The gradual recovery is continuing. Activity has been expanding at a pace just slightly ahead of potential, while the labour market has recovered very slowly. The housing market has shown signs of a turnaround, but its contribution to overall GDP growth remains small. Faced with these developments, the Federal Reserve announced in September that it would take further measures to sustain the upturn through a new round of long-term asset purchases, and that the federal funds rate was likely to remain at exceptionally low levels at least through mid-2015. Nevertheless, given the substantial fiscal drag still ahead, output is projected to expand only moderately next year and pick up slowly thereafter.
Reducing the large federal budget deficit is necessary to restore fiscal sustainability, but this should be done gradually and in the context of a well identified medium-term consolidation plan. It is thus essential that current legislation be amended to smooth the implementation of tax increases and spending cuts and to raise the debt ceiling in an orderly manner. Given the low levels of resource utilisation, monetary policy can remain accommodative for an extended period, provided that inflation expectations stay well anchored.
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Labour market participation remains weak
Gains in net wealth will support spending
Employment, income and inflation
The budget deficit is assumed to narrow gradually
Inflation expectations appear well anchored
Demand and output