exchange rates show strong reactions to developments abroad, and, in recent months, foreign developments have at times been the dominant factor driving u. s. bis central bankers ’ speeches financial conditions. weak foreign aggregate demand, as well as accompanying accommodative monetary policies in the euro area and japan, and diverging expectations have been key among the factors causing a significant 10 percent appreciation of the dollar since last june. to the extent that exchange rate appreciation exerts a tightening force on financial conditions in the united states, it delays the return of u. s. interest rates to more normal levels. while trade is a smaller share of the u. s. economy than in many other economies, exchange rate changes of the magnitude seen recently can have large effects on aggregate demand. 3 we have already seen a large negative contribution of net exports to u. s. gdp growth in the past two quarters. in addition, because some models estimate that exchange rates ’ effect on net exports can last up to three years, it is possible that the drag from net exports will persist for some time. even before the latest estimate of the first - quarter contribution of net exports to gdp was published, many private - sector forecasters ( as well as the congressional budget office ) expected net exports to subtract from gdp growth this year and next. recently, the euro area has seen some encouraging data on retail sales, industrial production, and inflation, auguring well for some sustained improvement in aggregate demand within the euro area. nonetheless, there remain risks and uncertainties surrounding foreign growth that could prolong or intensify foreign headwinds going forward. most immediately, negotiations between greece and its creditors are challenging, and the risk of further deterioration cannot be ruled out. while the euro area has broadened its policy toolkit and most member states have made significant strides in building resilience in the past couple of years, the recovery is still fragile in several member states, and vulnerabilities to financial stresses remain. in addition, chinese gdp growth looks to have slowed noticeably in the first quarter, and there is some risk of further slowing. this development reflects in part a significant correction in the property market and the shadow banking sector following years of rapid growth. but structural factors are also at work. after growing at a nearly double - digit rate for more than three decades, china has reached a transitional phase in which potential output growth is expected to slow in part because of challenging demographics and the transition from heavy reliance on

lael brainard : the us economic outlook and implications for monetary policy speech by ms lael brainard, member of the board of governors of the federal reserve system, at the center for strategic and international studies, washington dc, 2 june 2015. * * * this spring marks the end of the federal reserve ’ s calendar - based forward guidance and the return to full data dependency in the setting of the federal funds rate. so it is notable that just as policymaking is becoming more anchored in meeting - by - meeting assessments of the data, the data are presenting a mixed picture that lends itself to materially different readings. 1 no doubt, bad weather, port disruptions, and statistical issues are responsible for some of the softness in first - quarter indicators of aggregate spending. indeed, it may be that the dismal estimate by the bureau of economic analysis of the annualized change in first - quarter gross domestic product ( gdp ), negative 0. 7 percent, is principally an extension of the pattern, seen for several years, of significantly slower measured gdp growth in the first quarter followed by considerably stronger readings during the remainder of the year. in that case, it would be appropriate to minimize the importance of the first - quarter estimate in judging the likely path of the economy over the remainder of the year. but there may be reasons not to ignore the recent readings entirely. first, the limited data in hand pertaining to the second quarter do not suggest a significant bounceback in aggregate spending, which we would expect if all of the weakness in the first quarter were due to transitory factors. private - sector forecasts of second - quarter growth are centered around 2 – 1 / 2 percent, while the federal reserve bank of atlanta ’ s gdpnow forecast, which was quite accurate in its prediction of the first estimate of first - quarter gdp growth, is projecting second - quarter gdp growth of only 0. 8 percent. 2 second, it would not be the first time this recovery has proceeded in fits and starts. the underlying momentum of the recovery has proven relatively susceptible to successive headwinds, which have kept overall economic growth well below the average pace of previous upturns. my own reading is that earlier, more optimistic growth projections may have placed too much weight on the boost to spending from lower energy prices and too little weight on the negative implications for aggregate demand of the significant increase in the foreign exchange value of the dollar and large decline in the price of crude oil. turning first to the expected