Economic Outlook, October 2016

Both sides of the Fed’s dual mandate are performing quite well. Labor markets continue to produce jobs faster than the working age population is growing. Inflation has been running below the Fed’s 2 percent target, but it has moved back toward that goal, and inflation expectations remain anchored. A benchmark of the Fed’s behavior in past periods of relatively successful monetary policy makes a strong case for raising the Fed’s policy interest rate above its current low level. While inflation may seem like a distant concern right now, history suggests that pre-emptive increases in the federal funds rate can help avoid the emergence of a situation that requires more drastic action after the fact. GDP growth in this expansion has been low relative to historical trends, due largely to slower-than-average productivity growth. If productivity growth reverts part way toward its longer-run average and employment growth continues apace with current population projections, real GDP growth may achieve a 1 ¾ percent trend over the next 10 years. The factors driving long-term productivity growth lie largely outside of the influence of monetary policy. Monetary policy can affect the swings of economic activity around the trend that’s driven by productivity, but such effects are generally temporary.