some influence on banks ’ ability to extend credit, but its relation to the longer term rates that really matter to investors and home buyers is uncertain at best. the most that one can say about the fed ’ s principal monetary policy tool is that we can safely guess the direction of the effect of moving it and that we know there is a considerable lag between the move and the effect ; but we cannot specify with any degree of certainty how large the effect is or how long it takes. that ’ s a pretty blunt instrument. - 3any monetary policy move is a judgment call to be made with a great deal of humility because the judgment involves making a guess about what is likely to be happening to economic activity six months to a year or more in advance and whether resources might be underutilized by then or inflationary pressure might be building. the judgment call seems especially hard at the moment, although i suspect it almost always seems especially hard, because the economy is behaving in ways that are gratifyingly puzzling. the combination of macro - economic statistics is actually more favorable - - more growth, more employment, less budget deficit, less inflation - - than most people would have guessed possible a year or two ago. on one level, these are pleasant surprises ; on another level, the behavior of the economy is revealing big challenges for the economics profession. these challenges are not likely to yield to more assiduous statistical manipulation of the same data that we already collect, but instead would require some new tools and new kinds of data. it would be a lot easier to make those judgment calls - - to move the blunt instrument so as to increase the probability of keeping labor markets tight and the economy growing at the highest sustainable rate - - if we knew a lot more about three interrelated questions. 1. what ’ s really going on in labor markets? 2. what ’ s really going on with prices? 3. and especially, what ’ s really going on with productivity? the labor market puzzle is partly why low unemployment is not leading to more obvious bottlenecks, more serious skill shortages and more rapid increases in compensation than we are in fact experiencing? it ’ s tempting to believe that the uniformity of unemployment rates around the country indicates that the information age is paying off in better functioning labor markets. possibly, at the equilibrating margin, people now move more easily to jobs, and jobs more easily to people than they once did. possibly the organizations that worked

/ 6 bis central bankers'speeches in this regard, it matters importantly whether increased fiscal deficits predominantly raise aggregate demand or also expand the supply potential of the economy more broadly. changes in fiscal policy that raise the level or growth rate of productivity or that induce greater labor force participation and higher levels of skill and education in the workforce raise the nation ’ s productive capacity and result in more sustainable increases in output and living standards. the higher productivity and workforce levels engendered by these policies would likely increase investment opportunities and raise expectations of future income growth, sustainably boosting the levels of investment and consumption and, as a result, the longer - run neutral rate. such policies are more likely to be sustainable because the boost to gdp that they provide continues to accumulate over time, limiting increases in the debt - to - gdp ratio and preserving fiscal space. in addition, the effects of fiscal policy depend importantly on the relative strength of the broader global economy. in recent years, major foreign economies have been contending with a deficiency of domestic demand. at a time when the u. s. economy has made important progress on employment and inflation, in both europe and japan output or inflation, or both, remain well below desired levels. as a result, forecasters expect short - term yields in these economies to remain near zero for years to come. moreover, growth in many emerging market economies, including importantly china, has slowed in recent years, and financial conditions in some emerging economies appear fragile. against the backdrop of deficient demand abroad, if more expansionary fiscal policy here at home raises expectations of a growing divergence between the united states and other economies, upward pressure on the exchange rate will likely result, as we have seen recently with the renewed increase in the dollar. the result could be cross - border spillovers from the increase in u. s. domestic demand, reducing the effect on u. s. real activity and inflation and potentially contributing to external imbalances. in the past few years, the effect on the dollar of increased expectations about divergence between u. s. and foreign interest rates has been especially strong. 9 the nearly 20 percent increase in the dollar over 2014 and 2015 coincided with falling real exports and import prices in the united states. net exports subtracted more than 1 / 2 percentage point from gdp growth in both 2014 and 2015, while falling non - oil import prices likely subtracted 1 / 4 percentage point from the annual rate of core inflation. 10 finally, the trajectory of federal