Output remains on a solid growth trajectory, propelled by household demand. Steady employment gains continue to push down the unemployment rate and other indicators of labour market slack. Domestic demand will continue to be sustained by supportive financial conditions, the improving labour market and the boost to household purchasing power from low energy prices and the stronger dollar. However, the boost from these influences should gradually subside, and will be damped by weaker export growth due to sluggish external demand and the recent strengthening of the dollar.
Monetary policy remains very accommodative, which is consistent with stubbornly below-target inflation, subdued wage pressures and hints of downward pressure on inflation expectations. However, as the economy has returned to near full employment, policy rates are assumed to increase by end-2015. Subsequent increases, which will depend on incoming data, are assumed to gradually lift the federal funds rate to 2% by end-2017. Public debt is above historic norms, but the budget deficit continues to narrow and slowing health expenditures have improved long-term prospects. Targeted measures to encourage inclusive longer-term growth remain appropriate, such as expanding the earned income tax credit to boost labour market participation amongst less-skilled workers.
US greenhouse gas emissions are high relative to OECD averages, and policies to reorient energy production could be a timely way to complement ongoing support to aggregate demand from monetary policy. US emissions decreased 9% between 2005 and 2013, partly due to investments that are transforming generation capacity from coal to cleaner-burning fuels and to progress in boosting vehicle efficiency. Reinforcing these successes should be a priority, including by encouraging additional renewables investment, putting a price on emissions, eliminating fossil fuel subsidies and enacting regulations that address market externalities.