current level of inflation or of output that figure into our policy decisions directly – rather, it is the expected level some quarters out, after the lags in the effects of policy actions have worked themselves out. in that regard, the projection of only a gradual strengthening of demand and subdued inflation imply that that these gaps – of inflation and output below our objectives – are likely to persist for quite some time. in these circumstances, at its last meeting, the fomc was of the view that economic conditions were likely to warrant unusually low levels of interest rates for an extended period. this assessment and my outlook do not mean that my colleagues and i will not also be looking carefully at any evidence that portends a potential pick up of inflation. uncertainty about the course of the economy is a lot lower than it was just a few short months ago. but we cannot lose sight that this uncertainty remains quite high ; we are still in largely uncharted waters when it comes to fully understanding how our economy will recover from the severe recession and financial disruptions of the past several years and how that recovery and inflation will be affected by the extraordinary actions we took. we need to base policy on our best estimate of the evolution of inflation and output relative to our objectives, but we also need to be ready to adjust our plans if events don't turn out as predicted in either direction. we have the tools to exit our unusual policies when the time comes. and we must act well before demand pressures or inflation expectations threaten price stability. in circumstances like these, we will be carefully watching the forecasts and economic evaluations of people like yourselves – indeed, perhaps as carefully as you will be watching the evolution of our thinking. in that regard, i'm glad to have had the opportunity to share some thoughts on these issues with you today.

of our securities portfolio without increasing its size. the fomc has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability. the committee also stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of their likely efficacy and costs. in other words, as with all of its policy decisions, the committee continues to assess its program of asset purchases within a cost - benefit framework. in the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear : monetary policy is providing important support to the recovery while keeping inflation close to the fomc ’ s 2 percent objective. notably, keeping longer - term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. by raising employment and household wealth – for example, through higher home prices – these developments have in turn supported consumer sentiment and spending. highly accommodative monetary policy also has several potential costs and risks, which the committee is monitoring closely. for example, if further expansion of the federal reserve ’ s balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the fomc ’ s price - stability objective at risk. however, the committee remains confident that it has the tools necessary to tighten monetary policy when the time comes to do so. as i noted, inflation is currently subdued, and inflation expectations appear well anchored ; neither the fomc nor private forecasters are projecting the development of significant inflation pressures. another potential cost that the committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. for example, portfolio managers dissatisfied with low returns may “ reach for yield ” by taking on more credit risk, duration risk, or leverage. on the other hand, some risk - taking – such as when an entrepreneur takes out a loan to start a new business or an existing firm expands capacity – is a necessary element of a healthy economic recovery. moreover, although accommodative monetary policies may increase certain types of risk - taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longerterm funding, and