The model consists of the Phillips curve previously outlined, equations linking aggregate demand to interest rates and a monetary policy rule in which the policy interest rate responds to divergences of actual inflation from the target and of actual output from potential output (a Taylor rule). An increase in competition in this model directly lowers inflation but barely affects the output gap (Chart 21).
As Chair Yellen said in her testimony to the Congress two weeks ago, while “global financial developments could produce a slowing in the economy, I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy.” Of course, the FOMC is closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation and the balance of risks to the outlook.