suggests that once the economy has returned to full employment, and absent in the other shocks,

core inflation should return to its pre-recession average level of about 2%.

This conclusion is tempered somewhat by recent movements, in longer run, inflation compensation,

which in principle could reflect changes and investors' expectations for long-run inflation.

This measure is now noticeably lower than in the years just prior to the financial crisis.

However, movements in inflation compensation are difficult to interpret because they can be driven by factors that are unique to financial markets,

such as movements in liquidity or risk premiums as well as by changes in expected inflation.

Indeed, empirical work that attempts to control for these factors

suggests that the long-run inflation expectations embedded in asset prices have, in fact, moved down relatively little over the past decade.

Nevertheless, the decline in inflation compensation, that's the red line, over the past year

may indicate the financial market participants now see an increased risk of very low inflation persisting.

Although the evident unbalance suggests that the inflation expectations are well-anchored at present,

policy makers would be unwise to take this situation for granted.

Anchored inflation expectations were not won easily or quick won.

Experience suggests that it takes many years of carefully-conducted monetary policy to alter what households and firms perceive to be inflation's normal behavior.

And furthermore, that the persistent failure to keep inflation under control by wedding a drift either too high or too low for too long

could cause expectations to once again become unmoored.

Given that inflation has been running below the FOMC's objective for several years now, such concerns reinforce the appropriateness of the federal reserve's current monetary policy,

which remains highly accommodative by historical standards, and is directed toward helping return inflation to 2% over the medium term.

Before turning to the implications of this inflation model for the current outlook in monetary policy, I do think a cautionary note is in order.

The Phillips Curve approach to forecasting inflation has a long history in economics, and it's usefully informed monetary policy decision-making around the globe.

But the theoretical underpinnings of the model are still subject to controversy among economists.

Moreover, inflation sometimes moves in ways the empirical versions of the model, which necessarily are a simplified version of a complicated reality cannot adequately explain.

And for this reason, significant uncertainty attaches to Phillips Curve predictions and the validity of forecast from this model

do have to be continuously evaluated in response to incoming data.