reassessment then feeds back to current spending and saving decisions. a fourth reason why the recovery has been slower than expected may be that we overestimated the capacity for fiscal policy to continue to provide support to growth until a vigorous recovery was achieved. on the fiscal side, the authorities can cut taxes or increase spending to support income and demand during the deleveraging phase that follows the financial crisis. but the ability of such stimulus to continue to support economic activity ultimately encounters budgetary limits. for example, the need to keep the long - term fiscal trajectory on a sustainable path limits the size and duration of federal fiscal stimulus measures. for state and local governments, the statutory requirements for balanced budgets meant that fiscal policies turned restrictive relatively quickly once budget surpluses and rainy day funds were exhausted, and this was only temporarily mitigated by federal transfers to the states as part of the initial fiscal stimulus program. fiscal policy is now a drag rather than a support to growth in the united states, and this will likely continue. bis central bankers ’ speeches monetary policy i would give each of these four explanations some weight for why the recovery has been consistently weaker than expected. but i would add a fifth, monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances. now let me be clear. i believe the evidence overwhelmingly indicates that our monetary policy has been effective in easing financial conditions and supporting economic activity. after reducing the traditional policy tool, the target for the overnight federal funds rate, to close to zero, the fed has aggressively employed two complementary types of non - traditional tools – asset purchases and forward guidance on the policy rate – to provide additional stimulus through their effects on long term rates and various risk premia. effective forward guidance on interest rates causes market participants to lower their expectations and uncertainty about future path of interest rates and to anticipate that easier financial conditions will persist well in to the future. this pushes down the yield curve and leads to easier financial conditions. federal reserve asset purchases also make financial conditions more accommodative. such purchases, by taking duration out of private hands, push down term premia and lead to lower long - term rates than would otherwise be the case for any given economic outlook. agency mbs ( mortgage - backed securities ) purchases absorb prepayment risk and reduce secondary and primary mortgage rates, stimulating demand for housing and increasing purchasing power through refinancing. lower long

in this regard. but, as shown in exhibit 4 the spread between primary mortgage rates and agency mbs yields3 has widened and this has limited the drop in primary mortgage rates. the incomplete pass - through from agency mbs yields into primary mortgage rates is due to several factors – including a concentration of mortgage origination volumes at a few key financial institutions and mortgage rep and warranty requirements that discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere. on a related note, higher guarantee fees charges by fannie mae and freddie mac have increased the fixed cost of originating loans and this has also increased the spread between primary and secondary mortgage rates. factors limiting pass - through warrant ongoing attention from policymakers. another reason why monetary policy has become less effective in stimulating the economy is because the impetus from a given level of monetary accommodation likely has become attenuated – that is, less powerful – over time. historically, attenuation has not been important because monetary policy typically has not stayed exceptionally easy for long periods of time. but this time is different and that difference may be important. so how might the monetary policy impulse on economic activity have become attenuated over time? i would suggest two potential channels. the first channel is that monetary policy works, in part, by changing the timing of purchase decisions. if interest rates decline, the drop in financing costs may induce some households to buy a motor vehicle or purchase a home now rather than in the future. of course, if the car or home is purchased today, this will borrow at least a portion of those sales from the future. there is a limit to how many cars and homes most people will want to buy, given their budget constraints. in this case, as the stimulus from the policy stays in place, the impulse on economic growth will gradually “ wear off ” as there are fewer and fewer households who can be induced to pull their future planned purchases forward to the present. the same argument applies to mortgage refinancing activity. the stimulus comes from the refinancing activity, which increases the amount of income that borrowers have available for other expenditures. the impetus to growth wears off unless mortgage rates keep dropping, stimulating additional rounds of refinancing activity. the second channel is that low interest rates will gradually reduce the interest income of savers and this could eventually affect their consumption. household interest income has fallen considerably over the past few years. this effect is likely to work quite