inflation at the medium - term horizon. to conclude, monetary policy is now in a transition phase. that short - term interest rates must eventually be normalized is a given. however, the remaining uncertainty about the likely paths of both employment and inflation of necessity implies that the timing of policy changes at this point also remains uncertain. like my colleagues on the fomc, i will continue to watch the relevant data very closely. the challenge that lies before the committee is to manage policy in a way that permits the economy to realize its productive potential while simultaneously maintaining firm control of inflation and inflation expectations.

will thus tend to promote greater actual inflation. more subtly, my conclusion that the effects on inflation of transitory changes in commodity prices or in the value of the dollar tend to dissipate in the longer run depends on the assumption that the public's inflation expectations are well anchored. if expectations are not well tied down, inflationary impulses that are in themselves transitory may become embedded in expectations and hence affect inflation in the longer term. therefore, an essential prerequisite for controlling inflation is controlling inflation expectations. my presumption that the current slack in the labor market is primarily cyclical, rather than structural, is based on several observations. first, the recent high rates of productivity growth are clearly above secular trends and suggest that firms have been working employees more intensely, deferring maintenance, and taking other temporary measures to raise output, behavior that is characteristic of the early stages of an employment expansion. second, i see little evidence ( for example, in the job flows data ) to suggest that the pace of structural change today is greater than it was after the 1990 - 91 recession or in the expansion of the mid - to late - 1990s. third, factors affecting labor supply and the efficiency of job matching, including demographic changes, greater worker experience and education, increases in incarceration rates, increases in disability rolls, increased use of temporary help firms, and increased job search through the internet, suggest strongly that the sustainable rate of unemployment has steadily declined since the mid - 1980s, to a level below the current rate. the relatively sharp disinflation of recent years is consistent with that view. finally, an increasing tendency of low - skilled workers to leave the labor force rather than remain formally unemployed has also likely lowered the sustainable rate of unemployment ( juhn, murphy, and topel, 2002 ). assessing the current state of inflation expectations in the united states is not entirely straightforward. survey measures of near - term inflation expectations, including those based on interviews of professional forecasters, individual consumers, and firm managers, have in some cases ticked up slightly in recent months, though long - term inflation expectations appear stable. the spread between the yields on treasury debt and inflation - indexed treasury securities of similar maturity, known as the breakeven inflation rate and conventionally treated as an indicator of expected inflation, has also risen. from a policy perspective, a difficulty with all these measures is that they reflect expectations of headline inflation rather than the core inflation measures usually emphasized in the monetary policy context