continue to strengthen in the coming months. we would welcome this. however, even if the economy added 300, 000 jobs per month from now on, we would likely still have considerable labor market slack at the end of 2012. despite these clearly encouraging signs, there are still some downside risks to the growth outlook that bear watching. let me list them for you : as i mentioned earlier, high oil and commodity prices have cut into household purchasing power, a difficult situation for many families that could constrain overall spending more than i anticipate. the renewed decline in home prices could dampen consumer spending and housing activity more than i expect. finally, aggressive near - term government spending cuts or tax increases could slow economic growth at least in the short - to medium - term. i would emphasize, however, that a credible plan for medium - term fiscal consolidation is sorely required and would have many economic benefits. although these issues bear watching, they remain risks rather than likely outcomes. in regard to inflation, after a period in which inflation was below the levels the fed judges to be most consistent with its statutory objectives, on a year - over - year basis, headline cpi ( consumer price index ) has increased more than 3 percent, which is somewhat above this desired level. the rise in commodity prices over the past year probably will push up headline bis central bankers ’ speeches inflation further in the next few months. it is noteworthy, however, that even with the sharp rise in oil and food prices over the past year ( and notwithstanding the more recent drops ), there has been limited pass - through into the prices of other goods and services. in fact, most measures of underlying inflation trends – such as core inflation ( which excludes volatile food and energy prices ) – remain below levels consistent with our mandate for price stability. going forward, futures markets do not signal that investors expect rapid ongoing increases in commodity prices from current levels. provided these prices stabilize ( or indeed retreat further ), i would expect headline inflation to move back to a more mandate - consistent rate. while this process plays out, however, it is critical that we ensure that inflation expectations do not become unmoored. it is much harder to keep inflation in check if people begin to raise their expectations of inflation. at this point, measures of inflation expectations overall remain stable. economists at the new york fed have examined inflation expectations using a unique survey that we sponsor. as reported in a recent post on our new liberty street economics blog, they

and building a business, and by building better transportation, power and telecommunications infrastructure. and they are about broadening access to and improving the quality of public education. allowing competitive pressures to operate is undoubtedly the best way to foster the investment, innovation and risk - taking that is central to raising an economy's long - run sustainable growth rate. but markets can't solve all problems, and they don't always function perfectly. this means that the policy imperative isn't simply to reduce regulation ; it is to improve the design of the regulations that are important to dealing with market failures. finally, future growth outcomes will depend importantly on the success of governments in fostering the development of the domestic financial system. this requires not only stronger financial intermediaries and better supervisors, but deeper and more liquid capital markets that provide greater access to capital for firms and greater freedom for households to borrow and to invest their savings. certain features of today's emerging economies, notably the size of current account surpluses and the high levels of reserves, tend to be seen principally as sources of comfort against future crises. but you can also look at these phenomena as measures of the incompleteness of the institutional changes achieved in the monetary and financial arena, and as a sign of the persistent ambivalence in the emerging world about financial integration. the current account surpluses are, of course, the mirror image of the high rates of savings relative to investment. there are a range of factors that affect the flows of goods and services across international borders, but the sustained outflow of funds from some emerging economies witnessed in recent years may have as much to do with the limited intermediation capacity of the local financial systems as with the scarcity of profitable domestic investment opportunities. and in this sense you can read a large current account surplus as a sign of financial sector under development rather than of financial strength and maturity. the pattern of intervention in exchange markets and the scale of reserve accumulation provides a similar perspective on the challenges ahead. policymakers in many emerging markets still reveal a substantial degree of reluctance to allow the exchange rate to adjust to market forces. part of this is aversion to appreciation, and part of it aversion to variability in the exchange rate. in this sense, the high level of reserves today could be read less as an indication of fundamental strength than as an indication of the need for more progress toward completing the transition to a modern monetary policy regime. even though reported inflation in most emerging economies has been moderate