inflation has been held down by the declines in crude oil prices over the past year, and the stronger dollar is exerting downward pressure on u. s. inflation as well. year - over - year changes in headline personal consumption expenditures ( pce ) prices have been running only a little above zero, and core inflation is at about 1 - 1 / 4 percent. but for reasons discussed at length in janet yellen ’ s recent speech at the university of massachusetts, amherst, as long as inflation expectations remain well anchored, inflation is likely to move back toward 2 percent as the transitory effects of oil prices and the dollar fade, and as the economic expansion continues. what about monetary policy? in support of our dual objectives of maximum employment and price stability, the federal reserve has maintained a highly accommodative monetary policy stance since the financial crisis ; this policy has fostered the marked improvement in labor market conditions that we have seen and has helped check undesirable disinflationary pressures. in its statement at the end of the september meeting, the fomc noted that it anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to 2 percent over the medium term. in the sep, the summary of economic projections prepared by fomc participants in advance of the september meeting, most participants, myself included, anticipated that achieving these conditions would entail an bis central bankers ’ speeches initial increase in the federal funds rate later this year. of course, that assessment was premised on the assumption of continued solid economic growth and further improvement in the labor market, which are key factors supporting our expectation that inflation will rise to our 2 percent objective. a great deal of market attention has focused on the exact timing of our first increase in the funds rate, but what matters for overall financial conditions is expectations for the entire trajectory of short - term interest rates. in that regard, most members of the fomc anticipate that economic conditions are likely to warrant raising short - term interest rates at a gradual pace over the next few years. however, that is an expectation, not a commitment. both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy. for example, it is conceivable that inflation may rise more slowly or rapidly than we currently anti

these more traditional elements of risk management continue to play key roles. areas for improvement in risk modeling although i believe that some of the criticisms of recent advances in risk management are misguided, events of the past several years have highlighted several areas for improvement. on balance, formal risk modeling has improved risk management, but making further improvements is important. for example, market participants have been made keenly aware of the implicit assumptions about market liquidity embedded in models and of the ways in which market, credit, and liquidity risk can interact. one common criticism of risk - management models is that they ignore the risk that liquidity may dry up or become depleted in certain markets, making trading difficult, if not impossible. it is certainly true that the first generation of risk - management models did not deal with liquidity in the most sophisticated way, but they did partially address this important issue. for example, the standard measures of value at risk assume that the firm cannot alter its positions for a time as market prices change. in other words, these models assume complete illiquidity throughout a stated holding period. another widely used, but more sophisticated, approach that takes account of liquidity risk is stress testing. unlike value - at - risk models, which usually assume normal market conditions, stress tests help to quantify how much a firm could lose in unusual or stressful scenarios. a typical stress scenario incorporates extremely large shocks of the kind that are almost always associated with reduced market liquidity. in sophisticated cases, these scenarios can be dynamic in that they account for likely changes in the firms ’ positions. a fixed - income dealer, for example, might consider a scenario in which the firm first accumulates a long position in certain bonds because of customer order flow, and then those bonds experience a large price decline at the same time that liquidity decreases or dries up. a survey done last year by the group of ten central banks found that nearly all internationally active banks use stress tests to help them understand their risk profiles and to communicate with senior management. even relatively simple methods can be used, to some extent, to quantify the liquidity risk that firms face. for example, the liquidity of each asset position in an investment portfolio can be measured as the number of days it would take to liquidate that position, assuming that the firm limited its trading on any day to 20 percent of average daily volume. aggregate portfolio liquidity would be the weighted average of this statistic across the entire portfolio. with