Natural disasters tend to depress economic activity initially, but once the recovery and reconstruction efforts get underway in earnest, such disasters actually serve to lift economic activity. Looking beyond the storm effects—which will make interpreting near-term economic data releases more difficult—the economy remains on a trajectory of slightly above-trend growth at 1/7  BIS central bankers' speeches  about 2 percent, and the fundamentals supporting continued expansion are generally quite favorable. Low unemployment, sturdy job gains (recognizing the near-term negative impact of the storms), and rising wages (even at a pace below previous expansions) are lifting personal income. Household wealth has been boosted by rising home and equity prices, and household debt has been growing relatively slowly, contributing to a healthy household balance sheet. Thus, consumer spending should continue to advance in coming quarters. Business fixed investment outlays are also likely to continue to rise. With the supply of labor tightening, there are greater incentives for businesses to invest in labor-saving technologies. Investment spending should also benefit from a better international outlook and the improvement in U.S. trade competitiveness caused by the dollar’s recent weakness. The softer dollar and solid growth abroad also suggest that the trade sector will no longer be a significant drag on economic growth. Turning to the outlook for inflation, I have been surprised by the persistence of the shortfall from the FOMC’s 2 percent long-run objective.
Thus, even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate to continue to remove monetary policy accommodation gradually. This judgment is supported by the fact that financial conditions have eased, rather than tightened, even as the FOMC has raised its short-term interest rate target range by 75 basis points since last December. But, the upward trajectory of the policy rate path should continue to be shallow, in part because the level of short-term interest rates consistent with keeping the economy on a sustainable longrun growth path is likely to be considerably lower than it was in prior business cycles. The FOMC recently launched the process of balance sheet normalization—in which an increasing proportion of maturing Treasuries and agency mortgage-backed securities (MBS) repayments are allowed to run off the Federal Reserve’s balance sheet. While this process also should exert some monetary policy restraint over time, I believe the impact will be quite modest. Not only was this shift in policy widely anticipated, but we also have seen that the impact on the level of long-term interest rates has been small as expectations have adjusted. The economy has made great strides in recovering from the Great Recession, as the unemployment rate has fallen from 10 percent to 4.2 percent, aided by accommodative monetary policy. Measures of underemployment have also improved considerably and are near pre-crisis levels.