which suggest that the pace of recovery will be considerably slower than usual. in particular, i expect that consumption – which accounts for about 70 percent of gross domestic product – is likely to grow slowly for three reasons. first, real income growth will probably be weak by historical standards. there were a number of special factors that boosted real income in the first half of the year, helping to offset a sharp drop in hours worked and very sluggish hourly wage gains. these factors included the sharp drop in gasoline and natural gas prices ; the large cost - of - living - allowance increase for social security recipients reflecting last year ’ s high headline inflation ; a sharp drop in final tax settlements ; a reduction in withholding tax rates ; and a one - time payment to social security recipients. these factors provided a transitory boost to real incomes, which will be absent during the second half of the year. as a result, real disposable income is likely to decline modestly over this period. second, households are still adjusting to the sharp drop in net worth caused by the persistent decline in home prices and last year ’ s fall in equity prices. this suggests that the desired saving rate will not decline sharply. that means consumer spending is unlikely to rise much faster than income. in other words, weak income growth will be an effective constraint on the pace of consumer spending. moreover, some sectors such as business fixed investment in structures are likely to continue to weaken as existing projects are completed. in an environment in which vacancy rates are high and climbing, prices are falling, and credit for new projects is virtually nonexistent, this sector is likely to be a significant drag on the economy over the next year. perhaps most important, the normal cyclical dynamic in which housing, consumer durable goods purchases and investment spending rebound in response to monetary easing is unlikely to be as powerful in this episode as during a typical economic recovery. the financial system is still in the middle of a prolonged adjustment process. banks and other financial institutions are working their way through large credit losses and the securitization markets are recovering only slowly. this means that credit availability will be constrained for some time to come and this will serve to limit the pace of recovery. if the recovery does, in fact, turn out to be lackluster, the unemployment rate is likely to remain elevated and capacity utilization rates unusually low for some time to come. this suggests that inflation will be quiescent. for all these reasons, concern about “

reserve ’ s purchase of treasury securities. the worry here is that the federal reserve ’ s purchases are “ monetizing the debt ” and that therefore these purchases will ultimately prove inflationary. in a world of excess reserves and a positive ioer, either the ioer or the fed funds rate could conceivably be used as the primary instrument of monetary policy. the federal reserve would have precise control over the ioer and this would lead to some variability in the actual fed funds rate. this would not be much of a departure from the recent past in which the actual fed funds rate has tended to fluctuate closely around the fed funds target. regarding the fed ’ s treasury purchase program, i want to make two points. first, with the fed funds rate constrained at zero lower bound, policymakers needed to find other ways to stimulate economic activity. the agency debt and agency mbs purchase programs proved effective in narrowing credit spreads in the debt and mbs market, but the federal reserve would have encountered diminishing returns in terms of impaired market function if it had raised the sizes of these two programs further. this suggested that the best course to hold down mortgage rates and other private borrowing rates would be to engage in a treasury purchase program that would put downward pressure on treasury rates. in this regard, the fed ’ s purchases have not been motivated by accommodating an expansive fiscal policy and the large fiscal deficits that are its consequence. i can assure you that the federal reserve will never engage in a program to accommodate or facilitate an unsustainable fiscal policy program. instead, these programs were designed to help ease financial conditions at a time that the federal reserve could not push the fed funds rate below zero. second, the program is small. so even if one were to take a darker view of what the federal reserve has done, it is important to put the purchase program in context. even after completion of a purchase program of up to $ 300 billion of treasuries, the federal reserve ’ s holdings of treasuries will be smaller than they had been in august 2007 on the eve of the crisis. moreover, as a share of treasuries outstanding, the fed ’ s share will be the lowest since the early 1990s. overall, the federal reserve ’ s balance - sheet expansion has had notable benefits. the asset purchase programs have helped to keep longer - term private interest rates relatively low, and the expansion of liquidity facilities has helped to restore more