Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

To go back to what I said to the Vice Chairman, implicit in that long- run scenario is a 2 percent inflation expectation that is sort of pegging inflation. Obviously we could be seriously wrong about that. We could also be seriously wrong about the degree of resource utilization in the economy right now. That 2 percent comes about because we don’t have a big positive or negative output gap either now or going forward. If the NAIRU is more like 4½ percent, then you might, in fact, make some progress in long-run inflation expectations. If the economy slows, you push the unemployment rate to 5 percent, and you get a bit of output gap, then you might get some good behavior there. Another issue with which I know you’ve been grappling is that headline inflation has been high in recent years. If that condition were to persist, it could lead to some deterioration in inflation expectations that might raise us from 2 to something above 2 going forward. We haven’t seen the evidence of that in measures of inflation expectations either from surveys or from financial markets, but that’s something we’re watching to see whether or not our story is right.

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