The Federal Reserve Board released an updated version of its large-scale model on the U.S. economy that may hold clues into why policy makers pivoted at their meeting earlier this week toward a December interest-rate increase.
The revised inputs and calculations on Friday suggest the economy will use up resource slack by the first quarter of 2016, according to an analysis by Barclays Plc, and that also indicates Fed staff lowered their near-term estimate for how fast the economy can grow without producing inflation — a concept known as potential growth.
“The output gap appears closed,” said Michael Gapen, chief U.S. economist at Barclays’s investment-banking unit in New York. “This means further progress would lead to resource scarcity and potential upward pressure on inflation in the medium term.”
A justification for multi-trillion-dollar quantitative easing was that the Fed could unleash just the right amount of inflation at just the right time.
That was most of a decade ago, and the dollar has remained stubbornly uninflated. Once inflation does come — and maybe this is the signal we’ve been waiting for — I remain dubious of the Fed’s ability to keep it restrained.
We’ll see.
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