I appreciate the opportunity to join the Forecasters Club to discuss the path ahead for our economy and monetary policy.1 In the months ahead, I expect to see tightening resource utilization in the U.S. economy as rising fiscal stimulus reinforces above-trend growth. Continued gradual increases in the federal funds rate are likely to be consistent with sustaining strong labor market conditions and inflation around target, with the balance sheet running off gradually and predictably in the background. This outlook suggests a policy path that moves gradually from modestly accommodative today to neutral — and, after some time, modestly beyond neutral — against the backdrop of a longer-run neutral rate that is likely to remain low by historical standards. Let me consider each element in turn.

Growing above Trend
Although indicators of economic activity were on the soft side earlier in the year, the outlook for the remainder of 2018 remains quite positive, supported by sizable fiscal stimulus as well as still-accommodative financial conditions.

In the latest report, real gross domestic product (GDP) increased 2.2 percent at an annual rate in the first quarter of 2018, a slowdown from the 3 percent pace in the final three quarters of 2017. The first-quarter slowdown was especially noticeable in consumer spending, which increased at only a 1 percent pace last quarter, compared with 2-3/4 percent in 2017. By contrast, business fixed investment increased 9 percent at an annual rate last quarter, surpassing its robust 2017 pace.

I expect real GDP growth to pick up in the next few quarters. In particular, the fundamentals for consumer spending are favorable: Income gains have been strong, consumer confidence remains solid, and employment prospects remain bright. And business investment should remain solid, with drilling and mining bolstered by increased oil prices.

Moreover, the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond.2 From a position of full employment, the economy will likely receive a substantial boost from $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending, with estimates suggesting a boost to the growth rate of real GDP of about 3/4 percent this year and next.3

Risks and Uncertainties
In short, with a tightening labor market and inflation near target, fiscal stimulus in the pipeline suggests some risk to the upside. By contrast, recent developments abroad suggest some risk to the downside.

Global growth has been synchronized over the past year, but recent developments pose some risk. Political developments in Italy have reintroduced some risk, and financial conditions in the euro area have worsened somewhat in response. With some uptick in political uncertainty, and inflation still below target in the euro area and Japan, monetary policies among the advanced economies look likely to be divergent for some time. In addition, some emerging markets may find conditions more challenging. An environment with a strengthening dollar, rising energy prices, and the possibility of rising rates raises the risks of capital flow reversals in some emerging markets that have seen increased borrowing from abroad. Although stresses have been contained to a few vulnerable countries so far, the risk of a broader pullback bears watching. In addition, uncertainty over trade clouds the horizon. An escalation in measures and countermeasures — although an outside risk — could prove disruptive at home and abroad.

Sustaining Full Employment
Here at home, the labor market is strong. So far this year, payroll gains have averaged 200,000 per month, sufficient to put further downward pressure on unemployment. Indeed, the unemployment rate moved down to 3.9 percent in April following six consecutive months at 4.1 percent. The unemployment rate for African Americans dropped in April to 6.6 percent, which is the lowest level recorded since this series began in 1972 but still high relative to other groups.