economic performance is that virtually any alternative scenario will represent a deterioration. it ’ s like being at the top of a mountain. there is an exhilaration from getting there and the view is great, but all paths are downhill. still, history suggests that expansions do not usually end because aggregate demand spontaneously weakens, but rather as a result of excessively buoyant demand, resulting in an overheated economy and an associated acceleration of inflation. on balance, taking into account the possibility that we are already slightly below nairu and historical precedent, i have slightly greater concern that inflation will increase than that the economy will lapse into persistent below trend growth and face rising unemployment and further disinflation. this modest asymmetry relative to the base forecast suggests that we need to balance our celebration over recent economic performance with a vigilance with respect to future developments to ensure that the progress we have made with respect to inflation over the last fifteen years is not eroded. the inflation - unemployment rate puzzle the recent surprisingly good inflation performance challenges our understanding of inflation dynamics. the equation relied on in most structural macro models to explain inflation, the phillips curve, has recently been over - predicting inflation. some will no doubt argue that there should be no great surprise here because the phillips curve regularity between short - run movements in inflation and unemployment was long ago theoretically discredited and historically repudiated. when i hear such remarks, and i often do, i know i am listening to someone who has not bothered to look at the data and probably has never estimated a phillips curve nor tried his or her hand at forecasting inflation. the truth is that the philips curve, in its modern, expectations - augmented form, was the single most stable and useful econometric tool in a forecaster ’ s arsenal for most of the last fifteen years. during this period at laurence h. meyer & associates, our excellent inflation forecasting record was based on one simple rule : don ’ t try to outguess our phillips curve. we did not always, of course, religiously follow our own rule. i remember vividly one episode when inflation accelerated early in the year and i convinced my partners to adjust our inflation forecast upward by add - factoring our phillips curve. one of our clients called to brag that he was going to make a better inflation forecast for the year than we were. his secret : he was going to ignore our judgment and listen to our model instead. he suggested we do

forward guidance language, noting that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – were likely to warrant exceptionally low levels for the federal funds rate at least through the middle of 2013. by providing a longer time horizon than had previously been expected by the public, the statement tended to put downward pressure on longer - term interest rates. at the january 2012 fomc meeting, the committee amended the forward guidance further, extending the horizon over which it expects economic conditions to warrant exceptionally low levels of the federal funds rate to at least through late 2014. in addition to the adjustments made to the forward guidance, the committee modified its policies regarding the federal reserve ’ s holdings of securities. in september, the committee bernanke, “ semiannual monetary policy report to the congress ” ( see note 4 ). inflation is measured using the price index for personal consumption expenditures. see table 1 available at board of governors, “ federal reserve board and federal open market committee release economic projections ” ( see note 3 ). bis central bankers ’ speeches put in place a maturity extension program that combines purchases of longer - term treasury securities with sales of shorter - term treasury securities. the objective of this program is to lengthen the average maturity of our securities holdings without generating a significant change in the size of our balance sheet. removing longer - term securities from the market should put downward pressure on longer - term interest rates and help make financial market conditions more supportive of economic growth than they otherwise would have been. to help support conditions in mortgage markets, the committee also decided at its september meeting to reinvest principal received from its holdings of agency debt and agency mortgage - backed securities ( mbs ) in agency mbs, rather than continuing to reinvest those proceeds in longer - term treasury securities as had been the practice since august 2010. the committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in the context of price stability. before concluding, i would like to say a few words about the statement of longer - run goals and policy strategy that the fomc issued at the conclusion of its january meeting. the statement reaffirms our commitment to our statutory objectives, given to us by the congress, of price stability and maximum employment. its purpose is to provide additional transparency and increase the effectiveness of monetary policy. the statement does not imply a change in how the committee conducts policy. transparency is