prematurely that the u. s. economy has returned to a more business - as - usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the zlb environment. such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives. this risk consideration means that the decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return to a sustainable 2 percent rate. we should also proceed cautiously and keep the path of rate increases relatively shallow for some time after we begin to raise rates. this approach will allow us time to assess how the economy is performing under less accommodative financial conditions and reduce the odds of overaggressive rate hikes choking off progress toward our policy goals. history shows that premature exit is a risk past experience with the zlb also counsels patience. history has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap. three occasions come readily to mind : the great depression ( which was resolved only with the massive fiscal expansion of world war ii ), japan over the past 20 years, and the recent european experience. indeed, both of the more recent episodes are ongoing today, though japan finally appears to be making important headway toward raising inflation and eventually exiting the zlb. the u. s., japanese and european lessons from monetary history strongly suggest that there are great risks to premature liftoff from the zlb or near - zlb conditions. unless the economy is fundamentally strong and the previous impediments to growth have receded sufficiently, the odds remain high that some unforeseen shock could cause the monetary authority to retreat right back into the zlb. and the costs of being mired in the zlb are simply very large. the zlb prevents using our very best policy tools to address negative shocks. the zlb means that interest rates cannot fall low enough to equate the supply of saving with the demand for investment, which, of course, significantly impedes capital formation, future economic growth, and the health of labor markets. and the zlb often comes hand in hand with undesirably low inflation or even a falling price level, carrying with it the associated costs of debt deflation on the real economy. the risk of too - high inflation what about the other

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