Since long-term yields reflect the market’s probability-weighted average of all possible short-term interest rate paths, along with compensating term and risk premiums, the generally low level of yields in advanced economies suggests that investors place considerable odds on adverse scenarios that would necessitate a lower and flatter trajectory of the federal funds than envisioned in participants’ modal SEP projections.
14 A final argument for gradually adjusting policy relates to the desirability of achieving a prompt return of inflation to the FOMC’s 2 percent goal, an objective that would be advanced by allowing the unemployment rate to decline for a time somewhat below estimates of its longerrun sustainable level.