for the median income family. this less rosy perspective on the current state of the economy was suggested by several members of congress during the recent oversight hearings on monetary policy. i think the point is an important one and i agree that we should not let the recent favorable performance of inflation, unemployment and equity prices distract our attention from the importance of confronting a slow average rate of increase in living standards and lingering social problems that both reflect and are exacerbated by a widening in income inequality. however, other than through its pursuit of its legislative mandates of price stability and maximum sustainable employment, monetary policy cannot make a major contribution to the resolution of these problems. monetary policy, in particular cannot remedy increases in income inequality, raise the trend rate of increase in living standards, or combat inadequate opportunities for upward mobility out of poverty. it is, as always, important that we carry out our traditional responsibilities well, accommodating the maximum sustainable growth and achieving the maximum sustainable level of employment. but we cannot do more. regularities the second challenge is to explain why performance has been so favorable, at least in terms of inflation and unemployment. before exploring explanations of the puzzle, i want to focus on common features of cyclical expansions. in doing so, i will focus on cyclical expansions that have not been dominated by dramatic external shocks, such as the two episodes that were marked by steeply rising world oil prices - - first in the early 1970s and again in the late 1970s and early 1980s. while even these expansions share many of the patterns i emphasize later, their endings are dominated by the effects of the powerful supply shocks and policy responses to the shocks. expansions, by definition, begin with considerable economic slack, inherited from the previous recession. the economy typically makes a rapid transition from declining output ( the definition of recession ) to above - trend growth. in a loose way, trend growth refers to the growth in the economy ’ s productive capacity. when growth is above trend, production is expanding faster than the economy ’ s - 4productive capacity and, as a result, resource utilization rates rise. rising capacity utilization rates and falling unemployment rates are thus a typical feature of an expansion period. the natural dynamic of an expansion is for above - trend growth to continue until demand overtakes capacity, despite the best efforts of policy to avoid cyclical excesses. the end of the story is particularly important. expansions do not die of old age or lethargy, a spontaneous weakening

economic outlook from historical forecast errors ( pdf ), ” financial and economic discussion series 2007 – 60. washington : board of governors of the federal 1 these remarks represent my own views, which do not necessarily represent those of the federal reserve board or the federal open market committee. 2 the analysis of forecast errors presented here uses data from 1986 to 2015 from the federal reserve bank of philadelphia ’ s november survey of professional forecasters. for more on the construction of forecast errors, see reifschneider and tulip ( 2007 ) and board of governors ( 2014 ). 3 the short - term interest rate used in this analysis is the three - month treasury bill rate. 4 annual data on cyclically adjusted federal deficits can be found in table c - 2 of the congressional budget office ( 2016, p. 126 ) report the budget and economic outlook : 2016 to 2026. the analysis takes a three - year centered moving average of the cbo ’ s estimates of the cyclically adjusted federal deficit, which can be quite volatile from year to year, and compares this average for the year prior to the new administration to the average in the sixth year of the new administration. 5 for example, see table 3 in the congressional budget office ( 2015, p. 6 ) report estimated impact of the american recovery and reinvestment act on employment and economic output in 2014. 6 see brainard ( 2015 ). 7 see laubach and williams ( 2015 ). for the most up - to - date laubach - williams estimates of the natural rate of interest, a concept closely related to the neutral rate, see www. frbsf. org / economicresearch / files / laubach _ williams _ updated _ estimates. xlsx. also see the most recent median estimates of the real neutral rate from the new york federal reserve bank ’ s survey of primary dealers ( www. newyorkfed. org / markets / primarydealer _ survey _ questions. html ) and survey of market participants ( www. newyorkfed. org / markets / survey _ market _ participants. html ). for estimates of the real neutral rate based on the summary of economic projections, see bongard and johannsen ( 2016 ). 8 for an analysis of macroeconomic behavior near the zero lower bound, see evans and others ( 2015 ). 9 see cucuru ( forthcoming ). 10 for estimates of the effect of exchange rate changes on inflation and gdp growth, see gruber, mccall