inflation is actually back at 2 percent? the difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. if the fomc were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. in addition, continuing to hold short - term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk - taking that might undermine financial stability. for these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data. conclusion to conclude, let me emphasize that, following the dual mandate established by the congress, the federal reserve is committed to the achievement of maximum employment and price stability. to this end, we have maintained a highly accommodative monetary policy since the financial crisis ; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. however, we have not yet fully attained our objectives under the dual mandate : some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. but i expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long - run inflation expectations remain well anchored. most fomc participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. but if the economy surprises us, our judgments about appropriate monetary policy will change. references ascari, guido, and argia m. sbordone ( 2014 ). “ the macroeconomics of trend inflation, ” journal of economic literature, vol. 52 ( september ), pp. 679 – 739. ball, laurence ( 2013 ). “ the case for four percent inflation, ” central bank of the republic of turkey, central bank review, vol. 13 ( 2 ), pp. 17

about a possible decline in stock prices triggers the aforementioned fallacy of composition. against such a backdrop, the bank has decided to begin exploring specifically the provision of subordinated loans to the banks that are subject to international capital standards. this measure aims at ensuring the smooth functioning of financial intermediation and the stability of japan ’ s financial system, by enabling japan ’ s banks to maintain sufficient capital bases even in severe financial and economic environments. by the measure taken by the bank, financial institutions are provided with three channels to raise capital ; ( 1 ) capital raising by financial institutions through markets, ( 2 ) capital raising based on the act on special measures for strengthening financial functions, ( 3 ) borrowing subordinated loans from the bank. subordinated loans by the bank will work effectively in conjunction with the other two measures to raise capital. in addition, providing such a safetynet measure would enhance the robustness of japan ’ s financial system and the functioning of financial intermediation even under the stressed conditions. for a central bank, this kind of direct provision of quasi - capital funds is an extremely extraordinary measure. however, considering the future stress scenario of the financial system, the bank has judged that, from the standpoint of a central bank, it is necessary to do its best to maintain the smooth functioning of financial intermediation and ensure the stability of the financial system even by conducting this extraordinary measure. the bank expects financial institutions to grasp the thinking behind the measure and to strive to maintain the smooth functioning of financial intermediation with further efforts of boosting capital bases. needless to say, risk management is extremely important for financial institutions, which cannot be emphasized too much. however, under the current circumstances, as i mentioned above, the surfacing of the risk stemming from the fallacy of composition should be avoided. to that end, it is important for the management of financial institutions, while conducting sound business operations, to boost capital bases with envisioning the consequences for japan's economy. the bank also expects financial institutions to pay due concern for the smooth communication with their client companies to convey business policies and lending stances. it is the basic premise that the stability of the financial system should be ensured in order to return to a sustainable economic growth path under price stability. from the standpoint of a central bank, the bank is determined to make its best effort to secure the stability of the financial system. we would appreciate your continued support and cooperation. thank you.