that gdp and employment are on a steady path toward potential. the final steps would take rates to between 3. 5 and 4. 5 percent as economic growth approaches long - run potential. if we are to achieve a steady rate environment, it is also important that the federal reserve ’ s balance sheet be restored to its pre - crisis size and composition. obviously this requires the careful process of selling the federal reserve ’ s $ 1. 3 trillion portfolio of mortgage - backed securities. various approaches to this can be identified but most agree that it should be done with the process or time horizon clearly set out for all to see. i also would suggest it begin at least when the fed funds rate rises above 1 percent or sooner if conditions provide the opportunity. monetary policy and unemployment finally, i want to spend a few minutes suggesting why it is important to move the federal funds rate off of zero even though the unemployment rate remains above 9 percent. it has been argued, with some supporting evidence, that the federal reserve ’ s commitment to very low interest rates in 2003 and 2004 was too low for too long and contributed to the housing and credit boom and subsequent busts. between august 2002 and january 2005 – two - and - a - half years – the federal funds rate was below the rate of core inflation. such low interest rates encourage borrowing and a buildup of debt, sometimes in ways we do not fully appreciate until much later with the benefit of hindsight. in addition, low interest rates – especially with a commitment to keep them low – led banks and investors to feel “ safe ” in the search for yield, which involves investing in lessliquid and more risky assets. in addition, financial institutions often search for yield by increasing the amount of assets supported by each dollar of net worth – leverage. for example, leverage at securities broker dealers rose dramatically. after averaging just 13 - 1 / 4 between 1970 and 2000, leverage climbed to a high of 40 in the third quarter of 2007 – the start of the financial crisis. it was after a period of too - low interest rates, too much credit, too much leverage that the collapse of the housing bubble, the rapid deleveraging and the ensuing financial crisis occurred. and it was after these events that unemployment rose to more than 10 percent and the united states lost 8. 4 million jobs. in 2010, we have only gained back 573, 000 jobs. in another period, the mid - 1970s and early 1980s, low interest rates also triggered an

them, returning the discount window to more normal operations. as part of this first step, the fomc would also eliminate its commitment to maintaining “ exceptionally low levels of the federal funds rate for an extended period. ” second, with these steps taken, with the improvements in market conditions and liquidity, and with an improving outlook, the fomc would be prepared to raise the funds rate target to 1 percent by the end of summer. this would continue the current highly accommodative policy, but would move nominal rates away from zero and real rates to a less negative level. we would then pause, maintaining the funds rate at 1 percent while we assess the economic outlook and emerging financial conditions. this would provide time to judge whether and to what degree further policy adjustments are warranted to assure long - run financial equilibrium and stability. based on the current outlook consensus, it seems reasonable that the economy would be well - positioned to accept this modest increase in the funds rate. as a reminder, the funds rate target remained between 1 and 2 percent even after the intensification of the crisis in the fall of 2008. it was reduced to its current target range of zero to ¼ percent in mid - december 2008. relative to the depths of the crisis, conditions today are much improved from where we were 18 months ago. financial stress is clearly reduced and a sustainable economic recovery appears under way. it is also important to emphasize that the 1 percent fed funds rate target, coupled with the federal reserve ’ s large balance sheet, provides an extraordinarily accommodative monetary policy environment and one that would ensure the economy ’ s continued progress in the recovery. setting out such a plan would be a more orderly move toward unwinding the earlier extraordinary actions and would serve to reduce the likelihood of a buildup of new financial imbalances. let me turn now to the subsequent steps that might be taken to more fully restore policy to a long - run equilibrium policy level. given the relatively modest expected trajectory of growth and inflation, these added moves will involve some quarters to complete. but the direction should be firmly established now with the timing dependent on the performance of a combination of financial, inflation and growth variables. experience tells me that a clear commitment now to such action would mitigate the likely need to later tighten beyond our estimate of neutral that so often comes with delay. more specifically, these next steps involve raising the funds rate from 1 to above 3 percent reasonably quickly as we gain confidence