even when these headwinds fully dissipate. the next question i wish to consider is how the fed will likely manage its balance sheet as the taper process is completed and lift - off eventually occurs. unlike previous normalizations of monetary policy, which only involved the level of short - term rates, this prospective tightening cycle also involves considerations with respect to the size and composition of our balance sheet. the committee stated in its june 2011 exit principles that changes in shortterm rates will be the primary means for adjusting monetary policy post - liftoff, not discretionary shifts in the balance sheet. in other words, the balance sheet will be set on automatic pilot. i believe this approach still very much applies. however, the language in the june 2011 exit principles concerning agency mortgage - backed securities ( mbs ) sales no longer applies. as chairman bernanke noted in the press conference following the june 2013 fomc meeting : “ while participants continue to think that in the long run the federal reserve ’ s portfolio should consist predominantly of treasury securities, a strong majority now expects that the committee will not sell agency mortgagebacked securities during the process of normalizing monetary policy. ” the balance sheet would shrink post - lift - off as treasury securities matured and mortgages were prepaid, but outright agency mbs sales are no longer contemplated during the process of monetary policy normalization. also, i think that the language in the june 2011 exit principles with respect to reinvestment needs to be revisited. the exit principles state : “ to begin the process of policy normalization, the committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the soma. ” there are two considerations that suggest to me that ending the reinvestments prior to lift - off may not be the best strategy. first, such a decision might complicate our communications regarding the process of normalization. ending reinvestments as an initial step risks inadvertently bringing forward any tightening of financial conditions as this might foreshadow the impending lift - off date for rates in a manner inconsistent with the committee ’ s intention. second, when conditions permit, it would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility. this goal would argue for lift - off occurring first followed by the end of reinvestment, rather than vice versa. delaying the end of reinvestment puts the emphasis where it needs to be – getting off the zero

if individuals lost their jobs during a deep recession that has been followed by a still tepid recovery – a cyclical problem in labor markets. in the first case, the long - term unemployed may be less well - attached to the labor market in terms of exerting downward pressure on compensation, while in the second case they were particularly unlucky – they are long - term unemployed because of bad timing. i suspect that a much greater proportion of those who are currently long - term unemployed have simply been very unlucky compared to historical averages. this blunts somewhat the distinction between being short - versus long - term unemployed. • if the long - term unemployed are simply unlucky as opposed to not having the appropriate skills, then their impact on wages presumably depends on whether or not there is an excess supply of short - term unemployed. if there are plentiful shortterm unemployed, they may get the best job opportunities first. in part, this reflects employer bias against the long - term unemployed when they compete with those who have been unemployed for shorter periods. but, once the short - term unemployed pool is depleted, then the long - term unemployed will become more relevant to the labor market supply, so their impact on wages and the labor market will likely increase as the labor market tightens. to sum up, this isn ’ t likely to be a case of black ( only total unemployment matters ) or white ( only short - term unemployment matters ) with respect to compensation cost trends. i suspect that the degree of attachment falls on average as one is unemployed for longer periods of time. but, i don ’ t believe that this pattern of attachment is stable. it is affected by the nature of the business cycle and how and why people have become long - term unemployed. before i turn to the implications of the economic outlook for monetary policy, let me leave you with a final thought on inflation and our inflation objective. i think there is some confusion as to whether the fomc ’ s 2 percent inflation objective is a ceiling or not. my own view is that bis central bankers ’ speeches 2 percent is definitely not a ceiling. once we reach 2 percent, i would expect that we would spend as much time slightly above 2 percent as below it, recognizing that we will hardly ever be exactly at 2 percent because of the inherent volatility in prices. if inflation were to drift above 2 percent, all else equal, then we would tend to resist such a rise. but, if