse shocks could push the economy into deflation, that is, a situation involving ongoing declines in prices. experience shows that deflation induced by economic slack can lead to extended periods of poor economic performance ; indeed, even a significant perceived risk of deflation may lead firms to be more cautious about investment and hiring. second, with short - term nominal interest rates already close to zero, declines in actual and expected inflation increase, respectively, both the real cost of servicing existing debt and the expected real cost of new borrowing. by raising effective debt burdens and by inhibiting new household spending and business investment, higher real borrowing costs create a further drag on growth. finally, it is important to recognize that periods of very low inflation generally involve very slow growth in nominal wages and incomes as well as in prices. ( i have already alluded to the recent deceleration in average hourly earnings. ) thus, in circumstances like those we face now, very low inflation or deflation does not necessarily imply any increase in household purchasing power. rather, because of the associated deterioration in economic performance, very low inflation or deflation arising from economic slack is generally linked with reductions rather than gains in living standards. in a situation in which unemployment is high and expected to remain so and inflation is unusually low, the fomc would normally respond by reducing its target for the federal funds rate. however, the federal reserve ’ s target for the federal funds rate has been close to zero since december 2008, leaving essentially no scope for further reductions. consequently, for the past two years the fomc has been using alternative tools to provide additional monetary accommodation. notably, between december 2008 and march 2010, the fomc purchased about $ 1. 7 trillion in longer - term treasury and agency - backed securities in the open market. the proceeds of these purchases ultimately find their way into the banking system, with the result that depository institutions now hold a high level of reserve balances with the federal reserve. bis central bankers ’ speeches although longer - term securities purchases are a different tool for conducting monetary policy than the more familiar approach of managing the overnight interest rate, the goals and transmission mechanisms of the two approaches are similar.