the unemployment rate still high and capacity utilization low, resource slack is likely putting downward pressure on prices. in addition, market measures of longer - run inflation expectations are at the low end of the range they have been running since last november. bis central bankers ’ speeches putting these factors together, my outlook is for overall inflation over the medium term to fall back towards core and remain below the 2 % level i see as consistent with the price stability leg of the fed ’ s dual mandate. monetary policy and the dual mandate in my view, central banks should focus on medium - term inflation. over shorter periods, measured inflation rates are affected by all sorts of short - term influences, such as fluctuations in food and energy prices that are beyond the control of monetary policy. furthermore, there are significant lags before policy actions influence inflation. so reacting too strongly to short - run influences simply adds noise to the policy - making process. so, by this appropriate standard i think inflation likely will be below our goal of 2 %. and of course, unemployment is much above its natural rate. thus, at the moment, there is little conflict between our two goals. both suggest at least some additional monetary policy accommodation would be helpful. however, given how truly badly we are doing in meeting our employment mandate, i argue that the fed should seriously consider actions that would add very significant amounts of policy accommodation. such further policy accommodation does increase the risk that inflation could rise temporarily above our long - term goal of 2 %. but i do not think that a temporary period of inflation above 2 % is something to regard with horror. i do not see our 2 % goal as a cap on inflation. rather, it is a goal for the average rate of inflation over some period of time. to average 2 %, inflation could be above 2 % in some periods and below 2 % in others. if a 2 % goal was meant to be a cap on inflation, then policy would result in inflation averaging below 2 % over time. i do not think this would be a good implementation of a 2 % goal. 1 with this in mind, i want to discuss the nature of policy - making under a dual mandate when we are far from our goals. what ’ s a central banker to do? ( warning : math ahead ) normally, the deviations of the real economy and inflation from our objectives are small enough that any conflicts are minor. and the well - known taylor rule captures normal policy adjustments well, appropriately weighting output gaps

japan. this timing, and the continued softness of most economic indicators into the early summer, indicates that the headwinds facing consumers and businesses are even stronger than we thought. what are these headwinds? first, even though credit conditions overall have been improving, many households and small businesses still seem to be having trouble getting credit. in addition, the repair process in residential real estate markets is painstakingly slow, and households are still in the process of paring debt and adapting to the huge losses in real estate and financial wealth that they experienced during the recession. of course, these forces are not new – indeed, they are important reasons why in this cycle forecasters never predicted rapid gains in output such as those that followed the deep recessions in the 1970s and 1980s. but they now appear to be even deeper and more persistent than we thought earlier in the year. many households and business may still feel they have inadequate buffers of assets to cushion against unexpected shocks. this leads to cautious behavior that holds back spending. for example, i regularly hear from business contacts that they do not want to risk hiring new workers until they actually see an uptick in demand for their products. they do not appear to be paring back at the moment, but they would rather sit on cash than risk undertaking a potentially unprofitable expansion. in addition to these long - running problems, continued uncertainty about the european debt crisis and the difficulties dealing with the u. s. fiscal situation have held back growth. against this backdrop, the outlook has weakened substantially. last june, most private sector forecasters were expecting real gdp to increase 2 - 3 / 4 % in 2011 and 3. 1 % in 2012. by early august, these forecasts had dropped to 1. 6 % and 2. 7 %, respectively. this 2012 growth rate is barely above most analysts ’ views of potential growth – so it certainly won ’ t make much of a dent in the unemployment rate and other measures of resource slack. on the price front, with energy prices increasing markedly, headline inflation – as measured by the 12 month change in the total personal consumption expenditures price index – rose from about 1 - 1 / 4 % last fall to 2 - 3 / 4 % in july. excluding food and energy, pce inflation has moved up from about 1 % to 1 - 1 / 2 % over the same period. energy prices have dropped sharply over the past month and the prices for many other commodities also have softened. and with