although the bis central bankers ’ speeches policy remains accommodative and will be adjusted at an appropriately gradual pace to achieve and maintain our dual objectives of maximum employment and 2 percent inflation. reflecting global economic and financial developments since december, however, the pace of rate increases is now expected to be somewhat slower. for example, the median of fomc participants ’ projections for the federal funds rate is now only 0. 9 percent for the end of 2016 and 1. 9 percent for the end of 2017, both 1 / 2 percentage point below the december medians. as has been widely discussed, the level of inflation - adjusted or real interest rates needed to keep the economy near full employment appears to have fallen to a low level in recent years. although estimates vary both quantitatively and conceptually, the evidence on balance indicates that the economy ’ s “ neutral ” real rate – that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential – is likely now close to zero. 3 however, the current real federal funds rate is even lower, at roughly minus 1 - 1 / 4 percentage point, when measured using the 12 - month change in the core price index for personal consumption expenditures ( pce ), which excludes food and energy. thus, the current stance of monetary policy appears to be consistent with actual economic growth modestly outpacing potential growth and further improvements in the labor market. 4 looking beyond the near term, i anticipate that growth will also be supported by a lessening of some of the headwinds that continue to restrain the u. s. economy, which include weak foreign activity, dollar appreciation, a pace of household formation that has not kept up with population and income growth and so has depressed homebuilding, and productivity growth that has been running at a slow pace by historical standards since the end of the recession. if these headwinds gradually fade as i expect, the neutral federal funds rate will also rise, in which case it will, all else equal, be appropriate to gradually increase the federal funds rate more or less in tandem to achieve our dual objectives. otherwise, monetary policy would eventually become overly accommodative as the economy strengthened. 5 implicitly, this expectation of fading headwinds and a rising neutral rate is a key reason for the fomc ’ s assessment that gradual increases in the federal funds rate over time will likely median projection for overall inflation

would, in my view, only delay the return of inflation to 2 percent, provided that inflation expectations remain anchored. unfortunately, the stability of longer - run inflation expectations cannot be taken for granted. during the 1970s, inflation expectations rose markedly because the federal reserve allowed actual inflation to ratchet up persistently in response to economic disruptions – a development that made it more difficult to stabilize both inflation and employment. with considerable effort, however, the fomc gradually succeeded in bringing inflation back down to a low and stable level over the course of the 1980s and early 1990s. since this time, measures of longer - run inflation expectations derived from both surveys and financial markets have been remarkably stable, making it easier to keep actual inflation relatively close to 2 percent despite large movements in oil prices and pronounced swings in the unemployment rate. lately, however, there have been signs that inflation expectations may have drifted down. market - based measures of longer - run inflation compensation have fallen markedly over the past year and half, although they have recently moved up modestly from their all - time lows. similarly, the measure of longer - run inflation expectations reported in the university of michigan survey of consumers has drifted down somewhat over the past few years and now stands at the lower end of the narrow range in which it has fluctuated since the late 1990s. the shifts in these measures notwithstanding, the argument that inflation expectations have actually fallen is far from conclusive. analysis carried out at the fed and elsewhere suggests that the decline in market - based measures of inflation compensation has largely been driven by movements in inflation risk premiums and liquidity concerns rather than by shifts in inflation expectations. 6 in addition, the longer - run measure of inflation expectations from the michigan survey has historically exhibited some sensitivity to fluctuations in current gasoline prices, which suggests that this measure may be an unreliable guide to movements in trend inflation under current circumstances. 7 moreover, measures of longer - run expected inflation gleaned from surveys of business and financial economists, such as those reported in the survey of professional forecasters, the blue chip survey, and the survey of primary dealers, have largely moved sideways in the past year or two. taken together, these results suggest that my baseline assumption of stable expectations is still justified. nevertheless, the decline in some indicators has heightened the risk that this judgment could be wrong. if so, for related background discussions, see bauer and rudebusch ( 2015 ), abrahams and others ( 2012 [ rev. 2015 ), and d ’