solid blue bars in figure 4 present a snapshot of the distribution of nominal wage changes for individual jobs during the depth of the current labor market slump, based on data collected by the bureau of labor statistics. 5 for comparison, the dashed red line presents a hypothetical distribution of wage changes, using a normal distribution that approximates the actual distribution of wage changes greater than zero. the distribution of actual wage changes shows that a relatively high percentage of workers saw no change in their nominal wage, and relatively few experienced modest wage cuts. this pile - up phenomenon at zero suggests that, even when the unemployment rate was around 10 percent, many firms were reluctant to cut nominal wage rates. in the absence of this barrier, nominal gains in wages and unit labor costs would have likely been even more subdued given the severity of the economic downturn, with the result that inflation would probably now be running at a lower rate. anchored inflation expectations are another reason why inflation has remained close to 2 percent in the face of very low resource utilization. as shown in figure 5, survey measures of longer - horizon inflation expectations have remained nearly constant since the mid - 1990s even as actual inflation has fluctuated. as a result, the current slump has not generated the downward spiral of falling expected and actual inflation that a simple accelerationist model of inflation might have predicted. indeed, keeping inflation expectations from declining has been an important success of monetary policy over the past few years. at the same time, the fact that longer - term inflation expectations have not risen above 2 percent has also proved extremely valuable, for it has freed the fomc to take strong actions to support the economic recovery without greatly worrying that higher energy and commodity prices would become ingrained in inflation and inflation expectations, as they did in the 1970s. while my modal outlook calls for only a gradual reduction in labor market slack and a stable pace of inflation near the fomc ’ s longer - run objective of 2 percent, i see substantial risks to this outlook, particularly to the downside. as i mentioned before, even without any political gridlock, fiscal policy is bound to become substantially less accommodative from early 2013 on. however, federal fiscal policy could turn even more restrictive if the congress does not reach agreement on several important tax and budget policy issues before the end of this year ; in fact, the cbo recently warned that the potential hit to gross domestic product ( gdp ) growth could be sufficient to push the economy into recession in 2013. 6 the

jing cynthia wu ( 2012 ), “ the effectiveness of alternative monetary policy tools in a zero lower bound environment, ” journal of money, credit and banking, vol. 44 issue supplement s1 ( february ), 3 – 46. estimates of the effects of largescale asset purchases in the united kingdom are provided in michael joyce, matthew tong, and robert woods ( 2011 ), “ the united kingdom ’ s quantitative easing policy : design, operation and impact ( pdf ), ” bank of england quarterly bulletin, third quarter, 200 – 12. the estimates shown in figure 9 employ the methodology discussed by li and wei, “ term structure modeling with supply factors, ” in note 10. these calculations require an assumption for market participants ’ expectations for the future path of the federal reserve ’ s portfolio at different points in time, both in the past and going forward ; accordingly, the estimates are somewhat sensitive to alternative assumptions for market bis central bankers ’ speeches pressure has had favorable spillover effects on other financial markets, leading to lower longterm borrowing costs for households and firms, higher equity valuations, and other improvements in financial conditions that in turn have supported consumption, investment, and net exports. because the term premium effect depends on both the federal reserve ’ s current and expected future asset holdings, most of this effect – without further actions – will likely wane over the next few years as the effect depends less and less on the current elevated level of the balance sheet and increasingly on the level of holdings during and after the normalization of our portfolio. 11 the rationale for highly accommodative policy i have already noted that, in my view, an extended period of highly accommodative policy is necessary to combat the persistent headwinds to recovery. i will next explain how i ’ ve reached this policy judgment. in evaluating the stance of policy, i find the prescriptions from simple policy rules a logical starting point. a wide range of such rules has been examined in the academic literature, the most famous of which is that proposed by john taylor in his 1993 study. 12 rules of the general sort proposed by taylor ( 1993 ) capture well our statutory mandate to promote maximum employment and price stability by prescribing that the federal funds rate should respond to the deviation of inflation from its longer - run goal and to the output gap, given that the economy should be at or close to full employment when the output gap – the difference between actual gdp and an estimate of potential output –