- term inflation expectations remain stable and that food and energy price increases are not passing through to other prices. 7 given the important role of labor costs in a developed, services - focused economy such as the united states, it is important to closely monitor trends in labor markets. currently, wages the average annual expected price change they expect over the next 5 to 10 years. see for example the comments on commodity price pressures and monetary policy by my colleague william dudley, president of the new york federal reserve bank and vice chair of the federal open market committee : “ inflation expectations are well - anchored today and we intend to keep it that way. a sustained rise in medium - term inflation expectations would represent a threat to our price stability mandate and would not be tolerated. ” [ http : / / www. newyorkfed. org / newsevents / speeches / 2011 / dud110228. html ] bis central bankers ’ speeches and salaries are reflecting heightened unemployment, and show no evidence that potential inflation concerns are placing upward pressure on wages and salaries. core inflation rates tend to be a reasonable predictor of inflation in the intermediate term. core inflation remains well below my long - run target for inflation. this gives us flexibility to focus on accommodative monetary policy doing what it can to promote more rapid growth in the economy. as figure 18 illustrates, the percent of the adult population that is employed now is quite low in relation to recent history, and has shown only a slight improvement over the course of the recovery. so with significant slack in labor markets, stable inflation expectations, and core inflation well below our longer run target, there is currently no reason to slow the economy down with tighter monetary policy. until we make more progress on both elements of the federal reserve ’ s mandate – employment and inflation – the current, accommodative stance of monetary policy is appropriate. thank you. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches

, the federal reserve took extraordinary measures to stabilize the financial system – measures that were critical to setting the stage for the current recovery. figure 9 depicts the additions to the central bank ’ s balance sheet from these temporary operations. as you can see in the chart, the liquidity facilities that we set up to restore more effective financial market functioning have wound down. at the same time, however, in response to the severity of the economic recession the federal reserve decided to expand its purchases of mortgage - backed and agency securities. these purchases were undertaken to improve market functioning in the mortgage market, and even more importantly, as a way to reduce a key interest rate at a time when many short - term interest rates were close to, or at, the zero lower bound. the purchase program ended in march, and these balances will naturally be dropping over time as households prepay mortgages, sell their homes, or refinance. this decline in our balance sheet will actually occur without the fed taking any specific actions. but it will occur slowly, and absent any action of the fed ’ s part, the balance sheet will remain elevated for years. this expansion of the federal reserve ’ s balance sheet raises concerns for some observers and commentators. an important side effect of our asset purchases has, necessarily, been a dramatic swelling of so called excess reserves in the banking system. when the central bank if the relationship is weaker, as some researchers suggest, even stronger growth would be required to reduce the unemployment rate to 5 per cent by year end 2013. for example, if the reduction in the unemployment rate resulting from real gdp growth of 1 per cent above potential is one - third of a per cent instead of one - half of a per cent, then real gdp growth of 6. 25 per cent would be needed to reduce the unemployment rate to 5 per cent by year end 2013. purchases assets, it credits the selling institution with reserves. over time, banks could choose to lend out these reserves, which would turn the reserves into broader money – and a rapid expansion of the broader money supply would be inflationary. however, as figure 10 suggests, the current problem is not a rapid expansion in lending and the money supply. in fact, quite the opposite ; banks have been reluctant to lend. many have taken significant losses that have drained their capital ; and, at the same time, the financial condition of many potential borrowers is worse than before the recession. 5 were that situation to change and bank lending to accelerate,