as long as inflation expectations stay well - anchored, it will be hard for inflation to fall further. putting these factors together along with my forecast of a gradual pickup in real economic activity, my outlook is for inflation to drift back toward our 2 percent objective over the medium term. however, much like the case of the real growth outlook, there is significant uncertainty around this forecast. monetary policy so what does this all imply for monetary policy? as you are aware, at last week ’ s fomc meeting we made no changes to our monetary policy. in particular, the committee decided to continue to purchase long - term treasury securities and agency mortgage - backed securities bis central bankers ’ speeches at a monthly pace of $ 45 billion and $ 40 billion, respectively. the fomc statement reaffirmed the committee ’ s intention “ to continue its purchases of treasury and agency mortgage - backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. ” 2 we also reaffirmed our forward guidance with respect to the federal funds rate. the statement notes that the committee, “ currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 - 1 / 2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee ’ s 2 percent longer - run goal, and longer - term inflation expectations continue to be well anchored. ” 3 several questions have emerged following the meeting. most noteworthy was – given that market expectations were skewed towards anticipating the beginning of a taper at this meeting – why the committee did not begin to reduce the pace of asset purchases. although i can ’ t speak for the committee, i can provide some reasons for my own decision. to begin to taper, i have two tests that must be passed : ( 1 ) evidence that the labor market has shown improvement, and ( 2 ) information about the economy ’ s forward momentum that makes me confident that labor market improvement will continue in the future. so far, i think we have made progress with respect to these metrics, but have not yet achieved success. with respect to the first metric, we have seen labor market improvement since the program began last september. over this time period, the unemployment rate has declined to 7. 3 percent from 8. 1 percent. 4 however, at the same time,

by about 120 basis points since may to more than 4½ percent. for a household considering buying a house and financing the purchase with a $ 100, 000 30 - year fixed - rate mortgage, this rise in mortgage rates would increase their annual payments by more than $ 800. the increase in financing costs and the rise in home prices has made housing considerably less affordable than it was earlier in the year. this is illustrated by the national association of realtors ’ affordability index which has declined by 25 percent over the six months ending in july. second, housing activity has already been contributing significantly to growth. for example, over the past two years, real residential investment swung from a drag of 1. 1 percentage points of gdp to a contribution of 0. 4 percentage points. together, this suggests that the impetus to growth from housing may moderate rather than strengthen. perhaps, the economy can get a boost from business fixed investment. after all, most of the evidence points towards further improvement. first, as i noted earlier, profit margins and cash flows are high, and credit availability is improving. thus, those businesses with successful track records should be able to readily finance new investments. second, business fixed investment is not very high as a share of gdp and overall industrial capacity has been expanding only slowly. this suggests that this sector is not over extended. third, the drop in u. s. energy costs relative to the rest of the world should spur more investment in the u. s. in energy intensive activities such as petrochemicals manufacturing. however, there are also some negatives here as well. in particular, despite the positive factors i have cited, the growth in manufacturing output has been only moderate, with the bis central bankers ’ speeches overall manufacturing capacity utilization rate still below its pre - recession level. thus, outside of the energy intensive sectors, there still appears to be little near - term motivation for firms to invest in order to increase their productive capacity. businesses seem to be waiting for stronger demand before they significantly increase their investment outlays. thus, we have a second chicken - egg problem. on the trade side, the news is mixed. although japanese and european economic activity has picked up recently, the sustainability remains in question. even as europe emerges from its recession, growth is likely to be anemic at best over the next year, constrained by continued fiscal consolidation and tight credit conditions as their banks continue to deleverage. in japan, the consumption tax is scheduled to increase significantly