In particular, we can’t be confident about how much fiscal drag will blunt growth. Ultimately, though, the drag should abate. When that happens – presumably later this year, the economy should strengthen. Inflation, as measured by the personal consumption expenditure deflator, is currently below the Federal Reserve’s 2 percent objective (Exhibit 9). Substantial slack remains in labor and product markets, and underlying measures of inflation are subdued. With weak labor compensation growth, the trend growth of unit labor costs is less than 1 percent annualized, which is well below price inflation. Moreover, inflation expectations remain well anchored at levels consistent with our 2 percent longer-run objective. Thus, I conclude that the risk that inflation could significantly exceed our 2 percent objective is quite low over the next few years, even if the recovery were to strengthen considerably. U.S. monetary policy initiatives Beginning in September, the FOMC made a number of important changes to monetary policy in order to promote a stronger recovery in the context of price stability. First, the FOMC began purchasing an additional $ billion of agency mortgage-backed securities (MBS) each month.4 Second, the FOMC stated, for the first time, that it would continue buying assets and employ its other policy tools as appropriate until there was a substantial improvement in the labor market outlook5. Third, the FOMC stated its intention to maintain a highly accommodative stance of monetary policy for a considerable time after the recovery strengthens. Two additional initiatives followed in December.
It is quite difficult to isolate the specific impact of European Monetary Union, due to the fact that large issuances during the 1999-2001 period were also linked to the refinancing needs arising from intense merger and acquisition activity. Looking ahead over the medium-term, growth in the bond market is likely to be driven by such elements as the development of pension fund assets, while retail savers may move away from bank deposits to invest in other savings products. In turn, the design of savings products will benefit from the standardisation and diversification of fixed income 5 issuance . The integration of interest rate markets in the euro area has been accompanied by a new phase in the development of derivative markets. The proportion of worldwide open interest contracts traded on  2  BIS and IMF statistics – quoted in RAJAN and ZINGALES – 2002. 3  OECD – Debt management and Government securities in the 21st century – 2002. 4  from about EUR 100 bios in 1998 to about 300 bios in 2000, 2001 and 2002 – source Bondware. 5  RAJAN and ZINGALES – 2002 – Second ECB international banking conference. 2  BIS Review 71/2002  6  European derivative exchanges went from less than 1% to more than 15% in 15 years . As derivative markets enhance the ability to manage and trade risk, they are at the heart of modern finance and the backbone of financial innovation.