be sure, our understanding of the forces that drive inflation is imperfect, and we recognize that this year ’ s low inflation could reflect something more persistent than is reflected in our baseline projections. the fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on. let me mention a few possibilities of more fundamental influences. 1 first, given that estimates of the natural rate of unemployment are so uncertain, it is possible that there is more slack in u. s. labor markets than is commonly recognized, which may be true for some other advanced economies as well. if so, some further tightening in the labor market might be needed to lift inflation back to 2 percent. second, some measures of longer - term inflation expectations have edged lower over the past few years in several major economies, and it remains an open question whether these measures might be reflecting a true decline in expectations that is broad enough to be affecting actual inflation outcomes. third, our framework for understanding inflation dynamics could be misspecified in some way. for example, global developments — perhaps technological in nature, such as the tremendous growth of online shopping — could be helping to hold down inflation in a persistent way in many countries. or there could be sector - specific developments — such as the subdued rise in medical prices in the united states in recent years — that are not typically included in aggregate inflation equations but which have contributed to lower inflation. such global and sectoral developments could continue to be important restraining influences on inflation. of course, there are also risks that could unexpectedly boost inflation more rapidly than expected, such as resource utilization having a stronger influence when the economy is running closer to full capacity. in this economic environment, with ongoing improvements in labor market conditions and softness in inflation that is expected to be temporary, the fomc has continued its policy of gradual policy normalization. as the committee announced after our september meeting, we are initiating our balance sheet normalization program this month. that program, which was described in the june addendum to the policy normalization principles and plans, will gradually scale back our reinvestments of proceeds from maturing treasury securities and principal payments from agency securities. as a result, our balance sheet will decline gradually and predictably. 2 by limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against outsized moves in interest rates and other potential market strains

this regard, we are in favour of strong co - ordination between economic policies, while strictly respecting the independence of the eurosystem. this co - ordination is contained in the treaty itself, which obliges member states to treat national economic policies “ as a matter of common interest ” and subjects them to a multilateral procedure. even more importantly, the euro zone is not devoid of mechanisms conducive to an appropriate policy mix. as a matter of fact, monetary policy alone cannot ensure price stability without the appropriate fiscal discipline at the overall emu level. indeed, for my part, i would mention three economic justifications for the treaty provisions that gave rise to the stability and growth pact : – first, by co - ordinating the fiscal policies of the member states of monetary union, the pact ensures a good policy mix within the euro area. this is essential for monetary policy, to counterbalance the fact that europe does not have a significant federal budget, just as it has no federal government. close mutual surveillance and co - ordination of fiscal policies are the responsibility of the “ euro group ” and of the ecofin council. adherence to the medium - term objective of achieving budgets that are “ close to balance or in surplus ” means that individual countries must first rely on themselves to withstand possible economic downturns which affect only their own economy, while ensuring a balanced policy mix throughout the euro zone. – second, the pact helps to prevent well - managed economies from having to bear an unjustified risk premium by setting up a penalty system for excessive deficits. – and lastly, the stability and growth pact allows us to disprove the assertion that the euro area has no automatic stabilisers in the event of asymmetric shocks to a member economy. indeed, by urging governments to aim at a fiscal position “ close to balance or in surplus ” in the medium term, the pact enables them to let fiscal deficits increase during recessions without exceeding the 3 % reference value. in short, it allows them to create a fiscal buffer during normal economic periods that can be drawn on to counter economic divergences or asymmetric shocks. to summarise that overall issue, the “ optimal currency area ” theory has frequently been called upon by economists who criticized emu and expressed concerns about giving up the exchange - rate policy instrument as a response to asymmetric shocks - in particular to asymmetric shocks within a monetary union. i would like to point out, first,