indicator loses its value as a gauge of the state of the economy. rather, the indicator becomes a signal of the public's belief in the competence and commitment of the government agency that is targeting the indicator. something along these lines could be happening to inflation, especially given the important role of expected inflation in the behavior of actual inflation. perhaps inflation is just sending a signal of people's trust in the fed's ability to meet its inflation objective. if so, no complaints here. that is a good thing. however, a problem does arise if the fed remains reliant on inflation as our only gauge of the economy's position relative to its potential. there are risks in pushing the economy into a place it does not want to go if we limit ourselves to navigating by what might be a faulty indicator. anchored inflation expectations might mask the inflation signal coming from an overheated economy for a period, but i have no doubt that prices would eventually move up in response to resource constraints. the ultimate price, from the perspective of the dual mandate, would be an unanchoring of inflation expectations. of course, i view this more as a risk than my baseline expectation. as i have said, i am optimistic about potential growth, and i expect that even relatively strong growth can be met without running into economic constraints. however, i also think that we should pay attention to other indicators of tightness and overheating in addition to inflation. there are other signs of potential besides inflation, including, but not limited to, direct measures of labor utilization or indications of shortages and bottlenecks in production. policy considerations how should these thoughts affect monetary policy? i began my remarks by noting that there may be reason to think that the productive capacity of our economy could be accelerating, which would allow a more gradual withdrawal of accommodation without overheating. but i have noted as well that there may be reason to think that resource constraints could be more binding than 3 / 5 bis central bankers'speeches current inflation measures would traditionally indicate, which would call for a more athletic response. moreover, there is today a higher degree of uncertainty about many of these factors - measures of labor slack, the relation between labor slack and inflation, the sensitivity of current inflation measures to actual resource constraints, and the future growth of productivity, to name a few - - than there has been for many years. in such an environment, some have argued that this greater uncertainty leaves policymakers without a clear guide and

the year, and indicators suggest continued strong growth through the summer. economic conditions are as close to meeting the federal reserve's dual mandate for monetary policy - - maximum sustainable employment and price stability as they have been in a long time. inflation is in line with the committee's 2 percent objective, and the unemployment rate is at nearly a 50 - year low. how long can this strong growth be sustained? the answer depends largely on what form growth takes. growth that is supported by increases in the productive capacity of the economy should be durable. however, if growth primarily reflects strong demand that stretches production beyond its sustainable capacity, the economy will run into constraints that will result in slower growth, higher prices, or a potentially destabilizing buildup of financial imbalances. so, which is it? unfortunately, it is very difficult to tell. i will return to that question shortly. that said, i see many reasons to be optimistic about the growth of the potential capacity of the economy over the next few years. in part, my optimism is rooted in the view that many of the factors that have been weighing on potential growth since the financial crisis could be lifting. so, have we reached the turning point? while i believe the issue remains unresolved, the recent evidence is encouraging. 1 / 5 bis central bankers'speeches have we reached a turning point? why am i optimistic about the economy's supply potential? the growth of potential can, at the most basic level, be broken down into two factors : the supply of labor and the productivity of that labor. productivity, in turn, is importantly affected by changes in the stock of capital - - that is, machines and factories - - as well as technological advances and improved production methods. i see reasons to be hopeful about both factors. let us start with labor. for some time, the contribution of the labor force to potential growth has been held down by the predictable drag of baby boomers moving into retirement. however, the decline in labor force participation following the financial crisis exceeded even what might be expected given this long - standing downward trend - - in particular, as the participation of primeage workers ( those between the ages of 25 and 54 ) fell and teenagers exited the workforce in droves. the reasons behind the fall in participation among non - retirement - age workers have been the subject of much debate. however, i see little reason to assume that it will be permanent, and we have already seen some signs of a turn