university of michigan and the new york fed indicate that household longer - term inflation expectations have declined somewhat over the past year and are in the lower end of their historical ranges. nevertheless, i am not unduly worried because the magnitude of these declines has been modest, and because the new york fed ’ s three - year2 bis central bankers ’ speeches ahead inflation measure has been gradually increasing since january and has reversed much of the decline observed in the second half of 2015. low longer - term inflation expectations, if allowed to become entrenched, would act as a restraint on actual inflation making it more difficult for us to meet our inflation objective. in contrast, i put less weight on the significantly larger declines in market - based measures of inflation compensation over the past two years. from my perspective, these declines seem driven more by changes in bond term premia and the relative liquidity characteristics of nominal versus inflation - protected treasury securities than by sharply falling inflation expectations. implications of the outlook for us monetary policy if, as i have indicated, the u. s. growth and inflation outlooks have not changed notably, then why have expectations about u. s. monetary policy shifted so much? compared to the start of the year, the expected timing of any further fed interest rate hikes has been pushed back, and the expected upward trajectory of u. s. short - term rates is now much flatter. there are several reasons to explain these shifts. first, assessments of the neutral real shortterm interest rate have declined as economic growth has consistently fallen short of consensus forecasts. with the u. s. economy having grown at only a 2. 1 percent annual rate over the past seven years, it has become harder to sustain the view that the neutral real short - term interest rate is close to, or will soon be close to, its historical level of around 2 percent. estimates of the neutral real short - term interest rate obtained from many of the dsge models used within the federal reserve system are currently clustered around zero, and this seems reasonable to me. an implication is that at present there is only a small gap between the actual real shortterm rate of about - 1 percent and the neutral real short - term rate. in other words, u. s. monetary policy is accommodative, but only moderately so. in addition, i suspect that many have come to question the view that headwinds from the financial crisis are temporarily depressing the neutral short - term rate

asymmetries, incentive conflicts, moral hazard and agency problems. by at times distorting incentives to manage risk, these market imperfections can alter credit decisions and lead to a higher overall level of risk - taking than may be optimal for the economy as a whole. this provides the classic rationale for supervision and regulation. supervision and regulation have the potential to help mitigate these sources of market failure. the recognition of a market failure does not mean, of course, that policymakers have the capacity to design solutions that can effectively mitigate those failures without raising others problems. the fundamental challenge for policy is how to achieve the appropriate balance between efficiency and financial resilience. with too much government intervention, innovation is constrained and the system is stifled. with too little, the probability of systemic crisis may rise to levels that are unacceptably high. we judge the appropriate balance not against the standard of whether it reduces to zero the probability of a major financial crisis, the failure of a large individual financial institution or a major reduction in asset prices. that is not an appropriate objective of policy. some vulnerability to crisis is a necessary and unavoidable feature of a dynamic and efficient financial system where asset prices need to be able to adjust to changes in fundamentals. the consequences of trying to induce regulated financial institutions to self - insure against all conceivable potential risks would do substantial damage to the level and efficiency of economic activity and cause the same risks to migrate to other institutions. this leaves policymakers with a set of normative questions, the answers to which must be based on knowledge about how markets work, as well as a substantial degree of judgment about what policy actions are likely to be both appropriate and effective. what level of exposure to very low probability, extreme adverse events should we be comfortable living with? what fraction of that residual exposure to the potential range of adverse events can and should the official sector try to protect the system against? the apparent success that market participants and supervisors have had so far in confronting these issues does not imply that the potential for systemic risk in financial markets no longer deserves the attention of central banks and supervisors. although improvements in capital adequacy and riskmanagement tools seem to have been a key part of the increased resiliency we ’ ve seen in recent years, we can ’ t assume that the standards and risk - management practices consistent with stability in the recent past are the ones that will perform well in the future. this is partly because