Economic Outlook, January 2017

The current economic expansion has been both longer and slower than past expansions. GDP growth has been held back by low productivity growth and slow growth of the labor force. The unemployment rate is low by historical standards, the result of strong employment growth. However, current employment growth is likely faster than needed to keep up with the growth of the working age population, which suggests employment growth will continue to slow. While the outlook for fiscal policy is uncertain, some fiscal stimulus seems possible. This might provide a slight boost to GDP growth, although it is likely to decline to a long-run trend of 1 ¾ percent in 2018 and beyond, in line with productivity and demographic trends. With inflation nearing 2 percent and unemployment low, interest rate benchmarks suggest the Fed’s current interest rate target is exceptionally low. Raising rates more briskly than markets currently anticipate may be necessary to restrain inflation pressures.