economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation. If it turns out that structural changes have played a significant role, I would generally view this as a positive, rather than negative, development. Over the coming months, I hope that we will be better able to differentiate between these competing explanations. These include the increased ability of prospective buyers to compare prices across different sellers quickly and easily, the shift in retail sales to online channels of distribution from traditional brick-and-mortar stores, and the consequences of these changes on brand loyalty and business pricing power. While some of this year’s shortfall can be explained by one-off factors, such as the sharp fall in prices for cellular phone service, its persistence suggests that more fundamental structural changes may also be playing a role. Turning to the outlook for inflation, I have been surprised by the persistence of the shortfall from the FOMC’s 2 percent long-run objective. The softer dollar and solid growth abroad also suggest that the trade sector will no longer be a significant drag on economic growth. trade competitiveness caused by the dollar’s recent weakness. Investment spending should also benefit from a better international outlook and the improvement in U.S. With the supply of labor tightening, there are greater incentives for businesses to invest in labor-saving technologies. Thus, consumer spending should continue to advance in coming quarters.īusiness fixed investment outlays are also likely to continue to rise. Household wealth has been boosted by rising home and equity prices, and household debt has been growing relatively slowly, contributing to a healthy household balance sheet. Low unemployment, sturdy job gains, and rising wages-even at a pace below previous expansions-are lifting personal income. So, why do I anticipate that the economy will likely continue to grow at a slightly above-trend pace? The fundamentals supporting continued expansion are generally quite favorable. Not only is this shift in policy now widely anticipated, but we have also seen that the impact on the level of long-term interest rates has been small as expectations have adjusted. But, I believe this impact will be quite modest. The process of balance sheet normalization-in which an increasing proportion of maturing Treasuries and agency mortgage-backed securities (MBS) repayments are allowed to run off the Fed’s balance sheet-should also exert some monetary policy restraint over time. But, the upward trajectory of the policy rate path should continue to be shallow, in part because the level of short-term interest rates consistent with keeping the economy on a sustainable long-run growth path is likely to be considerably lower than it was in prior business cycles. In response, the Fed will likely continue to remove monetary policy accommodation gradually. When combined with a firmer import price trend-partly reflecting recent depreciation of the dollar-and the fading of effects from a number of temporary, idiosyncratic factors, that causes me to expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term. Over time, this should support a rise in wage growth. Overall, the economy remains on a trajectory of slightly above-trend growth, which is gradually tightening the U.S. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. In my remarks, I will focus on two topics: 1) The economic outlook and the implications for monetary policy, and 2) the Fed’s balance sheet normalization process, which is likely to begin relatively soon. It is a pleasure to have the opportunity to speak at this Money Marketeers event.
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