The Federal Reserve Board released an updated version of its large-scale model on the US 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 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 US 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."
Gapen said that may explain why US central bankers signaled this week that they will consider the first interest-rate increase since 2006 at their next meeting, on December 15-16.
The model assumes that the Federal Open Market Committee raises the benchmark lending rate in late 2015. However, immediate liftoff has "been a feature" of the model since late 2014, Barclays noted. Fed spokesman David Skidmore declined to comment. In the current model, "the long-run growth rate is two-tenths lower" at 2 per cent, Barclays said. FOMC participants forecast the economy's long-run growth rate at 2 per cent in September.
The unemployment rate stood at 5.1 per cent in September, and the Fed model assumes little change from that level, dipping to a low of 4.8 per cent in a forecast horizon that extends to 2020, according to Barclays.
