Economic Outlook, January 2015

While GDP growth in 2015 may revert to its post-recession average of around 2 ¼ percent, there are reasons to believe that growth could rise to between 2 ½ and 3 percent this year. We have seen pickups at other times during this expansion, only to see them subside, but the recent strength in consumer spending and the decline in the saving rate suggest the current higher growth rate can be sustained. Many labor market indicators also have strengthened. The economy still faces some challenges, however, including sluggishness in the housing market, potentially weaker exports and declines in government spending. Inflation is currently below the FOMC’s target of 2 percent but is likely to move closer to 2 percent after energy price movements subside. The FOMC has no pre-set timetable for raising the federal funds rate target. Policymakers should strive to look through transitory phenomena to assess the appropriate path for interest rates.