After the longest government shutdown in December and January dented GDP growth, fiscal policy is set to remain broadly neutral with the spending ceilings from the Budget Control Act assumed to be raised to avoid a sharp contractionary impulse. Developing policy to support infrastructure investment would lay the foundation for a targeted spending boost should the economy falter. At the same time, easing regulatory barriers would help sustain stronger growth of private investment.
The Federal Reserve is unlikely to raise interest rates further over the projection as growth is moderating and inflation expectations remain well anchored, albeit towards the lower end of their normal range. A further reason for caution is that inflation has risen only very gradually towards target, questioning the extent to which the inflation target is viewed as symmetrical. The Federal Reserve has announced that quantitative tightening, or reducing the size of its balance sheet, will end later in 2019, leaving the federal funds rate as the principal monetary policy instrument. In this low-interest rate environment, prudential regulators need to ensure robust lending standards. In particular, regulators need to ensure that high levels of non-financial corporate debt do not pose systemic risks.
Labour force participation has recovered from the crisis, which is particularly notable amongst prime‑age workers, but there is scope for further increases. The impact of labour market tightness has induced greater participation of older workers and groups that have remained on the margins of the labour force. For example, disability rolls have begun to decline after a long period of steady increases. In recent years, these developments have lifted household income and reduced poverty rates. However, demographic pressures dictate that labour force growth will slow. This puts a priority on easing remaining barriers to participation and spatial mobility, such as reducing occupational licensing, increasing training of needed skills, or facilitating job search.
Reducing policy uncertainty about international trade would also support growth. Current uncertainty is likely depressing investment in companies reliant on global supply chains. Exporters, notably agriculture, are suffering the consequences of retaliatory measures, while importers of affected goods have faced higher prices and largely passed these on to consumers. Relaxing these barriers to trade would benefit both exporters and consumers. The projections assume trade measures remain unchanged from late April, with neither new barriers (including the increase in tariffs on imports from China announced in mid-May) nor relaxation of existing ones.
