sheet normalization, ” speech delivered at the national bureau of economic research ’ s monetary economics summer institute, cambridge, mass., july 13. cecchetti, stephen g., michael e. feroli, peter hooper, anil k. kashyap, and kermit l. schoenholtz ( 2017 ). deflating inflation expectations : the implications of inflation ’ s simple dynamics ( pdf ), report prepared for the 2017 u. s. monetary policy forum, sponsored by the initiative on global markets at the university of chicago ’ s booth school of business, held in new york, n. y., on march 3. international monetary fund ( imf, 2013 ). “ the dog that didn ’ t bark : has inflation been muzzled or is it just sleeping ( pdf ), ” in world economic outlook april 2013 : hopes realities, and risks. washington : international monetary fund. kiley, michael t. ( 2015 ). “ low inflation in the united states : a summary of recent research, ” feds notes. washington : board of governors of the federal reserve system, november 23. kiley, michael t., and john m. roberts ( 2017 ). “ monetary policy in a low interest rate world ( pdf ), ” finance and economics discussion series 2017 – 080. washington : board of governors of the federal reserve system, august. nakata, taisuke, and sebastian schmidt ( 2016 ). “ the risk - adjusted monetary policy rule ( pdf ), ” finance and economics discussion series 2016 – 061. washington : board of governors of the federal reserve system, july. stock, james h., and mark w. watson ( 2007 ). “ why has u. s. inflation become harder to forecast? " journal of money, credit and banking, vol. 39 ( s1, february ), pp. 3 - 33, available at scholar. harvard. edu / stock / publications / why - has - inflation - become - harder - forecast. 1 i am grateful to john roberts for his assistance in preparing this text. the remarks represent my own views, which do not necessarily represent those of the federal reserve board or the federal open market committee. 2 see brainard ( 2017 ) for a fuller discussion of this topic. 3 according to congressional budget office estimates, the natural rate of unemployment was about the same in the two periods : it was 4. 8 percent in the 2014 – 17 period

normalization of the federal funds rate to be well under way, the criterion for commencing balance sheet normalization. the approaching change to our reinvestment policy has been clearly communicated and is well anticipated. in principle, the fomc could use both the balance sheet and the federal funds rate as active tools for setting monetary policy. however, i view the federal funds rate as the preferred active tool, because its effect on financial conditions and the economy has been more extensively tested and therefore is better understood than changes to the balance sheet. as a result, once we set in motion the change in balance sheet policy, as long as the economy evolves broadly as expected, we should allow the balance sheet to run off in the background at the gradual pace that was announced. we would primarily look to ongoing adjustments in the federal funds rate to calibrate the stance of monetary policy as economic conditions evolve. once balance sheet normalization is under way, i will be looking closely at the evolution of inflation before making a determination about further adjustments to the federal funds rate. we have been falling short of our inflation objective not just in the past year, but over a longer period as well. my own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target. unless we expect inflation to move quickly back toward target — or there are indications that the short - run neutral rate has moved up further — a variety of empirical estimates suggest we could approach neutral without too many additional rate increases. many forecasters assume that the neutral rate of interest is very low currently, and that it is likely to be low relative to historical norms in the longer run. 12 for example, the well - known laubach - williams model currently suggests an estimate of the longer - run neutral federal funds rate that is actually slightly below zero. 13 and in the most recent summary of economic projections ( sep ), the median longer - run nominal federal funds rate was 3 percent, which implies the long - run real federal funds rate would only be 1 percent, lower than its average in the decades before then of around 21 / 2 percent. 14 these estimates suggest that the neutral rate of interest is likely to rise only modestly in the medium term. it is worth remembering, in addition, that the federal reserve ’ s balance sheet policy may be reinforcing this tendency over the next several years. a recent study suggests balance sheet runoff could boost the level of the term premium on the 10 -