stability by bringing demand into line with still - constrained supply. over the past year, we have raised the federal funds rate nearly 5 percentage points and have begun to reduce the size of our balance sheet. 1 / 5 bis - central bankers'speeches as a result, financial conditions have tightened significantly. borrowing costs have risen, equity prices have declined, and the dollar has appreciated on net. interest - sensitive sectors of the economy have slowed. residential investment subtracted nearly 1 percentage point from gross domestic product growth last year, as housing demand was curtailed by higher mortgage rates. business fixed investment held up last year but appears to have slowed more recently. manufacturing activity has slowed in response to tighter financing conditions, the stronger dollar, and some retracement of the pandemic - related shift from services to goods. as energy prices have moderated and supply disruptions have eased, inflation has started to abate. however, the process of returning inflation to 2 percent has a long way to go and is likely to be uneven and bumpy. indeed, the inflation picture is less favorable than it appeared earlier this year. part of the encouraging disinflation initially observed in the fourth quarter of last year was revised away, while inflation over the first two months of this year came in high. the inflation data show some persistence. the 3 -, 6 -, and 12 - month changes in february prices for the core pce index - excluding food and energy - are all around 4 - 1 / 2 to 5 percent. housing services inflation continues at a rapid monthly clip, contributing much more to inflation than it did before the pandemic. inflation in non - housing core services remains sticky at elevated levels. even core goods prices rose in january and february, after three months of declines, highlighting the uneven nature of the disinflationary process. even so, several factors are likely to contribute to disinflation. long - term inflation expectations remain well anchored, and shorter - term expectations have retraced much of last year's rise. 2 rent increases on new leases have slowed sharply over the past six months, which should begin to pull down measured housing - services inflation over the course of this year. moreover, significant supply of multifamily housing is coming online, which should take further pressure off the rental market. core goods inflation should continue converging toward its pre - pandemic trend of slightly negative numbers, as supply chains continue to heal and demand for goods

deregulation of key industries have removed bottlenecks and increased the competitive supply response of many economies, especially ours, and these developments have been influential in suppressing price increases. it would be an exaggeration to imply that, whenever a potential cost increase emerges on the horizon, a capital investment is available to quell it. yet the veritable explosion of spending on high - tech equipment and software, which has raised the growth of the capital stock dramatically over the past five years, could hardly have occurred without a large increase in the pool of profitable projects available to business planners. as our experience over the past century and more attests, such surges in prospective investment profitability carry with them consequences for interest rates, which ultimately are part of the process that balances saving and investment in a non - inflationary economy. in these circumstances, rising credit demand is almost always reflected in an increase in corporate borrowing costs and that has, indeed, been our recent experience, especially in longer - dated debt issues. real interest rates on corporate bonds have risen more than a percentage point in the past couple of years. home mortgage rates have risen comparably. the federal reserve has responded in a similar manner, by gradually raising the federal funds rate over the past year. certainly, to have done otherwise - to have held the federal funds rate at last year ’ s level even as credit demands and market interest rates rose - would have required an inappropriately inflationary expansion of liquidity. it is difficult to imagine product price levels remaining tame over the longer haul had there been such an expansion of liquidity. in the event, of course, inflation has remained largely contained. to be sure, the tripling of crude oil prices has left its mark on “ headline ” inflation rates and inflicted considerable pain on some sectors of our economy. however, there is little evidence, at least to date, to suggest that oil price increases have started to embed themselves more broadly in the underlying cost structure of american business - that is, beyond the direct effects of the higher energy costs themselves. nevertheless, despite the very recent declines in the price of oil, there are risks here that need to be monitored closely. given the persistent strength of private credit demands, market interest rates would have risen even more were it not for the emergence of a sizable unified budget surplus following a long period of chronic deficits. more recently, the administration and the congress have wisely chosen to wall off the surplus in the social security