ongoing budgetary pressures, and federal fiscal stimulus is being withdrawn. there is ample room for debate about the appropriate size and role for the government in the longer term, but – in the absence of adequate demand from the private sector – a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring. the prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult tradeoffs currently faced by fiscal policymakers. as i have emphasized on previous occasions, without significant policy changes to address the increasing fiscal burdens that will be associated with the aging of the population and the ongoing rise in health - care costs, the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage. but, while prompt and decisive action to put the federal government ’ s finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery. fortunately, the two goals – achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery – are not incompatible. acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives. the outlook for inflation let me turn now from the outlook for growth to the outlook for inflation. prices of many commodities, notably oil, increased sharply earlier this year. higher gasoline and food prices translated directly into increased inflation for consumers, and in some cases producers of other goods and services were able to pass through their higher costs to their customers as bis central bankers ’ speeches well. in addition, the global supply disruptions associated with the disaster in japan put upward pressure on motor vehicle prices. as a result of these influences, inflation picked up significantly ; over the first half of this year, the price index for personal consumption expenditures rose at an annual rate of about 3 – 1 / 2 percent, compared with an average of less than 1 – 1 / 2 percent over the preceding two years. however, inflation is expected to moderate in the coming quarters as these transitory influences wane. in particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. meanwhile, the step - up in automobile production should

reduce pressure on car prices. importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. longer - term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households ’ longer - term expectations from the thompson reuters / university of michigan survey, the 10 - year inflation projections of professional forecasters, and the five - year - forward measure of inflation compensation derived from yields of inflation - protected treasury securities. in addition to the stability of longer - term inflation expectations, the substantial amount of resource slack that exists in u. s. labor and product markets should continue to have a moderating influence on inflationary pressures. notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation. monetary policy although the fomc expects a moderate recovery to continue and indeed to strengthen over time, the committee has responded to recent developments – as i have already noted – by marking down its outlook for economic growth over coming quarters. the committee also continues to anticipate that inflation will moderate over time, to a rate at or below the 2 percent or a bit less that most fomc participants consider to be consistent with the committee ’ s dual mandate to promote maximum employment and price stability. given this outlook, the committee decided at its august meeting to provide more specific forward guidance about its expectations for the future path of the federal funds rate. in particular, the statement following the meeting indicated that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid - 2013. that is, in what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low level for at least two more years. in addition to refining our forward guidance, the federal reserve has a range of tools that could be used to provide additional monetary stimulus. we discussed the relative merits and costs of such tools at our august meeting. my fomc colleagues and i will continue to consider those and other pertinent issues,