Economic Leadership in an Uncertain World

In recent months, U.S. monetary policy has diverged from monetary policy in some other developed countries, a fact that is justified by the relative strength of the U.S. economy. Consumer spending, residential investment, overall business investment and government spending are likely to contribute to continued GDP growth of about 2.1 percent in the near term. In the next few years, GDP growth is likely to converge to about 1 ¾ percent. Falling energy costs and the rising value of the dollar have held down inflation recently, but inflation is likely to return to 2 percent over the near term. The decline in the natural real interest rate suggests that short-term interest rates are unlikely to reach the levels reached in previous expansions. Still, there are strong reasons to expect real short-term interest rates to rise in the near term. Such increases are a sign of the strength of the U.S. economy. There are challenges, however. The increase in the college premium over the past several decades suggests we are not keeping pace with the economy’s demand for skilled workers. Strategies to improve human capital investment are essential to the United States’ continued economic leadership.