Is the US Economy Running Out of Slack?
Given the unprecedented nature of the COVID-19 pandemic and its effects on labor markets, there is a spirited debate over whether the US economy is close to returning to its full potential. If it is, the US Federal Reserve is at risk of falling behind the curve.
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NEW YORK – How much slack is there in the US economy? In economics, the “gap version” of Okun’s law holds that a one-percentage-point increase in the unemployment rate is associated with a two-point decline in the real (inflation-adjusted) GDP growth rate below its potential. The gap matters, because the closer the economy is to its potential, the more we should worry about inflation.