is the federal funds rate, p is the percent change in the headline pce price index from four quarters earlier, and y is the output gap. the output gap in turn is approximated using okun's law ; specifically, yt = 2. 3 ( 5. 6 - ut ), where 2. 3 is the estimated value of the okun's law coefficient and 5. 6 is the assumed value of the non - accelerating inflation rate of unemployment, or nairu. see john b. taylor ( 1999 ), " introduction ", in john b. taylor, ed., monetary policy rules ( chicago : university of chicago press ), pp. 1 – 14. see david reifschneider and john c. willams ( 2000 ), " three lessons for monetary policy in a low - inflation era, " journal of money, credit, and banking, vol. 32 ( november ), pp. 936 – 66. bis central bankers ’ speeches economic recovery were to proceed much faster than expected or if inflation were to come in higher. in contrast, if the recovery faltered or inflation drifted down, the committee could provide additional stimulus using its unconventional tools, but doing so involves costs and risks. given the unprecedented nature of the current economic situation and the limits placed on conventional policy by the zero lower bound on interest rates, these issues of risk management take on special importance. more broadly, these considerations help illustrate why it would be imprudent to adhere mechanistically to the prescriptions of any single policy rule. such rules can serve as useful benchmarks for facilitating monetary policy deliberations and communications, but a dose of good judgment will always be essential as well. uncertainty and policy conditionality the policy prescriptions i ’ ve discussed thus far are conditioned on an illustrative baseline forecast for unemployment and inflation. because any economic forecast is inherently uncertain, the fomc ’ s forward policy guidance states explicitly that the committee “ currently anticipates ” that economic conditions are likely to warrant such a stance of policy. the guidance does not state that the committee will keep the funds rate exceptionally low until at least late 2014. i ’ d consider it completely appropriate to modify the specification of the forward guidance in response to significant changes in the economic outlook. potential modifications of the forward guidance can be illustrated by showing how the taylor ( 1999 ) rule responds to two different shifts in the outlook. figure 9 shows one scenario in which the recovery turns out to be

spread between the u. s. and the german sovereign yields is slightly narrower than it was at the end of third quarter 2014, but it remains historically large and attractive for investors. 2 hold that thought. now, if you read page c3 of today ’ s wall street journal, specifically the article titled “ watchdog warns of risks in markets ” about the risks of a repeat of the bond market turmoil of october and concerns about market stability as seen through the eyes of the office of the fomc ’ s “ policy normalization principles and plans ” released on sept. 17 is available at www. federalreserve. gov / newsevents / press / monetary / 20140917c. htm. over the past 15 years, the u. s. long rate has averaged about 40 basis points higher than the german long rate. since january 2013, the yield spread has widened by 110 basis points to about 1. 50 percent. over the same period, german 10 - year inflation expectations have dropped from 1. 9 percent to 1. 0 percent, or 90 basis points. u. s. 10 - year cpi inflation expectations have dropped from 2. 3 percent to 2. 2 percent – just 10 basis points. so it is worth noting that the drop in german inflation expectations relative to u. s. expectations can account for most of the widening of the yield spread between these two sovereigns. for investors who measure performance in terms of nominal returns or returns against nominal indexes, however, the currently widened spread is relatively attractive. bis central bankers ’ speeches financial research ( a bureaucracy of some 225 people and growing, created by the doddfrank law ), you would have noted the following sentences : “ a reduction in securities that are available to lend against in financial markets – such as treasury bonds and asset - backed securities – also is fueling... volatility. the securitization markets have shrunk since the financial crisis and the federal reserve has further reduced the amount of available securities by snapping up trillions of dollars in bonds in recent years. ” let me repeat that last clause : the federal reserve has further reduced the amount of available securities by snapping up trillions of dollars in bonds in recent years. to be precise, $ 1. 7 trillion of treasuries and asset - backed securities were purchased under qe3, on top of the $ 2 trillion purchased under the previous rounds of quantitative easing. to be sure, we have