Economic Outlook, July 2014

The Fed’s hybrid public-private structure is a product of debates a century ago over the balance of centralized versus decentralized powers in our banking system. This structure has at times helped insulate the Fed from electoral political pressures that can induce an excessively short-run focus. The Fed’s lending authority was originally provided as a means of regulating the supply of money – thus, monetary stability has always been the Fed’s primary mission. My forecast is that GDP growth will be between 2 and 2 ½ percent for the remainder of this year and next, on par with what we’ve already seen in this recovery. This forecast is below rates typically observed in recovery periods, in part because of lower productivity growth, slowing population growth and declining labor force participation. These changes are likely to be persistent. Inflation has been higher in recent months, and is likely to move back toward the FOMC’s 2 percent objective. It will be important to withdraw monetary stimulus at an appropriate time to prevent inflation pressures from emerging and to keep inflation near 2 percent.