stephen s poloz : three things keeping me awake at night remarks by mr stephen s poloz, governor of the bank of canada, to the canadian club toronto, toronto, ontario, 14 december 2017. * * * introduction the holiday season is traditionally a time to reflect on the events of the past year, and to look ahead at what may be in store for next year. speaking from an economic perspective, i think we can look back at 2017 with considerable satisfaction. and 2018 is looking positive, too. the canadian economy is on pace for about 3 per cent growth in 2017, which would be the strongest among the group of seven economies. most sectors and regions are now participating. over 350, 000 full - time jobs have been created so far this year, and wages have recently shown signs of picking up. this is supporting robust consumer spending. exports and business investment have long been the laggards in our recovery story. encouragingly, though, business investment has grown for the past three quarters in a row. as well, the government ’ s infrastructure program is becoming increasingly evident in the data. in contrast, exports have not been stellar. they started the year strong, but faltered during the summer. nevertheless, the most recent data show a broad - based upturn, supporting our forecast that — after looking through all the noise — exports will continue to be pulled along by rising foreign demand. that brings me to inflation, our policy anchor. inflation spent the year within our 1 to 3 per cent target band, although it has tended to fall a little short of the 2 per cent midpoint. we did a lot of work this year to satisfy ourselves that our fundamental understanding of inflation remains valid. it does, once you take account of short - term effects in the data. i have talked before about the process of bringing the economy back home — at the intersection of full capacity and 2 per cent inflation. our return home was made even longer by the detour we took when oil prices collapsed back in 2014. but, today, we find ourselves quite close to home, and getting closer, with the economy now running close to full output and inflation expected to be around 2 per cent later in 2018. that is all good. but as an economist, and as a central banker, i find myself preoccupied with a number of slower - moving, nagging issues that i expect will be with us for a long time. they keep me awake at night because i wonder if we have done all we

a “ balanced approach ” in seeking to mitigate deviations of inflation from 2 percent and employment from estimates of its maximum sustainable level. i see this language as entirely consistent with modern descriptions of flexible inflation targeting. for the past four years, a major challenge for the federal reserve and many other central banks has been how to address persistently high unemployment when the policy rate is at or near the effective lower bound. this troubling situation has naturally and appropriately given rise to extensive discussion about alternative policy frameworks. i have been very keen, however, to retain what i see as the key ingredient of a flexible inflation - targeting framework : clear communication about goals and how central banks intend to achieve them. with respect to the federal reserve ’ s goals, price stability and maximum employment are not only mandated by the congress, but also easily understandable and widely embraced. well - anchored inflation expectations have proven to be an immense asset in conducting monetary policy. they ’ ve helped keep inflation low and stable while monetary policy has see gill hammond ( 2012 ), state of the art of inflation targeting ( pdf ), centre for central banking studies, ccbs handbook no. 29 ( london : bank of england ). bis central bankers ’ speeches been used to help promote a healthy economy. after the onset of the financial crisis, these stable expectations also helped the united states avoid excessive disinflation or even deflation. of course, many central banks have, in the wake of the crisis, found it challenging to provide appropriate monetary stimulus after their policy interest rate hit the effective lower bound. this is the point where “ many instruments ” enters the discussion. the main tools for the fomc have been forward guidance on the future path of the federal funds rate and largescale asset purchases. the objective of forward guidance is to affect expectations about how long the highly accommodative stance of the policy interest rate will be maintained as conditions improve. by lowering private - sector expectations of the future path of short - term rates, this guidance can reduce longer - term interest rates and also raise asset prices, in turn, stimulating aggregate demand. absent such forward guidance, the public might expect the federal funds rate to follow a path suggested by past fomc behavior in “ normal times ” – for example, the behavior captured by john taylor ’ s famous taylor rule. i am persuaded, however, by the arguments laid out by our panelist michael woodford and others suggesting that the policy rate should, under present