Nonetheless, the performance of the American economy in recent years has exceeded expectations in a rather extraordinary fashion. But recent developments have challenged our understanding of the workings of the macroeconomy.
Although the recent surprises of both low unemployment and well-behaved inflation have been quite favorable, they have been surprises nonetheless and not easily reconcilable with each other based on old relationships and our earlier assessment of the economy’s potential. These developments have increased the uncertainty about the economic outlook and about the appropriate response of monetary policy in general to new developments.