these transitory factors dissipate. finally, i take some signal from the fact that the spread between the core services inflation rate and core goods inflation rate is wider than normal. core services likely better reflect the underlying trend, while core goods prices are more sensitive to external factors such as the drop in commodity prices and import prices. so what does this imply for monetary policy and the likely timing and pace of interest rate normalization? as you may be able to infer from my earlier remarks, i think it is quite possible that the conditions the committee has established to begin to normalize monetary policy could soon be satisfied. in particular, i will be evaluating the incoming information to see if it confirms my expectation that growth will be sufficient to further tighten the u. s. labor market. after lift - off commences, i expect that the pace of tightening will be quite gradual. in part, that is because monetary policy is not as stimulative as the low level of the federal funds rate might suggest. there is strong evidence that the short - term neutral real interest rate – let ’ s call that r * – is currently quite low, certainly below the level that historically has applied on a longer - term basis. 1 a wide range of models suggest that the short - run real r * is currently around 0 percent, far below its historical longer - run level that is estimated to be about 2 percent. 2 this benchmark “ neutral ” rate needs to be compared to the actual real federal funds rate. if we measure the latter by subtracting the core pce inflation rate from the nominal federal funds rate, the actual real federal funds rate is slightly below – 1 percent. thus, current short - term real interest rates are not far below their neutral counterparts, suggesting that the current monetary policy stance is not exceptionally stimulative. the notion that r * is currently very low is also evident by more casual empiricism. simply ask the following question : if r * were close to its long - run historical value of 2 percent, would we expect to see the economy growing at only slightly above its potential growth rate? the fact that the economy is growing quite slowly despite a low federal funds rate and a very large federal reserve balance sheet suggests that monetary policy currently is not providing that much stimulus to the economy. in other words, the gap between r * and the federal funds rate is relatively narrow. why is r * depressed and how is it likely to evolve over time?

, such as job creation and improvement of incomes. for this reason, the inflation targeting framework retains the fundamental monetary policy paradigm of striking the optimum balance between inflation and output. apparently, when a central bank faces a dilemma of choosing between inflation and growth, inflation remains the priority. an example of this can be seen in the problems we faced last year, when world oil prices almost doubled. this disturbing trend became highly problematic for monetary policy because not only did it boost inflationary pressure, but also inhibit economic growth. many suggested that the central bank did not need to respond to this temporary surge in inflation. however, our view at the time was that despite the temporary nature of the disturbance, the inflationary impact emanating from the higher oil prices through increased price for other goods and services, such as transport and wages, would drive up core inflation. in this situation, the tight policy was necessary to prevent sustained escalation in public inflation expectations. the third characteristic of the itf is that monetary policy is implemented on a transparent basis with measured accountability. in my view, with elements like these, inflation targeting is more than a mere framework for monetary policy. inflation targeting promotes the good governance of a central bank. by announcing the inflation target to the public, the central bank commits itself to its achievement. uncertainty over future inflation will ease because public inflation expectations have a point of reference, and thus economic costs arising from uncertainty will also be reduced. communication to the public on the future monetary policy direction is also vital so that the public can anticipate the central bank monetary policy and to avoid ‘ surprises ’ that could trigger volatility in the money market. to strengthen policy effectiveness in this present age of disclosure, the central bank must also carry out a process of educating the public on what the monetary policy objectives are, the strategy for achieving these objectives, and what lies behind the decisions taken. one example involves the communication of the monetary policy response to soaring oil prices and risks from global imbalances at a time of weak conditions in the real sector and high unemployment. communications between the central bank and market players are also necessary, especially when financial markets are experiencing turbulence. in financial markets fraught with asymmetric information, the wealth of information held by the central bank is frequently of great benefit in mitigating this issue and thus preventing panic and herding by investors. in this regard, the credibility of the central bank is crucial. concluding remarks under the environment of financial integration, the task of