these people will be enticed back into formal work arrangements if the economy improves further. the distance between current conditions and our goals doesn ’ t have to be completely closed for the fomc to start moving interest rates higher. monetary policy is, of necessity, forward looking. if, as we look forward, it seems likely we will achieve our policy objectives, then we can consider beginning to adjust policy. from a main street perspective, it is the overall direction and extent of normalization that should matter most, rather than the exact date of liftoff. liftoff will be a momentous event when it happens, but it is the evolution of the interest - rate environment over the next few years that will most influence real business activity. confidence as linchpin the linchpin in a decision to make a significant policy change is confidence. by that, i mean confidence in a forecast – an outlook narrative, if you will – that has the economy on track to achieve the fomc ’ s policy objectives in a reasonable timeframe. i think a reasonable time horizon is one to two years. i really want to emphasize this point. the committee has repeatedly stressed that the first and subsequent policy moves will be data - dependent. it is confidence based on clear evidence in the data that will trigger the start of normalization. one hundred percent confidence is never attainable. the test is one of sufficiency – that is, sufficient confidence that, in a defined period of time, the broad economy will reach conditions consistent with sustainable full employment and stable prices. at this particular moment, i don ’ t quite have sufficient confidence. there are factors at work at the moment whose effects i consider to be transient. key among these factors is inflation. inflation, by almost every measure, has been running considerably below the fomc ’ s target of 2 percent. this was the case well before the recent drop in energy prices. because of the sharp falloff of energy prices – especially gasoline prices – headline or total inflation has gone negative in the most recent readings. core inflation – the measure that excludes the direct impact of energy and food prices – has recently been running below 1 percent. in my baseline forecast, i have inflation getting past this period of broad disinflation and resuming a gradual rise to 2 percent. it ’ s important, in my opinion, to be confident that this will occur, and certainly that the trend in overall prices is not continuing to move away from the f

rate of 2 percent annual inflation over the longer run as measured by a particular index called the personal consumption expenditures price index. importantly, inflation is targeted on a total or headline basis including the highly variable components of food and energy prices. in practice, most fed officials monitor a collection of inflation indicators in an attempt to discern the underlying trend. there are worrisome aspects of the current inflation picture, and reading underlying trends is problematic at present. hold that thought. i ’ ll emphasize the centrality of inflation concerns a little later. maximum, or full, employment is less explicitly defined. most economists assume that what constitutes full employment changes over time. structural shifts in the economy cause the natural rate of unemployment to move around. for a good part of the recovery period, a number of fed policymakers, me included, have estimated the unemployment level consistent with full employment as between 5 1 / 4 and 5 1 / 2 percent or a little higher. today ’ s report has the headline unemployment rate at 5. 7 percent. so, on that basis, we would seem to be approaching an acceptable steady - state level of employment. it ’ s a fair question, then, why the fomc has not already started to normalize interest - rate policy. my answer is the recovery has been sluggish for much of its five - and - a - half years. to accomplish what we have, the recovery has required the support of extraordinary policy measures – measures such as a policy rate set effectively at zero and three rounds of quantitative easing. furthermore, the economy has endured periodic headwinds that threatened to dilute or reverse progress. and although the economy is growing, its strength has sometimes seemed tentative and fragile. a moment ago, i said the job is not finished. some gaps remain. employment progress, for instance, may be less than meets the eye. many of us have held that the conventional measure of unemployment probably overstates actual progress. there are still almost 7 million workers counted as employed who say they are working part - time bis central bankers ’ speeches involuntarily. as a point of reference, 7 million is about 4 1 / 2 percent of a labor force of 157 million. there are always people in this involuntary part - time category, but the number is still elevated compared to historical levels. over the last few years, there has been a worrisome outflow of prime - age workers – especially men – from the labor force. i believe some of