the previous peak for this series was 2. 5 percent in 1983. the records for long - term unemployed begin in 1948. see janet l. yellen ( 2014 ), “ what the federal reserve is doing to promote a stronger job market, ” speech delivered at the 2014 national interagency community reinvestment conference, chicago, march 31. for the view that most of the recent decline in labor force participation reflects retirement, see shigeru fujita ( 2014 ), “ on the causes of declines in the labor force participation rate, ” ( pdf ) federal reserve bank of philadelphia, special report, research rap, february 6. the view that a larger share of the recent decline reflects cyclical factors is expressed by christopher j. erceg and andrew t. levin ( 2013 ), “ labor force participation and monetary policy in the wake of the great recession, ” paper presented at “ fulfilling the full employment mandate – monetary policy and the labor market, ” 57th economic conference of the federal reserve bank of boston, april 12. see ben s. bernanke ( 2002 ), “ deflation : making sure ‘ it ’ doesn ’ t happen here, ” speech delivered at the national economists club, washington, november 21. if firms ’ and households ’ spending decisions depended only on longer - term interest rates, temporarily higher short - term real interest rates due to low inflation at a time that nominal interest rates are constrained by the zero lower bound would have little economic effects, provided that these higher short - term real interest rates would be expected to be compensated by lower short - term real interest rates later on. however, to the extent that these spending decisions depend in part on shorter - term real interest rates, low inflation can induce meaningful economic costs. bis central bankers ’ speeches inflation well below this expected value increases the real burden of debt for households and firms, which may put a drag on economic activity. i will mention two considerations that will be important in assessing whether inflation is likely to move back to 2 percent as the economy recovers. first, we anticipate that, as labor market slack diminishes, it will exert less of a drag on inflation. however, during the recovery, very high levels of slack have seemingly not generated strong downward pressure on inflation. we must therefore watch carefully to see whether diminishing slack is helping return inflation to our objective. 10 second, our baseline projection rests on the view that inflation expectations will remain well anchored near 2 percent and

9. for the description of the fomc ’ s maturity extension program that appeared in its september 2011 statement, see board of governors of the federal reserve system ( 2011 ), “ federal reserve issues fomc statement, ” press release, september 21. there are a range of estimates on the effectiveness of these policies. a review is provided in ben s. bernanke ( 2012 ), “ monetary policy since the onset of the crisis, ” speech delivered at “ the changing policy landscape, ” a symposium sponsored by the federal reserve bank of kansas city, held in jackson hole, wyo., august 30 - september 1. bis central bankers ’ speeches developments in a manner that reduces or blunts potentially harmful consequences. if the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. monetary policy will thus have an “ automatic stabilizer ” effect that operates through private - sector expectations. it is important to note that tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain. but by responding to changing circumstances, policy can be most effective at reducing uncertainty about the course of inflation and employment. recall how this worked during the couple of decades before the crisis – a period sometimes known as the great moderation. the fomc ’ s main policy tool, the federal funds rate, was well above zero, leaving ample scope to respond to the modest shocks that buffeted the economy during that period. many studies confirmed that the appropriate response of policy to those shocks could be described with a fair degree of accuracy by a simple rule linking the federal funds rate to the shortfall or excess of employment and inflation relative to their desired values. 17 the famous taylor rule provides one such formula. 18 the idea that monetary policy should react in a systematic manner in order to blunt the effects of shocks has remained central in the fomc ’ s policymaking during this recovery. however, the application of this idea has been more challenging. with the federal funds rate pinned near zero, the fomc has been forced to rely on two less familiar policy tools – the first one being forward guidance regarding the future setting of the federal funds rate and the second being large - scale asset purchases. there are no time - tested guidelines for how these tools should be adjusted in response to changes in the outlook. as the episodes recounted earlier illustrate, the fomc has continued to try to adjust its policy tools