However, I believe inflation is likely to firm up as some of the factors that have held it down, such as the cut in payments to Medicare providers and generally weak medical costs, are likely to abate over time. I am encouraged that inflation expectations remain near their longer-term averages and consistent with our 2-percent target.
As a result, real interest rates will decline, thereby stimulating such private demand components as business fixed investment, private consumption, and housing investment. The upward pressure on prices will grow stronger as demand increases and the output gap narrows accordingly. Rises in actual inflation rates will be translated into higher expected rates of inflation and thus lower real interest rates.