Lael Brainard: Sustaining full employment and inflation around target
The views expressed in this speech are those of the speaker and not the view of the BIS.
I appreciate the opportunity to join the Forecasters Club to discuss the path ahead for our economy and monetary policy. In the months ahead, I expect to see tightening resource utilization in the U.S. economy as rising fiscal stimulus reinforces above-trend growth. Continued gradual increases in the federal funds rate are likely to be consistent with sustaining strong labor market conditions and inflation around target, with the balance sheet running off gradually and predictably in the background. This outlook suggests a policy path that moves gradually from modestly accommodative today to neutral—and, after some time, modestly beyond neutral—against the backdrop of a longer-run neutral rate that is likely to remain low by historical standards. Let me consider each element in turn
Growing above Trend
Although indicators of economic activity were on the soft side earlier in the year, the outlook for the remainder of 2018 remains quite positive, supported by sizable fiscal stimulus as well as still-accommodative financial conditions.
In the latest report, real gross domestic product (GDP) increased 2.2 percent at an annual rate in the first quarter of 2018, a slowdown from the 3 percent pace in the final three quarters of 2017. The first-quarter slowdown was especially noticeable in consumer spending, which increased at only a 1 percent pace last quarter, compared with 2-3/4 percent in 2017. By contrast, business fixed investment increased 9 percent at an annual rate last quarter, surpassing its robust 2017 pace.