11 while in the 1970s and 1980s stock and bond returns tended to be positively correlated, more recently the correlation has tended to be negative. with an inverse correlation, bonds recently have been a good hedge for stocks, and that correlation may have contributed to lower bond term premiums by increasing the demand for bonds as an instrument for hedging portfolio risks. this changed correlation between stock and bond returns in turn may be related to better anchored inflation expectations following a long period of low and stable inflation. see, for example, li and wei ( 2013 ). see chen, engstrom, and grishchenko ( 2016 ). - 9looking ahead, it seems likely the term premium will increase somewhat, although perhaps not to the levels seen historically. on the one hand, a continued gradual runoff of the balance sheet of the federal reserve and reduced bond buying by other central banks will tend to put upward pressure on the term premium. on the other hand, the fomc ’ s demonstrated commitment to maintaining low and stable inflation makes it unlikely that expectations of high inflation will reemerge. thus, on balance, while term premiums may recover somewhat from their recent depressed values, it is unlikely they will return to the high levels of earlier decades. the path of policy in the median outlook in the fomc ’ s summary of economic projections ( sep ), the federal funds rate is projected to reach its longer - run value by 2019 and exceed it in 2020. if the 10 - year term premium were to stay very low, that path would likely imply a yield curve inversion. but for the reasons i just noted, if the term premium remains low by historical standards, there would probably be less adverse signal from any given yield curve spread. it is important to emphasize that the flattening yield curve suggested by the sep median is associated with a policy path calibrated to sustain full employment and inflation around target. so while i will keep a close watch on the yield curve as an important signal on how tight financial conditions are becoming, i consider it as just one among several important indicators. yield curve movements will need to be interpreted within the broader context of financial conditions and the outlook and will be one of many considerations informing my assessment of appropriate policy. - 10 as suggested by the sep median path, i believe that the forward - guidance language in the committee statement that was introduced a few years ago that “ the federal funds rate is likely to remain, for some time, below levels that are expected

outside investors. most of the concerns associated with systemic risks flow from the size of the balance sheets that these gses maintain. one way the congress could constrain the size of these balance sheets is to alter the composition of fannie ’ s and freddie ’ s mortgage financing by limiting the dollar amount of their debt relative to the dollar amount of mortgages securitized and held by other investors. although it is difficult to know how best to set such a rule, this approach would continue to expand the depth and liquidity of mortgage markets through mortgage securitization but would remove most of the potential systemic risks associated with these gses. ideally such a ratio would focus the business operations of fannie and freddie on the enhancement of secondary markets and not on the capture of the implicit subsidy. 3 limiting the debt of fannie and freddie and expanding their role in mortgage securitization would be consistent with the original congressional intent that these institutions provide stability in the market for residential mortgages and provide liquidity for mortgage investors. deep and liquid markets for mortgages are made using mortgage - backed securities that are held by non - gse private investors. fannie ’ s and freddie ’ s purchases of their own or each other ’ s securities with their debt do not appear needed to supply mortgage market liquidity or to enhance capital markets in the united states. likewise, the ability of federal home loan banks to hold mortgages and mortgage - backed securities directly could also be limited, so that mortgage - related interest rate risks are managed by a variety of purely private investors. the expansion of homeownership is a widely supported goal in this country. a sense of ownership and commitment to our communities imparts a degree of stability that is particularly valuable to society. but there are many ways to enhance the attractiveness of homeownership at significantly less potential cost to taxpayers than through the opaque and circuitous gse paradigm currently in place. even with a constraint on debt issuance, fannie and freddie would remain among the largest financial institutions in the united states and would be able to grow with the size of the mortgage markets. these are important organizations that, because of their implicit subsidy, are expanding at a pace beyond that consistent with systematic safety. they have made, and should - with less reliance on subsidies - continue to make, major contributions to the financial system of the united states. * * * in sum, the congress needs to create a gse regulator with authority on a par with that