The recovery remains on track, but is now entering a more critical phase where the boost from inventories, fiscal policy and normalisation of financial conditions is fading.
Going forward, the fate of the recovery will depend upon the strength of underlying demand. In this respect, a turnaround in jobs remains essential for the economy to settle on self-sustained recovery path.
The longer-term outlook remains one of moderate growth as tough fiscal consolidation and financial regulation lie ahead.
Inflation is heading lower with headline CPI hovering around 1.6% from mid-2010 and core inflation bottoming at 0.5%. Strong deflationary forces will keep core inflation subdued throughout 2011.
Monetary policy will be tightened in small and gradual steps. The first rate hike is likely to arrive late this year and reflect a desire to move away from ZIRP. Fundamentals may lead Fed to pause in 2011.
Research_US_110310
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