And I would say even if you consider our forward guidance we put in place in march, the committee indicated that even after we think the time has come to raise rates, that we think it will be some considerable time before we move them back to historically normal levels, and that reflects -- well, different people have different views, but to my mind, it in part reflects the fact that headwinds holding back the recovery do continue. Productivity growth has been slow, and of course, we need to be cautious to make sure that the economy continues to recover.

Even when the economy gets back on track, it doesn't mean that these headwinds will have completely disappeared. And in addition to that, productivity growth is rather low. At least that may not be a permanent state of affairs, but it's certainly something that we have seen in the aftermath. We'll -- we've seen it during most of the recovery. That's a factor that I think is suppressing business investment and will work for some time to hold interest rates down. These concerns and these factors are related to what economists are discussing, including secular stagnation. The committee -- you know, when it thinks about what is normal in the longer run, the committee has recently slightly reduced their estimates of what will be normal in the longer run. It -- the median view on that is now something around 3 and 3 1/4 percent, but we don't really know. But it's the same -- the same factors that are making the committee feel that it will be appropriate to raise rates only gradually, they're some of the same factors that figure in the secular stagnation.

Over the past year or so, the FOMC has cut its federal funds rate target by 425 basis points to its current level of 1 percent.  Nonetheless, most private-sector borrowing rates are higher now than at the beginning of this crisis in August 2007. In pointing this out, I don’t mean to imply that the rate cuts did no good: borrowing rates in my view would be substantially higher absent the reduction in our base lending rate. It’s just that the effects of the growing credit crunch have outpaced the easing of policy, and, indeed, every major sector of the economy has been adversely affected by it.

Indeed, in view of the scope and severity of the recent financial shock, the restraint on economic activity stemming from credit market headwinds could exceed the experience of the 1990s.

I would, however, be cautious about this conclusion, for several reasons. First, many 'initial conditions' prevailing prior to the current financial shock were perceptibly better than in the early 1990s...

Second, the policy response, including the Treasury program to purchase troubled assets from financial institutions and to inject capital into banking firms, as well as the extension of deposit insurance, is substantial and far-reaching...

The Treasury program, properly implemented, will improve capital positions and help to establish values for assets currently locked up...

I think that today's circumstances align, although not perfectly, with the experience of the early 1990s. There is no doubt that a variety of potential borrowers are finding funding more difficult and expensive to obtain. Moreover, while there was a significant contraction in residential construction activity in the late 1980s and early 1990s, the recent correction in this sector has been more severe, especially with the decline in housing values, and is continuing.

It is important to bear in mind, however, that many “initial conditions” prevailing prior to this financial shock were perceptibly better than in the early 1990s. Unemployment, interest rates, and inflation were all lower at the outset of the latest period of turmoil than in the previous headwinds episode. Equally important, the financial condition of both most banking and nonfinancial businesses was relatively healthier at the onset of recent problems.

In my judgment, the 1990s headwinds episode continues to provide a valuable reference point for thinking about economic prospects. For the near-term, I think that this framework suggests further declines in employment and likely softness in consumer spending, with a diminution of inflation, absent a resurgence in energy and other commodity prices.

Although this rate is low by historical standards, I still don't consider the stance of monetary policy to be excessively stimulatory. In light of all of the disruptions to the financial system I described, I consider financial conditions to be more restrictive overall now than when the financial crisis struck a year ago. Policy must be calibrated to push through the substantial headwinds the economy faces.

In measuring the stance of policy, it's common to look at the real federal funds rate—the nominal rate less a measure of the rate of inflation that is likely to prevail over the period ahead. For inflation, I have tended to use core PCE price inflation, that is, without the effects of food and energy prices...

Doing the math leaves us with a slightly negative real federal funds rate. Does this mean that policy is highly accommodative? Normally, a negative real funds rate would imply that the answer is "yes" because it is typically associated with low borrowing costs and easy credit terms—that is, easy overall financial conditions. But, as I discussed, overall financial conditions are probably more restrictive now than when the financial crisis struck a year ago, so the slightly negative real funds rate does not imply a highly accommodative policy stance. In other words, policy must be calibrated to push through the substantial headwinds the economy faces. While the economy did well in the second quarter, that strength, as I indicated, is likely to prove ephemeral. My forecast is for sluggish growth in the second half of this year, with substantial downside risks—especially emanating from the financial system.

Overall inflation over the past year has been unacceptably high. But, the prognosis going forward is favorable. Inflation expectations remain relatively well contained, reducing the chance that a wage-price spiral will develop. Moreover, if new lower commodity prices hold, even at today's high levels, we are likely to see improvements in overall and core consumer inflation coming through the pipeline soon.

The potential for headwinds is integral to thinking about U.S. economic prospects over the next year or two. To the extent that headwinds gain momentum, and we have seen a few squalls already, they suggest relatively modest growth for a time and the likelihood of increases in the unemployment rate.

As reported by Market News International

The implications of the headwinds for inflation are not so clear, although I would note that the pace of inflation diminished in the 1990s relative to its performance over the preceding several years.

As reported by Market News International.

Globalization, once helpful in tamping down U.S. inflation by creating access to cheap labor, has become a headwind as demand for goods in developing nations rises rapidly, he said.

"Demand is in full force," Fisher said. "I do not see demand pressures being mitigated any time soon."

From Q&A as reported by Reuters

What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls...

This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the Fed Funds rate.

With respect to small business, I've heard mixed anecdotes about small business. Not all small community banks have had problems. Many of them were not involved in any way in the subprime lending, for example, and they haven't taken any losses, and so many of them are still making loans to local businesses.

But as a general matter, the loss of capital in the banking system, which has only been partially replenished; the increase in the size of the balance sheets as they brought off-balance-sheet assets onto their balance sheets; and their concerns about liquidity all are creating a situation where our financial institutions are hunkered down. They're not making loans at the normal rate.  And it's having real effects on small businesses, on mortgages, on all aspects of our economy.

From the Q&A session

The potential for headwinds is integral to thinking about U.S. economic prospects over the next year or two. To the extent that headwinds gain momentum, they suggest relatively modest growth for a time and the likelihood of increases in the unemployment rate.

With respect to globalization, I agree with Bill that, through its effect on relative prices, globalization has created both tailwinds and headwinds for central banks in their quest for price stability. Such shocks do not, in my view, alter in the least the ability of a central bank to attain its desired inflation objective over the medium term in a flexible exchange rate regime. But they do affect inflation in the short run, and they can make the attainment of a particular inflation goal easier or more painful by impacting NAIRU, at least for a time.

In the current situation, monetary stimulus is facing significant headwinds from the weak condition of some of the interest-sensitive sectors, as well as restrictions in credit availability and a repricing of risk. In these circumstances, a central bank may have to ease policy more in order to achieve its desired effect.

It's no question that in a globalized economy, whereas before we were the beneficiary of tailwinds that helped us with new labor supply feeding into our productivity here in the United States, now we're facing headwinds based on demand-pull inflationary forces with these 3 billion plus new consumers around the world. So I'm more concerned about inflation than I have been of late. It's a growing concern.