But our current best judgment is that the underlying trend of inflation is somewhere around 1.6 per cent to 1.8 per cent. To get the trend moving back toward 2 per cent, it’s essential that excess capacity in the economy be used up.
One is the exit problem – that a large balance sheet may make it harder for the FOMC to raise rates when the time comes. Between the ability to pay interest on reserves, as well as various reserve-draining methods that the Fed has been methodically testing, I am confident that we have the tools to raise rates.