would expect to see mounting inventories of bis central bankers ’ speeches commodities as speculators hoarded such commodities, whereas in fact stocks of crude oil and agricultural products have generally been falling since last summer. 2 a third concern expressed by some observers is that the exceptionally low level of u. s. interest rates has translated into excessive monetary stimulus in the emes. in particular, even though their economies have been expanding quite rapidly, many emes have been reluctant to raise their own interest rates because of concerns that higher rates could lead to further capital inflows and boost the value of their currencies. some argue that their disinclination to tighten monetary policy has in turn resulted in economic overheating that has generated further upward pressures on commodity prices. i do not think this explanation accounts for much of the surge in commodity prices, in part because i believe that the bulk of the rapid economic growth in emes mainly reflects fundamental improvements in productive capacity, as those countries become integrated into the global economy, rather than loose monetary policies. irrespective of monetary conditions in the advanced foreign economies, it is clear that the monetary and fiscal authorities in the emes have a range of policy tools to address any potential for overheating in their economies if they choose to do so. indeed, in light of the relatively high levels of resource utilization and inflationary pressures that many emes face at present, monetary tightening and currency appreciation might well be appropriate for those economies. the outlook for consumer prices turning now to the outlook for u. s. consumer prices, i anticipate that the recent surge in commodity prices will cause headline inflation to remain elevated over the next few months. however, i expect that consumer inflation will subsequently revert to an underlying trend that remains subdued, so long as increases in commodity prices moderate and longer run inflation expectations remain reasonably well - anchored. underlying inflation trends focusing on inflation prospects over the medium term is essential to the formulation of monetary policy because, due to lags, the medium term is the timeframe over which the fomc ’ s actions can influence the economy. for this purpose, economists have constructed a variety of measures to separate underlying persistent movements in inflation from more transitory fluctuations. these measures include “ core ” inflation, which excludes changes in the prices of food and energy, and “ trimmed mean ” inflation, which exclude prices exhibiting the largest increases or decreases in any given month. no single measure of underlying inflation is perfect, but it is

and longer - term treasury securities. the committee initiated a second round of treasury purchases last november and has indicated that it intends to complete those purchases by staff analysis at the federal reserve board indicates that a dollar increase in retail gasoline prices – a little more than has occurred over the last year – reduces real household disposable income by nearly 1 percent and hence tends to exert a significant drag on consumer spending. increased investment in energy - conserving technologies would likely provide a partial offset to the various factors damping capital spending outside the commodity - producing sectors. bis central bankers ’ speeches the end of june. my reading of the evidence is that these securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures. i believe this accommodative policy stance is still appropriate because unemployment remains elevated, longer - run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low relative to the rate of 2 percent or a bit less that committee participants judge to be consistent over the longer term with our statutory mandate. however, there can be no question that sometime down the road, as the recovery gathers steam, it will become necessary for the fomc to withdraw the monetary policy accommodation we have put in place. that process will involve both raising the target federal funds rate over time and gradually normalizing the size and composition of our security holdings. importantly, we are confident that we have the tools in place to withdraw monetary stimulus, and we are prepared to use those tools when the right time comes. of course, there are risks to the outlook that may affect the timing and pace of monetary policy firming. in my view, however, even additional large and persistent shocks to commodity prices might not call for any substantial change in the course of monetary policy as long as inflation expectations remain well anchored and measures of underlying inflation continue to be subdued. as i noted earlier, a surge in commodity prices unavoidably impairs performance with respect to both aspects of the federal reserve ’ s dual mandate : such shocks push up unemployment and raise inflation. a policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects ; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery. under such circumstances, an appropriate balance in fulfilling our dual mandate might well call for the fomc to leave the stance of monetary policy