Notably, the 1994 cycle was associated with a large increase in U.S. long-term bond yields, and appears to represent a case in which there was a considerable gap between what the Fed did in terms of monetary policy tightening relative to initial market expectations. A similar gap was apparent during the taper tantrum in the spring of 2013, when our attempts to provide guidance about the potential tapering of asset purchases ended up confusing market participants, causing many to anticipate an earlier start and more rapid rollout of actual policy rate hikes. These episodes are reminders of the importance of transparency and clear messaging in how the Fed is evaluating the evolving economic landscape, a point I’ll return to shortly. Third, the stance of Fed policy will be far from the only factor affecting external financial conditions for EMEs. Even as the FOMC considers the appropriate timing and pace of moving to a less accommodative policy stance, the ECB and the Bank of Japan are implementing additional easing measures. As a result, external conditions will remain more supportive than would be indicated by a narrow focus on Fed policy alone. Finally, EME fundamentals are likely to be the most important determinant of how their financial conditions respond to Fed policy normalization. This was one of the key lessons of the taper tantrum. At first, market pressure was somewhat indiscriminant across countries.
The winter weather was quite severe in the eastern two-thirds of the United States and bottlenecks at the West Coast ports disrupted both sales and production. More important in assessing the growth potential of the U.S. are the improved underlying fundamentals. The firming of growth in 2013 and 2014 reflected several important developments that, in my view, are likely to continue to support growth over the remainder of this year and into 2016. Those developments include the fact that the household deleveraging process has largely run its course and the imbalances in the housing market have been largely worked off. In addition, federal fiscal consolidation appears to be over for BIS central bankers’ speeches  1  now, and employment and spending are again increasing at the state and local government level. My outlook for 2015 as a whole is that economic growth will be close to the pace of the past two years, supported by continued solid fundamentals and accommodative financial conditions. If I am correct, then this would lead to a further reduction of labor market slack, with the unemployment rate approaching 5 percent by the end of the year. An important underpinning of this outlook is that, after a lull in the first quarter, household spending will move back toward the kind of growth path it was on over the second half of 2014, when real PCE grew at about a 3¾ percent annual rate.