www. federalreserve. gov / econresdata / feds / 2008 / and is based on refet gurkaynak, brian sack, and jonathan wright ( 2010 ), “ the tips yield curve and inflation compensation, ” american economic journal : macroeconomics 2 ( 1 ), 70 – 92. bis central bankers ’ speeches for me, at present, the uncertainties rest more on the outlook of the labor market. if the labor market continues to improve and inflation expectations remain well - anchored, then i would expect – in the absence of some dark cloud gathering over the growth outlook – to support a decision to begin normalizing monetary policy later this year. when the normalization process starts and we raise the target range for the federal funds rate, what should we anticipate? i anticipate a smooth lift - off in terms of the ability of the fomc to push the federal funds rate up into a higher range. less clear is what the financial market reaction will be. will it be more like the turbulent taper tantrum of 2013 in response to chairman bernanke ’ s remarks that we might at some point begin to taper our asset purchases, or the benign response when the fomc actually tapered in 2014? let me consider these two issues in turn. i am very confident that the federal reserve has the tools in place to ensure that the fomc can successfully raise the federal funds rate into a new, higher target range when the time comes to do so. this reflects several factors. most importantly, we have demonstrated that the interest rate paid on banks ’ reserve balances ( ioer ) – which is our primary tool to raise the federal funds rate target – and daily overnight reverse repo ( on rrp ) operations – which is a supplementary tool to help put a floor under money market rates – have been effective in keeping the federal funds rate well within the fomc ’ s desired target range. moreover, in the unlikely event that the rates we initially selected for the ioer and on rrp were insufficient to move the federal funds rate into the desired range, we could alter the level of these rates and / or the spread between these rates so as to move the federal funds rate into the desired range. finally, we also have other tools, such as the term deposit facility and term reverse repo that could be used if needed to help achieve the targeted range for the federal funds rate. while i don ’

circumstance should not adversely affect our ability to push the federal funds rate into a higher target range. we have the appropriate tools to push up short - term interest rates. however, lift - off may not go so smoothly in terms of the impact on financial asset prices. after all, lift - off will represent a regime shift after more than six years at the zero lower bound. more important for financial market asset prices than the precise timing of lift - off is the expected trajectory of short - term rates over the next few years following lift - off. most likely, this will be a shallow, upward path. because of the persistent headwinds associated with the recent financial crisis, the level of real short - term interest rates consistent with a neutral monetary policy seems considerably lower now than in the past. and, if potential gdp growth is much lower – due to slower labor force growth and productivity growth – the long - run equilibrium real short - term rate is also likely to remain lower than normal in the future even after those headwinds fully dissipate. but there must be considerable uncertainty about the path for short - term interest rates. after all, the economic outlook is uncertain. moreover, the appropriate stance of monetary policy will be influenced by how financial market conditions respond to the federal reserve ’ s actions. all else equal, if financial conditions tighten sharply, then we are likely to proceed more slowly. in contrast, if financial conditions were not to tighten at all or only very little, then bis central bankers ’ speeches – assuming the economic outlook hadn ’ t changed significantly – we would likely have to move more quickly. in the end, we will adjust the policy stance to support the financial market conditions that we deem are most consistent with our employment and inflation objectives. as always, what i have to say today reflects my own views and not necessarily those of the fomc or the federal reserve system. 1 the economic outlook turning first to the economic outlook, the real gdp growth rate appears to have slowed sharply during the first half of 2015. based on the revision we received last week, firstquarter real gdp fell by 0. 7 percent at an annualized rate. although most projections anticipate a pickup in growth to around 2 percent or slightly higher in the current quarter, there is little question that economic growth has slowed significantly from last year ’ s secondhalf pace. what ’ s going on? why has growth slowed and what does this portend for the remainder of the year