The lower levels of yields would be expected to boost other asset prices as investors substitute into alternative asset classes. These patterns describe what researchers often refer to as portfolio balance effects. Such effects are important to consider, because they have implications for monetary policy. If the Fed’s holdings of assets have produced lower long-term interest rates, the FOMC has to carefully take into consideration how it will manage the size of its balance sheet going forward. In particular, a rapid and substantial reduction in our holdings of assets would likely push up long-term interest rates that is, it would put upward pressure on those rates by unwinding the portfolio balance effect. That increase in long rates would, in turn, weigh on other asset prices, reversing the positive effects that had been associated with the expansion of the Fed’s balance sheet. Under this view, the size of the Fed’s asset holdings becomes a relevant policy lever. Accordingly, this will be the first tightening cycle for which there are two broad policy decisions in play, as the FOMC will have to set out not only the path of the short-term interest rate, but also the path of its asset holdings. The decisions on these two variables will have to be made in conjunction with one another to produce the desired outcome for economic activity and inflation. These considerations leave open a range of outcomes for how the two instruments will be used.
Against this background, we judge that the level of nominal wages can move up at an annual rate of just over 4%. This is marginally less than foreseen in the December Report. In the longer run, however, wages cannot go on rising at this rate because they would then exceed the room that now looks like being provided by the probable trend for productivity growth. One illustration of this is that in the coming one to two years, underlying domestic inflation will be somewhat above 2%, though this is countered by downward effects from import prices. In our main scenario we judge that overall inflation prospects are in line with the target one to two years ahead but that UND1X inflation will be marginally above the target at the end of the period. With an unchanged repo rate, UND1X inflation is expected to be 1.6% one year ahead and 2.1% after two years. Diagram 3. UND1X forecast with uncertainty intervals  3. UND1X with uncertainty intervals Percentage 12-month change  5  5  4  4  3  3  2  2  1  1  0  0 95  96  97  98  99  00  01  02  Sources: Statistics Sweden and the Riksbank  The transitory factors that the Riksbank should disregard in the formation of monetary policy are judged to be small in the coming one to two years. Moreover, the Riksbank considers that the risk spectrum for inflation is balanced.