Solid Economic Fundamentals and a Temporary Upward Drift in Inflation

The constant stream of real-time data releases by the government and several private sources diverts attention away from the very sound fundamentals that support strong sustainable U.S. economic expansion and provide substantial flexibility to withstand external shocks. Standard estimates of U.S. potential growth far exceed estimates for most other large industrialized nations. The sound fundamentals also are the basis for the attractiveness of U.S. dollar-denominated assets that generate net foreign capital inflows. Concerns about the ?impending doom? posed by the large and widening trade deficit and the low rate of personal saving are overstated...An unanticipated rise in inflation and inflationary expectations, however, poses a key risk to economic and financial market performance, and it is critical that the Federal Reserve respond appropriately to keep inflation low and maintain its inflation-fighting credibility.