As the output gap closes, economic stability will require that interest rates eventually move up from unusually low levels if we are to preserve price stability. The FOMC stated again last week that it believes it can be patient in removing its policy accommodation.
Our research shows this to be driven by an increase in the volatility of business cycle surprises on the supply-side, rather than the demand-side.14 This reinforces the idea that supply-side shocks have been more responsible for low inflation than in the past, masking the underlying and continuing positive relationship between demand-led activity and inflation.