 Good evening. I'm Kumbul Subbaswamy, Chancellor of the University of Massachusetts Amherst. Welcome to the University of Massachusetts Amherst and the 19th annual Philip Gamble Memorial Lecture. We are honored to have the esteemed Janet Yellen, Chair of the Board of Governors of the Federal Reserve System today. Through these lecture series, it is our pleasure to bring together faculty, staff and members of the community to listen to and learn from some of the most powerful and influential economic voices in the world. We're immensely pleased to host this event and I thank all of you for being here this evening. I would like to now welcome Michael Ash, Professor and Chair of Economics, to the stage. Thank you very much Chancellor Subbaswamy for your introduction and for your generous support of the Gamble Lecture, including live streaming. Welcome colleagues, students and honored guests. This afternoon Janet Yellen will deliver the 2015 Philip Gamble Lecture of the UMass Amherst Department of Economics. The annual Gamble Lecture features a prominent economist. Previous speakers in the series have included eight Nobel Prize winners, among them George Akerlof, James Tobin and Eleanor Ostrom, as well as others whose work and thought have illuminated our field, including Barbara Bergman, Alan Blinder, Marianne Ferber, Lonnie Guinear, our own Robert Polin and John Kenneth Galbraith. The Philip L. Gamble Memorial Lectureship Endowment was established by Israel Raghosa, class of 1942, and his family and friends in memory of Philip Gamble, a member of the UMass Economics faculty from 1935 to 1971 and chair from 1942 to 1965. He was beloved by his students who recount dinners at his house in town. This afternoon, Marty and Elizabeth Raghosa are among those gathered for the Gamble Lecture. Israel Raghosa's nephew Marty is a 1979 graduate of the Eisenberg School of Management and the steward of the Philip Gamble Memorial Lectureship Endowment. His wife Elizabeth is a 1988 Zoology graduate. Welcome and thank you for your commitment to UMass. The Gamble Lectureship is also supported by the Charles L. and Martha S. Gleason Fund. Charles and Martha were economics graduates in 1940 and 1942. Both are now deceased. There are many people at UMass who made this event possible, and on behalf of the economics department, I thank them. I would like to mention in particular Natalie Blaise, Melissa Cleary, Heather Bell, Jessica Dizak, and Sheila Gilroy to borrow from one of my favorite songs without their brain and muscle, not a single wheel would turn. I hope you will convey my thanks to your teams. Let me remind you now to turn off ringers, and their schedule today does not permit the speaker to take questions. Our Gamble Lecturer and distinguished guest is Dr. Janet Yellen, Chair of the Board of Governors of the Federal Reserve System and Chair of the Federal Open Market Committee, the Federal Reserve System's principal monetary policymaking body. Dr. Yellen has had a stellar career since graduating summa cum laude from Brown University. She earned her PhD in economics in 1971 from Yale, where she worked with the illustrious Keynesian, James Tobin. Her academic research, published in scores of articles, is essential reading for any advanced economist and has profoundly reshaped our understanding of employment, unemployment, and the business cycle. Dr. Yellen has received many academic awards and honors, including Yale's Wilbur Cross Medal, an honorary doctorate of Laws from Brown, and an honorary doctorate of Humane Letters from Bard College. Appointed to the faculty at Harvard University from 1971 to 1976, Yellen left to serve as economist at the Fed before joining the London School of Economics when she was recruited by the University of California Berkeley in 1980. Yellen is Professor Emeritus at Cal, where she was the Eugene E. and Catherine M. Trafethan Professor of Business. But Yellen heeded the call of public service, leaving lovely Berkeley, when President Bill Clinton appointed her first as member of the Fed and then as Chair of the Council of Economic Advisors. She served as President of the Federal Reserve Bank of San Francisco from 2004 through 2010 and returned to Washington when President Barack Obama appointed her to the Board of Governors as Member and Vice Chair. On October 9, 2013, President Obama nominated Dr. Yellen as Chair of the Fed. The appointment was unprecedented, not only because Dr. Yellen became the first woman to lead the Fed in its 100-year history, but also because the appointment decision hung in the balance and was debated in public with the politics of the Fed and its power over unemployment and over finance in the foreground as never before. 505 economists from more than 200 colleges and universities signed a letter endorsing Janet Yellen. We appreciated her intellectual power, admired her ethics, and shared her humanism. We sought and through collective action got a Fed Chair who sees the financial system not as private gold mines but as a public trust. A Fed Chair who says of unemployment and I quote Dr. Yellen, these are not just statistics to me, the toll is simply terrible on the mental and physical health of workers, on their marriages, on their children. Dr. Yellen, you are our Fed Chair. It's my honor to welcome you as the 2015 Gamble Lecturer at the University of Massachusetts Amherst. My thanks to Chancellor Subhaswamy and to Michael Lash for his lovely introduction. My thanks to the University of Massachusetts for the honor of being invited to deliver this year's Philip Gamble Memorial Lecture. In my remarks today, I will discuss inflation and its role in the Federal Reserve's conduct of monetary policy. I'll begin by reviewing the history of inflation in the United States since the 1960s, highlighting two key points. That inflation is now much more stable than it used to be, and that it is currently running at a very low level. I will then consider the costs associated with inflation and why these costs suggest that the Federal Reserve should try to keep inflation close to 2%. After briefly reviewing our policy action since the financial crisis, I will discuss the dynamics of inflation and their implications for the outlook and monetary policy. A crucial responsibility of any central bank is to control inflation. The average rate of increase in the prices of a broad group of goods and services. Keeping inflation stable at a moderately low level is important because for reasons I will discuss, inflation that is high, excessively low, or unstable, imposes significant costs on households and businesses. As a result, inflation control is one half of the dual mandate that Congress has laid down for the Federal Reserve, which is to pursue maximum employment and price stability. The Federal Reserve has not always been successful in fulfilling the price stability element of its mandate. The dashed red line in this figure plots the four-quarter percent change in the price index for personal consumption expenditures, or PCE. The measure of inflation that the Fed's policy-making body, the Federal Open Market Committee, or FOMC, uses to define its longer-run inflation goal. Starting in the mid-1960s, inflation began to move higher. Large jumps in food and energy prices played a role in this upward move, but they were not the whole story. For as illustrated here, inflation was already moving up before the food and energy shocks hit in the 1970s and early 1980s. And if we look at core inflation, which is the solid black line which excludes food and energy prices, we see that it too starts to move higher in the mid-1960s and rises to very elevated levels during the 1970s, which strongly suggests that something more than energy and food price shocks must have been at work. A second important feature of inflation over this period can be seen if we examine an estimate of its long-term trend, which is plotted as the dotted black line in this figure. At each point in time, this trend is defined as the prediction from a statistical model of the level to which inflation is projected to return in the long-run once the effects of any shocks to the economy are fully played out. As can be seen from the figure, this estimated trend drifts higher over the 1960s and 1970s, implying that during this period there was no stable anchor to which inflation could be expected to eventually return. That's a conclusion generally supported by other procedures for estimating trend inflation as well. Today, many economists believe that these features of inflation in the late 1960s and 1970s, its high level and lack of a stable anchor, reflected a combination of factors, including chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an inflationary psychology whereby a rise in actual inflation led people to revise up their expectations for future inflation. Together, these various factors caused inflation, actual and expected, to ratchet higher over time. Ultimately, however, monetary policy bears responsibility for the broad contour of what happened to actual and expected inflation during this period, because the Federal Reserve was insufficiently focused on returning inflation to a predictable low level following the shocks to food and energy prices and other disturbances. In late 1979, the Federal Reserve began significantly tightening monetary policy to reduce inflation. In response to this tightening, which precipitated a severe economic downturn in the early 1980s, overall inflation moved persistently lower, averaging less than 4% from 1983 to 1990. Inflation came down further following the 1990-91 recession and subsequent slow recovery, and then averaged about 2% for many years. Since the recession ended in 2009, however, the United States has experienced inflation running appreciably below the FOMC's 2% objective, in part reflecting the gradual pace of this subsequent economic recovery. Examining the behavior of inflation's estimated long-term trend reveals another important change in inflation dynamics. With the caveat that these results are based on a specific implementation of a particular statistical model, they imply that since the mid-90s there have been no persistent movements in this predicted long-run inflation rate, which has remained very close to 2%. Remarkably, the stability is estimated to have continued during and after the recent severe recession, which saw the unemployment rate rise to levels comparable to those during the 1981-82 downturn when the trend did shift down markedly. As I'll discuss, the stability of this trend appears linked to a change in the behavior of long-run inflation expectations, measures of which appear to be much better anchored today than in the past, likely reflecting an improvement in the conduct of monetary policy. In any event, this empirical analysis implies that over the past 20 years inflation has been much more predictable over the longer term than it was back in the 1970s, because the trend rate to which inflation was predicted to return no longer moved around depreciably. That said, inflation still varied considerably from year to year in response to various shocks. As this figure highlights, the United States has experienced very low inflation on average since the financial crisis, in part reflecting persistent economic weakness that has proven difficult to fully counter with monetary policy. Overall inflation, shown as the dashed red line, has averaged only about 1.5% per year since 2008, and it's currently close to zero. This result is not merely a product of falling energy prices as core inflation, that's the solid black line, has also been low on average over this period. In 2012, the FOMC adopted for the first time an explicit longer-run inflation objective of 2% as measured by the PCE price index. Other central banks, including the European Central Bank and the Bank of England, also have a 2% inflation target. This decision reflected the FOMC's judgment that inflation that persistently deviates up or down from a fixed low level can be costly in a number of ways. Persistent high inflation induces households and firms to spend time and effort trying to minimize their cash holdings and forces businesses to adjust prices more frequently than would otherwise be necessary. More importantly, high inflation also tends to raise the after-tax cost of capital, thereby discouraging business investment. These adverse effects occur because capital depreciation allowances and other aspects of our tax system are only partially indexed for inflation. Persistently high inflation, if unanticipated, can be especially costly for households that rely on pensions, annuities, and long-term bonds to provide a significant portion of their retirement income. Because the income provided by these assets is typically fixed in nominal terms, its real purchasing power may decline surprisingly quickly if inflation turns out to be consistently higher than originally anticipated, with potentially serious consequences for retirees' standards of living as they age. An unexpected rise in inflation also tends to reduce the real purchasing power of labor income for a time, because nominal wages and salaries are generally slow to adjust to movements in the overall level of prices. Survey data suggests that this effect is probably the number one reason why people dislike inflation so much. In the longer run, however, real wages, that is, wages adjusted for inflation, appear to be largely independent of the average rate of inflation, and instead are primarily determined by productivity, global competition, and other non-monetary factors. In support of this view, this figure shows that nominal wage growth tends to broadly track price inflation over long periods of time. Inflation that is persistently very low can also be costly, and it is such cost that have been particularly relevant to monetary policy makers in recent years. The most important cost is that very low inflation constrains the central bank's ability to combat recessions. Normally, the FOMC fights economic downturns by reducing the nominal federal funds rate. That is the rate charged by banks to lend to each other overnight. These reductions, current and expected, stimulate spending and hiring by lowering longer-term real interest rates, that is, nominal rates adjusted for inflation, and by improving financial conditions more broadly. But the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities. Thus, the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem, because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period of time to restore full employment at a satisfactory pace. For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC's mandate to promote maximum employment. An unexpected decline in inflation that is sizable and persistent can also be costly because it increases the debt burdens of borrowers. Consider homeowners who take out a conventional fixed-rate mortgage with the expectation that inflation will remain close to two percent and say their nominal incomes will rise about four percent per year. If the economy were instead to experience chronic mild deflation, accompanied by flat or declining nominal incomes, then after a few years the homeowners might find it noticeably more difficult to cover their mortgage payments than they originally anticipated. Moreover, if house prices were to fall in line with consumer prices rather than rising as expected, then the equity in their home will be lower than they had anticipated. This situation, which is sometimes referred to as debt deflation, would also confront all households with outstanding student loans, auto loans, or credit card debt, as well as businesses that had taken out bank loans or issued bonds. Of course, in this situation lenders would be receiving more real income, but the net effect on the economy is likely to be negative, in large part because borrowers typically have only a limited ability to absorb losses. And if the increased debt service burdens and declines in collateral values are severe enough to force borrowers into bankruptcy, then the resultant hardship imposed on families, small business owners, and laid-off workers may be very severe. As I noted earlier, after weighing the costs associated with various rates of inflation, the FOMC decided that 2% inflation is an appropriate operational definition of its longer-run price objective. In the wake of the 2008 financial crisis, however, achieving both this objective and full employment, the other leg of the Federal Reserve's dual mandate has been difficult, and you can see this in Figure 4. Initially, the unemployment rate, the solid black line, soared, and inflation, the dashed red line, fell sharply. Moreover, after the recession officially ended in 2009, the subsequent recovery was significantly slowed by a variety of persistent headwinds, including households with underwater mortgages and high debt burdens, reduced access to credit for many potential borrowers, constrained spending by state and local governments, and weakened foreign growth prospects. In an effort to return employment and inflation to levels consistent with the Federal Reserve's dual mandate, the FOMC took a variety of unprecedented actions to lower long-term interest rates, including reducing the federal funds rate, that's the dotted black line, to near zero, communicating to the public that short-term interest rates would likely stay exceptionally low for some time, and buying large quantities of longer-term treasury debt and agency-issued mortgage-backed securities. These actions contributed to highly accommodative financial conditions, thereby helping to bring about a considerable improvement in labor market conditions over time. The unemployment rate, which peaked at 10% in 2009, is now 5.1%, that's slightly above the median of FOMC participants' current estimates of its longer-run normal level. Although other indicators suggest that the unemployment rate currently understates how much slack remains in the labor market, unbalance the economy is no longer far away from full employment. In contrast, inflation has continued to run below the Committee's objective over the past several years, and over the past 12 months it has been essentially zero. Nevertheless, the Committee expects that inflation will gradually return to 2% over the next two or three years, and I'd like to now turn to the determinants of inflation and the factors that underlie this expectation. Models used to describe and predict inflation commonly distinguish between changes in food and energy prices, which enter total inflation, and movements in the prices of other goods and services that's called core inflation. This decomposition is useful because food and energy prices can be extremely volatile, with fluctuations that often depend on factors that are beyond the influence of monetary policy, such as technological or political developments in the case of energy prices or weather or disease in the case of food prices. As a result, core inflation usually provides a better indicator than total inflation of where total inflation is headed in the medium term. Of course, food and energy account for a significant portion of household budgets, so the Federal Reserve's inflation objective is defined in terms of the overall change in consumer prices. What then determines core inflation? Recalling figure one, core inflation tends to fluctuate around a longer term trend that now is essentially stable. Let me first focus on these fluctuations and then turn to the trend. Economic theory suggests an empirical analysis confirms that deviations of inflation from trend depend partly on the intensity of resource utilization in the economy. As approximated, for example, by the gap between the actual unemployment rate and its so-called natural rate, or by the shortfall of actual gross domestic product or GDP from potential output. This relationship, which likely reflects, among other things, a tendency for firms' costs to rise as utilization rates increase. This represents an important channel through which monetary policy influences inflation over the medium term, although in practice the influence is modest and gradual. Movements in certain types of input costs, particularly changes in the price of imported goods, also can cause core inflation to deviate noticeably from its trend. Sometimes by a marked amount from year to year. Finally, a non-trivial fraction of the quarter to quarter and even the year to year variability of inflation is attributable to idiosyncratic and often unpredictable shocks. Now what about the determinants of inflation's longer term trend? Here it's instructive to compare the purely statistical estimate of the trend rate of future inflation that I showed you in my first figure with survey measures of people's actual expectations of long-run inflation, which is what you see in this figure. The theory suggests that inflation expectations, which presumably are linked to the central bank's inflation goals, should play an important role in actual price setting. And indeed the contours of these series are strikingly similar, which suggests that the estimated trend in inflation is in fact related to households and firms' long-run inflation expectations. So to summarize, this analysis suggests that economic slack, changes in imported goods prices, and idiosyncratic shocks all cause core inflation to deviate from a longer-run trend that is ultimately determined by long-run inflation expectations. As some of you may recognize, this model of core inflation is a variant of a theoretical model that is commonly referred to as an expectations augmented Phillips curve. Total inflation in turn reflects movements in core inflation combined with changes in the prices of food and energy. An important feature of this model of inflation dynamics is that the overall effect that variations in resource utilization, import prices, and other factors will have on inflation depends crucially on whether these influences also affect long-run inflation expectations. This figure illustrates this point with a stylized example of the inflation consequences of a gradual increase in the level of import prices, perhaps occurring in response to stronger real activity abroad or a fall in the exchange value of the dollar that causes the rate of change of import prices to be elevated for a time. First, consider the situation shown in panel A, in which households and firms' expectations of inflation are not solidly anchored, but instead just in response to the rates of inflation that are actually observed. Such conditions, which arguably prevailed in the United States from the 1970s to the mid-1990s, could plausibly arise if the central bank has in the past allowed significant and persistent movements in inflation to occur. In this case, the temporary rise in the rate of change of import prices results in a permanent increase in inflation. The shift occurs because the initial increase in inflation generated by a period of rising import prices leads households and firms to revise up their expectations of future inflation. A permanent rise in inflation would also result, for example, from a sustained rise in the level of oil prices or a temporary increase in resource utilization. By contrast, suppose that inflation expectations are instead well-anchored, perhaps because the central bank has been successful over time in keeping inflation near some specified target, and has made it clear to the public that it intends to continue to do so. Then the response of inflation to a temporary increase in the rate of change of import prices or any other transitory shock will resemble the pattern shown in panel B. In this case, inflation will deviate from its longer-term trend only as long as import prices are rising. But once they level out, inflation will fall back to its previous trend in the absence of other disturbances. A key implication of these two examples is that the presence of well-anchored inflation expectations greatly enhances a central bank's ability to pursue both of its objectives, namely price stability and full employment. Because temporary shifts in the rate of change of import prices or other transitory shocks have no permanent influence on expectations, they have only a transitory effect on inflation. And the result is that a central bank can look through such short-run inflationary disturbances in setting monetary policy, allowing it to focus on returning the economy to full employment without placing price stability at risk. And indeed, the Federal Reserve has done exactly that in setting monetary policy over the past decade or more. Moreover, as I will discuss shortly, these inflation dynamics are a key reason why the FOMC expects inflation to return to 2% over the next few years. On balance, the evidence suggests that inflation expectations are in fact well-anchored at present. This figure plots the two survey measures of longer-term expected inflation I presented earlier, along with a measure of longer-term inflation compensation that's derived as the difference between yields on nominal treasury securities and inflation indexed ones called TIPS. Since the late 1990s, survey measures of longer-term inflation expectations have been quite stable. This stability has persisted in recent years despite a deep recession and concerns expressed by some observers regarding the potential inflationary effects of unconventional monetary policy. The fact that these survey measures appear to have remained anchored at about the same levels that prevailed prior to the recession suggests that once the economy has returned to full employment and absent any other shocks, core inflation should return to its pre-recession average level of about 2%. This conclusion is tempered somewhat by recent movements in longer-run inflation compensation, which in principle could reflect changes in investors' expectations for long-run inflation. This measure is now noticeably lower than in the years just prior to the financial crisis. However, movements in inflation compensation are difficult to interpret because they can be driven by factors that are unique to financial markets, such as movements in liquidity or risk premiums, as well as by changes in expected inflation. Indeed, empirical work that attempts to control for these factors suggests that the long-run inflation expectations embedded in asset prices have in fact moved down relatively little over the past decade. Nevertheless, the decline in inflation compensation, that's the red line, over the past year may indicate that financial market participants now see an increased risk of very low inflation persisting. Although the evidence on balance suggests that inflation expectations are well-anchored at present, policymakers would be unwise to take this situation for granted. Anchored inflation expectations were not won easily or quickly. Experience suggests that it takes many years of carefully conducted monetary policy to alter what households and firms perceive to be inflation's normal behavior, and furthermore that a persistent failure to keep inflation under control by letting it drift either too high or too low for too long could cause expectations to once again become unmoored. Given that inflation has been running below the FOMC's objective for several years now, such concerns reinforce the appropriateness of the Federal Reserve's current monetary policy, which remains highly accommodative by historical standards and is directed toward helping return inflation to 2% over the medium term. Before turning to the implications of this inflation model for the current outlook in monetary policy, I do think a cautionary note is in order. The Phillips Curve approach to forecasting inflation has a long history in economics, and it's usefully informed monetary policy decision-making around the globe. But the theoretical underpinnings of the model are still a subject of controversy among economists. Moreover, inflation sometimes moves in ways that empirical versions of the model, which necessarily are a simplified version of a complicated reality, cannot adequately explain. And for this reason, significant uncertainty attaches to Phillips Curve predictions and the validity of forecasts from this model do have to be continuously evaluated in response to incoming data. But assuming that my reading of the data is correct and long run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy? This framework suggests first that much of the recent shortfall of inflation from our 2% objective is attributable to special factors whose effects are likely to prove transitory. As the solid black line in figure 8 indicates, PCE inflation has run noticeably below our 2% objective on average since 2008, with the shortfall approaching about a percentage point in both 2013 and 2014 and more than one-and-a-half percentage points this year. The stacked bars in the figure give the contributions of various factors to these deviations from 2%. They're computed using an estimated version of the simple inflation model I just discussed. As the solid blue portion of the bar shows, falling consumer energy prices explain about half of this year's shortfall and a sizable portion of the 2013 and 2014 shortfalls as well. Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15% appreciation in the dollar's exchange value over the past year. In contrast, the restraint imposed by economic slack, that's the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest. Finally, a similarly small portion of the current shortfall of inflation from 2% is explained by other factors which include changes in food prices. Importantly, the effects of these other factors are transitory and often switch signs from year to year. Although an accounting exercise like this one is always imprecise and will depend on the specific model that is used, I think its basic message that the current near zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports is quite plausible. If so, the 12 month change in total PCE prices is likely to rebound to 1.5% or higher next year, barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further. To be reasonably confident that inflation will return to 2% over the next few years, we need in turn to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization with longer term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year, and the overall economy has been expanding modestly faster than its productive potential. My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016. The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment. Although the unemployment rate may now be closer to its longer run normal level, which most FOMC participants now estimate is around 4.9%, this traditional metric of resource utilization almost certainly understates the actual amount of slack that currently exists. On a cyclically adjusted basis, the labor force participation rate remains low relative to its underlying trend, and an unusually large number of people are working part-time but would prefer full-time employment. Consistent with this assessment is the slow pace at which hourly wages and compensation have been rising, which suggests that most firms still find it relatively easy to hire and retain employees. Reducing slack along these other dimensions may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent in the longer run with inflation stabilizing at 2%. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2% inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving American standard of living. Consistent with the inflation framework I've outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2%, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. These projections embody two key judgments regarding the projected relationship between real activity and interest rates. First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential. This implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy's underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should gradually rise over time. This expectation coupled with inherent lags in the response of real activity and inflation to changes in monetary policy are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short term rates at a gradual pace thereafter as the labor market improves further and inflation moves back toward 2% objective. By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions in the general economy. What matters for overall financial conditions is the entire trajectory of short term interest rates that's anticipated by markets in the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short term interest rates at a quite gradual pace over the next few years. It's important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the committee's outlook for progress toward maximum employment and 2% inflation. The economic outlook, of course, is highly uncertain and it's conceivable, for example, that inflation could remain appreciably below our 2% target despite the apparent anchoring of inflation expectations. Here, Japan's recent history may be instructive. This figure shows that survey measures of longer term expected inflation in Japan remain positive and stable even as that country experienced many years of persistent mild deflation. The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe it illustrates a problem faced by all central banks. Economists' understanding of the dynamics of inflation is far from perfect. Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the committee currently anticipates, and if such a development occurs, we would of course need to adjust the stance of policy in response. Considerable uncertainties also surround the outlook for economic activity. For example, we cannot be certain about the pace at which the headwind still restraining the domestic economy will continue to fade. Moreover, net exports have served as a significant drag on growth over the past year, and recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity, somewhat further. The committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy. That said, in response to surprises affecting the outlook for economic activity, as with those affecting inflation, the FOMC would need to adjust the stance of policy so that our actions remain consistent with inflation returning to our 2 percent objective over the medium term in the context of maximum employment. Given the highly uncertain nature of the outlook, one might ask, why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently pushing the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity is returned to normal and headwinds have faded could encourage excessive leverage in other forms of inappropriate risk taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace adjusting policy as needed in light of incoming data. So to conclude, let me emphasize that following the dual mandate established by Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis. That policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflation pressures. However, we have not yet fully attained our objectives under the dual mandate. Some slack in labor markets remains and the effects of this slack and the influence. Some slack remains in labor markets and the effect of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors. Keeping inflation below our goal, but I expect that inflation will return and the influence of lower energy prices and inflation below our goal. I expect this to occur as the temporary factors that are currently weighing on inflation, weighing, provided that economic growth continues to be strong enough to complete the return of the economy to full employment and to return to full employment and long run expectations remain well anchored. For most FOMC participants, including myself, we currently anticipate that achieving these conditions will likely entail an increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgment's a bit appropriate. Excuse me. Monetary policy will of course change. So let me stop there. Thank you. Thank you Dr. Yellen for an absolutely fascinating, for a fascinating gamble lecture. I'm grateful to you for coming to the University of Massachusetts. It's my pleasure to present you with this poster of your visit and we will make sure that it joins you in Washington. And so as I said, there is not time for questions this afternoon, but please thank our 2015 gamble lecturer, Sarah Janet Yellen.