Review and Outlook

Economic Overview - The worst economic distortions from the COVID-19 pandemic are fading, with inflation significantly declining and the labor market cooling[1] - Inflation has risen 2.5% over the past 12 months, moving closer to the Federal Reserve's 2% target[3] - The unemployment rate is currently at 4.3%, nearly a full percentage point above early 2023 levels[4] Labor Market Dynamics - Job gains averaged 170,000 per month over the three months ending in July 2024, indicating solid but slowing employment growth[7] - The ratio of job vacancies to unemployment has returned to pre-pandemic levels, suggesting a normalization of labor market conditions[5] - Nominal wage gains have moderated, and the labor market is less tight than in 2019 when inflation was below 2%[5] Inflation Trends - Inflation peaked at 7.1% in June 2022, driven by supply chain disruptions and increased demand for goods[17] - The decline in inflation by 4.5 percentage points from its peak occurred alongside low unemployment, a historically unusual outcome[18] - The Federal Reserve raised its policy rate by 425 basis points in 2022 and an additional 100 basis points in 2023 to combat inflation[17] Policy Outlook - The Federal Reserve is prepared to adjust monetary policy in response to evolving economic data and risks to both inflation and employment[6] - Anchored inflation expectations, supported by strong central bank actions, can facilitate disinflation without requiring economic slack[20] - The current policy rate provides ample room to respond to potential risks, including further weakening in labor market conditions[8]