depend, though, on how much is spent versus saved. while i am relatively optimistic about the growth outlook for 2015, i also must acknowledge that there are some significant downside risks. in particular, the roughly 15 percent appreciation of the exchange value of the dollar since mid - 2014 is making u. s. exports more bis central bankers ’ speeches expensive and imports more competitive. my staff ’ s analysis concludes that an appreciation of this magnitude would, all else equal, reduce growth of real gdp by about 0. 6 percentage point over this year. some of the recent softness in indicators of manufacturing activity is likely a reflection of this development. additionally, the decline in energy prices, while helping to support household spending, will adversely impact business investment. the support to growth from rapidly rising u. s. oil production almost certainly will fade due to the oil price decline. now, with prices sharply lower, u. s. oil exploration and drilling activity is falling off very sharply, and this will undoubtedly exert a meaningful drag on economic activity. turning to the inflation outlook, the data continue to come in below the fomc ’ s objective of a 2 percent annualized rate for the personal consumption expenditures ( pce ) deflator. the twelve - month change of the total pce deflator was just 0. 3 percent in february, with the core pce deflator at just 1. 4 percent. despite these low readings, my expectation is that inflation will begin to firm later this year. importantly, most of the impact from the decline in energy prices that has weighed down overall inflation is likely over. although the appreciation of the dollar may cause some further softness in import prices, the continued decline in resource slack as the economy expands should push in the opposite direction. we are already seeing some firming in rent inflation as rental vacancy rates have returned to more normal levels and employment and income growth have strengthened. longer - term household inflation expectations have been well maintained through this period of very low inflation as shown in our survey of consumer expectations. this should reinforce the effect of a higher level of overall resource utilization in slowly pushing inflation back towards the fomc ’ s 2 percent objective. monetary policy as the fomc has consistently communicated, decisions on monetary policy, such as the timing of lift - off will, depend on how the economic outlook evolves – in particular with respect to the labor market and inflation. as i have discussed, the labor market has improved substantially over the past

to think that this adjustment will prove manageable and not be very disruptive. first, many emes appear to be better equipped today to handle the fed ’ s prospective exit from its exceptional policy accommodation than they were during past tightening cycles. this reflects the fundamental reforms that emes have put in place over the past 15 years, as well as the hard lessons learned from past periods of market stress. among the positives are : • the absence of pegged exchange rate regimes that often came undone violently during periods of acute stress ; • improved debt service ratios and generally moderate external debt levels ; • larger foreign exchange reserve cushions ; • clearer and more coherent monetary policy frameworks, supporting what are now generally low to moderate inflation rates ; • generally improved fiscal discipline ; and bis central bankers ’ speeches • better capitalized banking systems, supported by strengthened regulatory and supervisory frameworks. to be sure, progress has not been uniform across emes, and more work remains in some countries to further strengthen institutional structures. vulnerabilities remain in several important emes, and some have been hit by a sharp adverse turn in their terms of trade due to the recent fall in global commodity prices. still, the fundamental improvements i ’ ve cited leave many emes better positioned than in the past to weather those times in the cycle when the external environment turns more challenging. second, during previous fed tightening cycles eme economic performance has generally been good. during the last three u. s. tightening cycles, eme industrial production growth has been between 7½ and 10 percent over the 12 - months from the start of fed tightening, while eme export volumes have risen 10 to 15 percent. the likely explanation for this favorable record is that fed tightening generally occurs during periods of strong u. s. economic performance. recent research from the imf bears out this hypothesis, finding that higher u. s. interest rates associated with stronger u. s. growth represent a net positive for emes. 1 financial performance of emes has been more diverse across fed policy cycles. the strongest contrast is between the tightening cycle that began in 2004, and the one beginning a decade earlier, in 1994. eme asset prices strengthened considerably during the 2004 cycle, but weakened considerably during the earlier cycle. notably, the 1994 cycle was associated with a large increase in u. s. long - term bond yields, and appears to represent a case in which there was a considerable gap between what the fed did in terms of monetary policy tightening relative to