Output has grown at a solid pace, underpinned by robust productivity growth, buoyant house prices, and fiscal and monetary stimulus. The continuation of several of these factors, together with the economy’s inherent momentum, suggests that the recovery will maintain a relatively smooth trajectory -- despite damaging hurricanes and large increases in oil prices. There has been little sign so far of increases in energy prices feeding into the general level of wages or non-energy consumer prices. Nevertheless, a moderate acceleration in core prices is expected during the next few quarters.

As the last signs of slack in the economy disappear, the large monetary stimulus delivered in recent years is no longer desirable and is being removed. Short-term interest rates are approaching a neutral position and will need to turn restrictive should increases in energy prices start being built into underlying inflation. The federal government’s financial position has improved, thanks to an unexpected increase in revenues. But much of this windfall is being spent on large hurricane and military-related expenditures. This highlights the importance of fiscal discipline in the face of longer-term spending pressures and the risks posed by the large external deficit.