the federal reserve ’ s purchases of longer - term securities have not affected very short - term interest rates, which remain close to zero, but instead put downward pressure directly on longer - term interest rates. by easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby supporting the economic recovery. a wide range of market indicators supports the view that the federal reserve ’ s securities purchases have been effective at easing financial conditions. for example, since august, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation - indexed securities has risen from low to more normal levels. yields on 5 - to 10 - year treasury securities initially declined markedly as markets priced in prospective fed purchases ; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. all of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our march 2009 announcement of a significant expansion in securities purchases. the fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy. my colleagues and i have said that we will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices. in particular, it bears emphasizing that we have the necessary tools to smoothly and effectively exit from the asset purchase program at the appropriate time. in particular, our ability to pay interest on reserve balances held at the federal reserve banks will allow us to put upward pressure on short - term market interest rates and thus to tighten monetary policy when required, even if bank reserves remain high. moreover, we have developed additional tools that will allow us to drain or immobilize bank reserves as required to facilitate the smooth withdrawal of policy accommodation when conditions warrant. if needed, we could also tighten policy by redeeming or selling securities. fiscal policy fiscal policymakers also face significant challenges. the

provisional. these uncertainties - - especially our inability to identify the upper bound of future demands for medical care - - suggest significant prudence when considering spending initiatives. new programs, whether spending or tax benefits, quickly develop constituencies who tend to fiercely resist any curtailment. as a consequence, our ability to rein in deficit - expanding initiatives, should they later prove to have been excessive or misguided, is quite limited. programs can always be expanded in the future should the resources for them become available, but history has shown that they cannot be easily curtailed if resources later fall short of commitments. i fear that we may have already committed more physical resources to the baby - boom generation in its retirement years than our economy has the capacity to deliver. if existing promises need to be changed, those changes should be made sooner rather than later. we owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. they need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals. addressing the government's own imbalances will require scrutiny of both spending and taxes. however, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. the exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side. in the end, i suspect that, unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programs. our current, largely pay - as - you - go social insurance system worked well given the demographics of the second half of the twentieth century. but as i have argued previously, the system is ill - suited to address the unprecedented shift of population from the workforce to retirement that will start in 2008. much attention has been focused on the forecasted exhaustion of the social security trust fund in 2041. but solving that problem will do little in itself to meet the imperative to boost our national saving. raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working -