the outlook was for a gradual decline in core inflation. 4 see blanchard ( 2016 ), kiley ( 2015 ), and brainard ( 2015a ). similarly, inflation did not fall very much as the unemployment rate climbed to 10 percent during the great recession. 5 the inflation information refers to core pce inflation measured on a 12 - month average basis. 6 see nalewaik ( 2016 ). 7 see brainard ( 2017 ). 8 this rationale is in brainard ( 2015b ). 9 bonis, ihrig, and wei ( 2017 ) estimate that the cumulative effect of the federal reserve ’ s asset purchases results in a reduction in the 10 - year treasury yield term premium moderately in excess of 90 basis points currently. 10 it seems likely that many investors have developed an expectation of the likely path of the federal reserve ’ s balance sheet once the process of normalization is well underway, and these expectations are already priced into asset prices. see, for instance, federal reserve bank of new york may 2017 responses to survey of primary dealers ( pdf ), and responses to survey of market participants ( pdf ). 11 there may be differences in the specific ways changes in short - term rates and the balance sheet transmit to different asset prices and the exchange rate, although estimates are limited and lack precision. 12 see the committee ’ s policy normalization principles and plans, available on the board ’ s website at www. federalreserve. gov / newsevents / press / monetary / 20140917c. htm. 7 / 7 bis central bankers'speeches

, the gradual reduction in our balance sheet should result in a gradual decline in reserves to a longer - run level that is well below today ’ s level but likely somewhat higher than in the pre - crisis regime. it is difficult to know in advance with any precision how low reserves can be allowed to drop. that minimum level will depend on the structural demand for reserves and the short - term variability in the demand for and supply of reserves. 5 / 7 bis central bankers'speeches during the process of balance sheet normalization, i favor an approach of monitoring money markets carefully to gauge the appropriate longer - run level of reserves consistent with efficient and effective policy implementation. finally, while subordination of the balance sheet to the federal funds rate should be our baseline policy, in my view, there may be circumstances when we may need to rely on the balance sheet more actively. during the period when the balance sheet is running down, if the economy encounters significant adverse shocks, it may be appropriate to commence the reinvestment of principal payments again in order to preserve conventional policy space. conclusion in recent quarters, the balance of risks has become more favorable, the global outlook has brightened, and financial conditions have eased on net. with the labor market continuing to strengthen, and gdp growth expected to rebound in the second quarter, it likely will be appropriate soon to adjust the federal funds rate. and if the economy evolves in line with the sep median path, the federal funds rate will likely approach the point at which normalization can be considered well under way before too long, when it will be appropriate to adjust balance sheet policy. i support an approach that retains the federal funds rate as the primary tool for adjusting monetary policy, sets the balance sheet to shrink in a gradual and predictable way for both treasury securities and mbs, and avoids spikes in redemptions. while that remains my baseline expectation, i will be watching carefully for any signs that progress toward our inflation objective is slowing. with a low neutral real rate, achieving our symmetric inflation target is more important than ever in order to preserve some room for conventional policy to buffer adverse developments in the economy. if the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy. references blanchard, olivier ( 2016 ). “ the u. s. phillips curve : back to the 60s? ( pdf ) ” policy brief pb16 1. washington : peterson institute for international economics, january. board of governors