many state governments are taking actions to make long - term structural reductions in spending. federal fiscal policy is widely acknowledged to be on an unsustainable path for the long term and must be addressed ( chart 33 ). for example, the expiration of the bush - era income tax cuts and legislated cuts in medicaid, if they went into effect, would stabilize the debt to gdp ratio at around 80 percent ; if, however, their effective date continued to be deferred, the debt to gdp ratio could move toward 100 percent fairly rapidly. the proposed budget delivered by the u. s. administration on february 14 begins the process of adjusting the fiscal trajectory. fifth, the challenge for monetary policy has been to provide stimulus and support in the wake of the combined financial crisis and recession. as noted at the outset, economic history suggests that such a combined financial and economic shock can drive the economy down very deeply. strong, forceful policy – both monetary and fiscal – is necessary to stem the contractionary forces in the economy. the federal reserve responded by lowering interest rates to near zero, to provide substantial liquidity support to the economy and to conduct the first large - scale asset purchase program, more than doubling the federal reserve ’ s balance sheet. history also suggests that the recovery from a combined financial and economic shock can be fragile. the federal reserve responded to the slowing of the recovery in midyear 2010 by beginning a second round of large - scale asset purchase programs. those purchases are resulting in a rough tripling of the federal reserve ’ s balance sheet ( chart 42 ). u. s. economic conditions are currently quite far away from levels consistent with the federal reserve ’ s dual mandate of the pursuit of the highest level of employment consistent with price stability. i ’ ve discussed the high unemployment and unused productive capacity in the united states. let ’ s turn to inflation. while trend inflation is quite low at the moment, we see it likely to be near the low point of this cycle. the rate of inflation for nonenergy services is beginning to increase, led by faster increases in apartment rents ( chart 36 ). a firming of demand along with a decline of the exchange value of the dollar should begin to put upward pressure on nonfood, nonenergy goods prices. however, underlying inflation fundamentals suggest relatively low trend inflation for some time : a substantial amount of slack in the economy, reflected in the sharp deceleration of core services prices – and the united states

philip lowe : the changing structure of the australian economy and monetary policy address by mr philip lowe, deputy governor of the reserve bank of australia, to the australian industry group 12th annual economic forum, sydney, 7 march 2012. * * * i would like to begin by thanking the aigroup for the invitation to once again speak at the annual economic forum. when i spoke at last year ’ s forum, the title of my remarks was “ changing relative prices and the structure of the australian economy ”. today, i would like to revisit this topic of structural change, first talking about some of the adjustments that are taking place within the australian economy and then, second, discussing some of the implications of these adjustments for monetary policy. structural change in the australian economy structural change is, of course, something that is not new. it is one of the ongoing features of all economies. over the past half a century, one of the most obvious changes has been the growth of the services sector, which has accounted for a steadily increasing share of both output and employment. in 1960, for example, a little over 50 per cent of the workforce in australia was employed in the services sector. today, the figure is over 75 per cent ( graph 1 ). conversely, the shares of manufacturing and agriculture have steadily declined. graph 1 1 these trends have been driven by a range of factors, but three stand out. the first is that the demand for services has increased faster than the demand for goods as average incomes have risen. the second is that most services are produced domestically rather than imported. and the third is that the rate of labour productivity growth in the production of withers g, t endres, and l perry ( 1985 ), “ australian historical statistics : labour statistics ”, australian national university source papers in economic history no 7. bis central bankers ’ speeches services is lower than that in the production of goods. not surprisingly, these same general influences have also been at work in all other advanced economies. beyond these long - term influences, the structure of the australian economy is currently also being affected by a number of other factors that are more unusual in nature. i would like to take a few minutes to talk about two of these. the mining boom and the exchange rate the first is the mining boom and the high exchange rate. as is well known, australia is currently experiencing, on the one hand, a once - in - a - century terms of trade and investment boom and, on the other,