The economy is growing, labor markets have improved dramatically, and inflation is forecast to return to two percent over the intermediate term. However, the Fed still expresses extreme caution about normalizing monetary policy, citing myriad concerns, ranging from sluggish wage growth and low inflation to foreign economic and political risks, which might delay the date at which interest rates finally lift off their zero lower bound. This creates the potential for an erosion of the FOMC’s credibility and suggests the Fed lacks a clear strategy for getting monetary policy back on track.
Economic growth since the deep recession of 2008-2009 has been modest but balanced, and momentum is now building. The outlook for sustained cyclical growth is favorable. So far this expansion, the pace of growth has been dampened by real and financial adjustments following the unsustainable debt and housing bubbles, along with harmful economic and regulatory policies. Not surprisingly, the Fed’s unprecedented monetary stimulus has been largely ineffective in addressing the real, nonmonetary constraints. As these post-crisis adjustments conclude, economic performance will strengthen in 2015-2016, supported by the Fed’s aggressive monetary accommodation and lower energy prices.