congressional budget office ( 2018 ). the budget and economic outlook : 2018 to 2028. washington : cbo, april 9, https : / / www. cbo. gov / system / files / 115th - congress2017 - 2018 / reports / 53651 - outlook. pdf. estrella, arturo, and frederic s. mishkin ( 1997 ). “ the predictive power of the term structure of interest rates in europe and the united states : implications for the european central bank, ” european economic review, vol. 41 ( july ), pp. 1375 - 401. - 13 favara, giovanni, simon gilchrist, kurt f. lewis, and egon zakrajsek ( 2016 ). “ recession risk and the excess bond premium, ” feds notes. washington : board of governors of the federal reserve system, april 8, https : / / www. federalreserve. gov / econresdata / notes / feds - notes / 2016 / recession - riskand - the - excess - bond - premium - 20160408. html. international monetary fund ( 2018 ). world economic outlook update : brighter prospects, optimistic markets, challenges ahead. washington : imf, january, https : / / www. imf. org / en / publications / weo / issues / 2018 / 01 / 11 / world - economicoutlook - update - january - 2018. johansson, peter, and andrew meldrum ( 2018 ). “ predicting recession probabilities using the slope of the yield curve, ” feds notes. washington : board of governors of the federal reserve system, march 1, https : / / www. federalreserve. gov / econres / notes / feds - notes / predicting - recessionprobabilities - using - the - slope - of - the - yield - curve - 20180301. htm. kiley, michael t., and john m. roberts ( 2017 ). “ monetary policy in a low interest rate world, ” brookings papers on economic activity, spring, pp. 317 - 96, https : / / www. brookings. edu / wp - content / uploads / 2017 / 08 / kileytextsp17bpea. pdf. kim, don h., and jonathan h. wright ( 2005 ). “ an arbitrage - free three - factor term structure model and the recent behavior of

increases in resource utilization, core inflation, as measured by changes in the pce price index for items other than food and energy, slowed by almost 1 / 2 percentage point relative to the pace a year ago. indeed, both overall and core inflation were only 1. 4 percent for the year through july, well short of the federal open market committee ’ s ( fomc ) objective. to what extent does it make sense to look through the recent low inflation readings on the grounds they are transitory? it appears that temporary factors, such as discounted cell phone plans, are pushing down inflation to some extent this year. by the same token, it is likely that other temporary factors — for example, prescription drug prices — boosted inflation last year. going forward, we should see a temporary boost to headline inflation due to hurricane harvey ’ s effect on gasoline prices that i mentioned earlier. temporary factors, by their nature, have little implication for the underlying trend in inflation. in contrast, what is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization. it is instructive to put the shortfall in inflation in recent years in perspective by comparing inflation in the past few years with the last time the economy was in the neighborhood of full employment — namely, just before the financial crisis. in particular, over the past three years, unemployment has averaged roughly 5 percent. similarly, over the three years ending in early 2007 — before the unemployment rate started rising — the unemployment rate also averaged 5 percent. despite a similar degree of resource utilization, core inflation averaged 2. 2 percent from 2004 to 2007, notably higher than the comparable threeyear average inflation rate today of 1. 5 percent. why is inflation so much lower now than it was previously? the fact that the period from 2004 to 2007 had inflation around target with similar unemployment rates casts some doubt on the likelihood that resource utilization is the primary explanation. 3 similarly, a 12 - quarter average is typically long enough that temporary factors should not be the dominant concern. one key factor that may have played a role in the past three years is the decline in import prices, reflecting the dollar ’ s surge, especially in 2015. by contrast, in the 2004 07 period, non - oil import prices increased at roughly a 2 percent annual rate and had a more neutral effect on inflation. nonetheless, while the decline in non - oil import prices likely accounts for some of the weakness in inflation over the past few