the medium term. that said, between today and the next fomc meeting, we will receive additional data that bear on the economic outlook. these data include a range of indicators regarding the labor market, inflation, and economic activity. when my colleagues and i meet, we will assess all of the available data and their implications for the economic outlook in making our policy decision. as you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate has been at its effective lower bound. we have tried to be as clear as possible about the considerations that will affect that decision. of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative. and it bears emphasizing that what matters for the economic outlook are the public ’ s expectations concerning the path of the federal funds rate over time : it is those expectations that affect financial conditions and thereby influence spending and investment decisions. in this regard, the committee anticipates that even after employment and inflation are near mandate - consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run. this expectation is consistent with an implicit assessment that the neutral nominal federal funds rate – defined as the value of the federal funds rate that would be neither expansionary nor contractionary if the economy were operating near its potential – is currently low by historical standards and is likely to rise only gradually over time. one indication that the neutral funds rate is unusually low is that u. s. economic growth has been quite modest in recent years despite the very low level of the federal funds rate and the federal reserve ’ s very large holdings of longer - term securities. had the neutral rate been running closer to the levels that are thought to have prevailed prior to the financial crisis, current monetary policy see, for example, adam and billi ( 2007 ), nakata ( 2012 ), and evans and others ( 2015 ). milton friedman famously concluded that “ monetary actions affect economic conditions only after a lag that is both long and variable ” ( 1961, p. 447 ). evidence that monetary policy affects inflation with a lag comes in part from vector autoregressions in which monetary policy shocks have been identified under a variety of identification assumptions. see, for example, christiano, eichenbaum and evans ( 2005 ) and uhlig ( 2005 ). bis

##inquency and charge - off rates at community banks have declined across most major categories of loans, and fewer institutions failed in 2011 than in each of the previous two years. that said, clusters of small bank failures can affect credit availability in a community while bank - dependent borrowers work to establish new relationships with surviving institutions. in addition, while standard measures of community banks ’ profitability, such as return on equity and assets, improved last year, as was also true at larger institutions, most of the gains were due to reductions in loan loss provisions rather than to more sustainable sources of profit such as expanded lending. financial - market indicators reflect the substantial improvements in banks ’ financial conditions since the crisis as well as the sizable challenges remaining. bank credit default swap ( cds ) premiums are now well below their crisis peaks, and bank stock prices have retraced some of their earlier losses and have outperformed the broader market this year, boosted somewhat by the release of the ccar results in march and first - quarter earnings that largely beat analysts ’ expectations. however, cds premiums remain elevated for some of the larger, more globally connected firms, and their stocks continue to trade at market - to - book ratios of less than 1. a number of key systemic risk measures that evaluate the potential performance of firms during times of financial market stress have improved in recent months. these indicators of systemic risk are now well below their levels in the crisis, and, overall, they present a picture of a banking system that has become healthier and more resilient. 1 regulatory and financial challenges banks face a number of significant challenges as they adapt to the post - crisis economic environment and to new domestic and international regulatory requirements. the most systemically important financial firms will face meaningfully higher capital and liquidity requirements and continue to undergo regular supervisory stress tests. they will also be such measures include the conditional value at risk, or covar, which is an estimate of the extent to which a bank ’ s distress would be associated with an increase in the downside risk to the financial system ; the distress insurance premium, or dip, which measures the cost of insuring a firm against systemwide distress ; and the systemic expected shortfall, or ses, which estimates the extent to which the market value equity of a firm would be depleted by a marketwide decline in equity prices. these measures are based on firms ’ stock prices, cds premiums, and stock price volatility, as well as the correlation