be sure, our understanding of the forces that drive inflation is imperfect, and we recognize that this year ’ s low inflation could reflect something more persistent than is reflected in our baseline projections. the fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on. let me mention a few possibilities of more fundamental influences. 1 first, given that estimates of the natural rate of unemployment are so uncertain, it is possible that there is more slack in u. s. labor markets than is commonly recognized, which may be true for some other advanced economies as well. if so, some further tightening in the labor market might be needed to lift inflation back to 2 percent. second, some measures of longer - term inflation expectations have edged lower over the past few years in several major economies, and it remains an open question whether these measures might be reflecting a true decline in expectations that is broad enough to be affecting actual inflation outcomes. third, our framework for understanding inflation dynamics could be misspecified in some way. for example, global developments — perhaps technological in nature, such as the tremendous growth of online shopping — could be helping to hold down inflation in a persistent way in many countries. or there could be sector - specific developments — such as the subdued rise in medical prices in the united states in recent years — that are not typically included in aggregate inflation equations but which have contributed to lower inflation. such global and sectoral developments could continue to be important restraining influences on inflation. of course, there are also risks that could unexpectedly boost inflation more rapidly than expected, such as resource utilization having a stronger influence when the economy is running closer to full capacity. in this economic environment, with ongoing improvements in labor market conditions and softness in inflation that is expected to be temporary, the fomc has continued its policy of gradual policy normalization. as the committee announced after our september meeting, we are initiating our balance sheet normalization program this month. that program, which was described in the june addendum to the policy normalization principles and plans, will gradually scale back our reinvestments of proceeds from maturing treasury securities and principal payments from agency securities. as a result, our balance sheet will decline gradually and predictably. 2 by limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against outsized moves in interest rates and other potential market strains

institutions should ensure that they have complete and timely information about risk and demonstrate the ability and will to act on it. they should also be aware that the next crisis could come precisely in the area where they are most exposed or have weaknesses. that is, a certain degree of humility is wise, because all firms have a limited understanding of what might happen next. all senior managers would benefit from taking a fresh look at the incentive structures within their firm. for example, are all parties being compensated on a risk - adjusted basis that takes into account longer - term performance? is management able to determine how risk taking at the business - unit level affects firm - wide risks? do business units have the right incentives to consider their units'risk taking in the context of the entire institution? these and other questions deserve attention, given some of the risk - management challenges seen lately. but i am confident that the industry can find appropriate solutions, and supervisors will assist them in those efforts.