housing relatively affordable, despite the ongoing recovery in home prices. last month ’ s passage of a fiscal 2016 budget package should also provide support to economic activity. not only does this budget package reduce uncertainty about the budgetary outlook, but its extension of a number of tax breaks and easing of the caps on domestic and military spending means that fiscal policy in 2016 will likely turn somewhat stimulative. on the weaker side, the collapse in energy prices continues to pull down domestic investment in oil and gas drilling projects. although this adjustment is now well - advanced, i suspect that there remains a further leg down given the sector ’ s diminished cash flows and the reduced access to credit. in addition, manufacturing remains very soft – hurt by the drop in energyrelated investment, an ongoing inventory adjustment and the loss of competitiveness caused by the persistent strength of the u. s. dollar. even the one bright spot in manufacturing over the past year – the auto sector – seems to be close to a cyclical peak. thus, i suspect manufacturing will continue to be soft in 2016. overseas developments, especially with respect to the emerging market economies, pose a risk to the u. s. economic outlook – potentially exerting greater restraint on the demand for u. s. exports and contributing to greater turbulence in global financial markets. putting these positives and negatives together, the most likely outlook seems to be more of what we have experienced in this expansion – an economy that grows at slightly above a 2 percent annual rate this year. the inflation outlook also has not changed much. inflation remains well below the federal reserve ’ s 2 percent objective. in my assessment, this is due mainly to weaker energy prices and the impact of a stronger dollar on non - energy import prices. however, the fact that core measures of inflation are considerably higher than the headline readings, and have been quite stable in recent months, suggests to me that we are likely to see inflation rise once energy prices stop falling and the dollar stops appreciating – clearly neither trend can persist indefinitely. of course, this assumes that the u. s. economy grows sufficiently rapidly so that pressure on available labor and capital resources continues to increase. with respect to the risks to the inflation outlook, the most concerning is the possibility that inflation expectations become unanchored to the downside. this would be problematic were it to occur because inflation expectations are an important driver of actual inflation. if inflation expectations become unanchored to the downside, it would

in other words, is the 2 percent inflation target a ceiling or not? i don ’ t think of the 2 percent objective as a ceiling. i would be equally intolerant of misses relative to 2 percent in both directions, above or below, with my intolerance growing the further we deviated from our 2 percent objective. we will almost certainly never be precisely at our 2 percent objective for any length of time given all the forces – many of which are not under our control – that influence actual inflation outcomes over a business cycle. thus, with a neutral monetary policy, my goal would be to spend about the same amount of time slightly above as slightly below our 2 percent objective. turning now to u. s. monetary policy, why did i favor raising the federal funds rate target last month? basically, my assessment was that our conditions for lift - off had been met. recall, these two conditions were : 1 ) further improvement in the labor market that we anticipated would be sustained in 2016, and 2 ) greater confidence that inflation would begin to move back towards our 2 percent inflation objective over the medium term. the timing of policy normalization involves a balancing of risks. i don ’ t disagree with our critics that there were risks from lifting off in december versus waiting a little longer. first, the economy might turn out to be more fragile than we anticipate, or economic shocks could push the economy off - course relative to our expectations. in other words, our economic projections might be too optimistic. second, the first tightening move might itself provoke another taper tantrum characterized by higher bond yields and tighter financial market conditions that could be sufficiently strong to impede the economic recovery. my judgment was that these risks were manageable. first, downside forecast errors are certainly possible, but the u. s. economy appears to be on sufficiently sound footing to withstand downside shocks better than was the case a few years ago. second, i felt that the likelihood of a substantial tightening in financial market conditions due to lift - off was relatively low, in part, because the rate hike was widely anticipated. market conditions had adjusted quite smoothly – except for some strains observed in the high - yield debt market – as market participants placed higher odds of tightening in the weeks preceding the december fomc meeting. this reinforced that conclusion. a large market reaction would have been a surprise given that this was one of the most anticipated monetary policy events in history. also, the policy action needs to be viewed