Our situation, as I mentioned a moment ago, is that the economy is approximately at its capacity. It is also growing at its capacity rate. Inflation is on target, and unemployment is at a 40-year low. We have all the readings we're looking for, except that interest rates are still extraordinarily low by historical standards and certainly relative to our notion of neutral.
But you're right that getting from here to neutral—as we've said many times today—is a process in which we need to evaluate continuously how the effects are playing out. It's certainly not going to be a rapid process. It's a process, though, and we wanted to make sure we weren't locked into a perception that we would move every second meeting. That's what the market said that “gradual” meant.
We thought that it might mean that, but it could easily not mean that, so we needed to clarify. We defined the pace more carefully, so that people would understand what we would be looking at. The most important thing is how households are responding. That's the most interest sensitive part of the economy, given the level of debt. We will be analyzing that in every which way, and in much detail. At each time, we will be offering more and more insight into how people are responding.
Of course, if we move too quickly, the economy will slow below its potential growth rate and that will put downward pressure on the future outlook for inflation. That's not what we want. That would mean “slow down”. That's what that would tell us. But if the economy continues to perk along at this stage and is adding to excess demand, then we would become concerned about inflation pressures down the road. We're at that point where we need to balance the risk of going too quickly against the risk of going too slowly, and there are a number of unknowns in that grey zone in the middle. We will be monitoring each of those carefully and forming our judgments at each meeting.