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The Federal Open Market Committee (FOMC) in its January meeting decided to leave the federal funds rate unchanged in a range of 125 to 150 basis points. We also expect business investment to be stronger than in 2017, and we believe that improved global growth could also help support economic growth in the U. Our forecast reflects the positive near-term impact of the recent tax legislation. We also expect U-6—a measure of labor slack that tracks the number of unemployed plus “marginally attached workers” (workers who indicate that they would like a job but have stopped looking for one) plus those working part time for economic reasons—to decline from 8.2 percent to well below 8 percent.In our FOMC statement after the meeting, the committee explained that it expects “economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.” The purpose of this essay is to briefly discuss my views regarding economic conditions, the implications for monetary policy and address a few of the fundamental challenges facing the U. It is our view that the bulk of this impact will be felt in 2018 and to a lesser extent in 20. It is the judgment of Dallas Fed economists that current levels of headline unemployment as well as U-6 are indicative of an economy that is either at or has moved past the level of full employment.While consumer leverage helped fuel GDP growth leading up to 2007, in 2008, it became apparent that the consumer had to deleverage. The corporate tax reform elements of recent tax legislation should help to encourage greater business formation and investment, which should lead to greater productivity and some increase in the growth potential of the U. Ultimately, we believe that growth will return back to trend.
Today's healthy consumer provides a key underpinning to the U. This projected increase in government debt to GDP comes at a point in the economic cycle when it would be preferable to be moderating the rate of debt growth at the government level.
While leverage can stimulate the economy as it is being added, deleveraging is likely to be depressing to GDP growth.
Despite this optimism, we believe longer-term challenges remain. Addressing these challenges is likely to require fundamental structural reforms and a broader menu of policy actions beyond monetary policy.
As I have been discussing for the past two years, technology-enabled disruption means workers increasingly being replaced by technology.
Possible remedies to the effects of aging demographics could include incentives for workers to work later in their careers, inducing discouraged workers to return to the workforce and/or other measures that could help improve the rate of workforce growth in the U. In addition, immigration has historically been an important element of our nation’s workforce growth.
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Based on published data, our Dallas Fed economists estimate that immigrants and their children have comprised over half of the workforce growth in the U. over the last 20 years and expect this group to comprise an even higher percentage over the next 20 years. Our economists have done extensive research regarding U. immigration as well as the immigration policies of other countries.
Due to the aging of our population, workforce growth in the U. Dallas Fed economists believe that the bulk of this decline is due to aging of the workforce.
Unfortunately, our economists believe that these demographic trends will cause the labor force participation rate to decline to below 61 percent over the next 10 years.
At a minimum, higher government leverage will make it less likely that fiscal policy will be a realistically available tool during the next recession. Dallas Fed economists are optimistic about economic prospects for 2018.
While addressing this issue involves difficult political considerations and policy choices, the U. may need to more actively consider policy actions that would moderate the path of projected U. We expect progress this year on our dual mandate of full employment and price stability. to take action and adopt policies that could improve sustainable economic growth and prosperity.