commodity price increases depend critically on the continued stability of inflation expectations. in that regard, year - ahead inflation expectations of households have increased this year in response to the jump in headline inflation. of greater concern, some measures of longer - term inflation expectations appear to have edged up. if longer - term inflation expectations were to become unmoored – whether because of a protracted period of elevated headline inflation or because the public misinterpreted the recent substantial policy easing as suggesting that monetary policy makers had a greater tolerance for inflation than previously thought – then i believe that we would be facing a more serious situation. monetary policy the federal open market committee will be monitoring inflation developments closely for any sign that our longer - run objective of promoting price stability is threatened. at the same time, we also need to continue to carefully assess whether, after a period of near - term softness in economic activity, the economy is likely to be on track for sustained economic expansion over time. with the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. but a large measure of uncertainty surrounds that judgment and as the economy evolves, so will the appropriate stance of policy. lessons for public pension systems now let me shift my focus to what pension fund managers might glean as lessons learned from the recent turmoil in financial markets and some of the structural challenges that lie ahead. from what we have seen so far, public pension systems generally appear to have avoided the worst of the damage resulting from the recent tumult. for example, while a number of public funds evidently held structured credit products such as collateralized debt obligations, the overall level of exposure to those products appears to have been relatively small. nonetheless, the recent experience does point up some serious considerations as pension funds address the challenges in meeting their obligations in coming years. one is that public pension systems – like all investors – need to be diligent about understanding and managing the risks on their balance sheets. too many investors seem to have placed too much faith in credit rating agencies, and too few seem to have developed their own views of the risks embedded in their holdings. of course, developing such views is no small undertaking. but if ever a demonstration of the value of doing so were needed, the recent episode certainly provides it. perhaps the biggest challenge facing public pension systems is inadequate funding. even by current measures of liability, which themselves may not be

the banking system has been recapitalized, and the financial system is safer. when the economy was in free fall in late 2008 and early 2009, such improvement was far from certain, as indicated at the time by stock prices that were nearly 60 percent below current levels and very wide credit spreads. despite this progress, the recovery clearly remains incomplete. at 7 percent, the unemployment rate still is elevated. the number of long - term unemployed remains unusually high, and other measures of labor underutilization, such as the number of people who are working part time for economic reasons, have improved less than the unemployment rate. labor force participation has continued to decline, and, although some of this decline reflects longer - term trends that were in place prior to the crisis, some of it likely reflects potential workers ’ discouragement about job prospects. in retrospect, at least, many of the factors that held back the recovery can be identified. some of these factors were difficult or impossible to anticipate, such as the resurgence in financial volatility associated with the european sovereign debt and banking crisis and the economic effects of natural disasters in japan and elsewhere. other factors were more predictable ; in particular, we appreciated early on, though perhaps to a lesser extent than we might have, that the boom and bust left severe imbalances that would take time to work off. as carmen reinhart and ken rogoff noted in their prescient research, economic activity following financial crises tends to be anemic, especially when the preceding economic expansion was accompanied by rapid growth in credit and real estate prices. 16 weak recoveries from financial crises reflect, in part, the process of deleveraging and balance sheet repair : households pull back on spending to recoup lost wealth and reduce debt burdens, while financial institutions restrict credit to restore capital ratios and reduce the riskiness of their portfolios. in addition to these financial factors, the weakness of the recovery reflects the overbuilding of housing ( and, to some extent, commercial real estate ) prior to the crisis, together with tight mortgage credit ; indeed, recent activity in these areas is especially tepid in comparison to the rapid gains in construction more typically seen in recoveries. for example, see reinhart and rogoff ( 2009 ). see also howard, martin, and wilson ( 2011 ). bis central bankers ’ speeches although the federal reserve, like other forecasters, has tended to be overoptimistic in its forecasts