adjusted for risk, with the nominally high - yielding credit looking particularly attractive. moreover, credit specialists at banks – a function often separated from the loan officers – historically have had difficulty making their case about risk because of their inability to measure and quantify risk. at the same time, with debt service current and market risk premiums cyclically low, and with the same inability to quantify and measure risk, supervisory criticisms of standards are difficult to justify. when the economy begins to slow and the quality of some booked loans deteriorates, loan standards belatedly tighten and supervisors ’ criticism of previous standards is taken more seriously, inducing an even greater tightening of credit. in part, the examiners ’ observations have often provided a reality check by which some banks came to recognize a deterioration at first denied. the last few years have had some of the traditional characteristics i have just described : the substantial easing of terms as the economy improves, the rapid expansion of the loan book, the deterioration of loan quality as the economy slows, and a cumulative tightening of loan standards. but this interval has had some interesting characteristics not observed in earlier expansions. first, in the mid - 1990s, examiners began to focus on banks ’ risk management systems and processes ; at the same time, supervisors ’ observations about softening loan standards came both unusually early in the expansion and were taken more seriously than had often been the case. the turmoil in financial markets in 1998 associated with both east asia and the russian default also focused bankers ’ attention on loan quality during the continued expansion in this country. and there was a further induced tightening of standards last year, months before the aggregate economy weakened, in response to early indications of deteriorating loan quality. all of this might have been the result of idiosyncratic events from which generalizations should not be made. perhaps. but at the same time another, more profound development of critical importance had begun : the creation at the larger, more sophisticated banks of an operational loan process with a more or less formal procedure for recognizing, pricing, and managing risk. in these emerging systems, loans are classified by risk, internal profit centers are charged for equity allocations by risk category, and risk adjustments are explicitly made. in short, the formal measurement and quantification of risk has begun to occur and to be integrated into the loan - making process. this is a sea change – or at least the beginning of one. formal risk management systems are designed to reduce the potential for the unint

amico, kim, and wei ( 2014 ). similarly, a monthly survey conducted by the federal reserve bank of new york shows a noticeable decline over the past two years in household expectations for inflation three years ahead. however, these readings on shorter - term expectations may also be influenced by current gasoline prices. moreover, readings from this survey are only available since 2013, making it difficult to determine the significance of these results. bis central bankers ’ speeches the return to 2 percent inflation could take longer than expected and might require a more accommodative stance of monetary policy than would otherwise be appropriate. 8 despite the declines in some indicators of expected inflation, we also need to consider the opposite risk that we are underestimating the speed at which inflation will return to our 2 percent objective. economic growth here and abroad could turn out to be stronger than expected, and, as the past few weeks have demonstrated, oil prices can rise as well as fall. more generally, economists ’ understanding of inflation is far from perfect, and it would not be all that surprising if inflation was to rise more quickly than expected over the next several years. for these reasons, we must continue to monitor incoming wage and price data carefully. monetary policy implications let me now turn to the implications for monetary policy of this assessment of the baseline outlook and associated risks. the fomc left the target range for the federal funds rate unchanged in january and march, in large part reflecting the changes in baseline conditions that i noted earlier. in particular, developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in december. given the risks to the outlook, i consider it appropriate for the committee to proceed cautiously in adjusting policy. this caution is especially warranted because, with the federal funds rate so low, the fomc ’ s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. if economic conditions were to strengthen considerably more than currently expected, the fomc could readily raise its target range for the federal funds rate to stabilize the economy. by contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the fomc would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero. 9 one must be careful, however, not to overstate the asymmetries affecting monetary policy at the moment. even if the federal funds rate