Fed challenge presentation (1)
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Transcript of Fed challenge presentation (1)
![Page 1: Fed challenge presentation (1)](https://reader034.fdocuments.us/reader034/viewer/2022051523/58aaa0091a28ab85678b6c43/html5/thumbnails/1.jpg)
Board of Governors
Staff Report to the FOMC
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Agenda
❖ GDP growth has improved
❖ Inflation remains below 2% target
❖ Unemployment is down
❖ Recommend keeping interest rates near zero
Inflation LaborMonetary
PolicyGDP
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GDP has returned to its former growth rates,
but still trends below potential
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Consumption and investment spur GDP growth, while
net exports and government spending slow GDP growth
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U.S. Consumption is slowly
recovering from the Great Recession
❖ Slow growth of household’s wealth
❖ Weak income expectations
❖ Less spending on discretionary
service
❖ Low consumer confidence
❖ Restricted terms for borrowingR
eal exp
en
dit
ure
in
dexed
to
th
e s
tart
of
the r
ecessio
n
Source: Bureau of Economic Analysis
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Forecast: Real GDP growth moving
gradually back toward its longer-run rate
❖ Projections
● 2014 (2nd half) & 2015: above longer-run rate
● 2016 & 2017: somewhat above longer-run rate
● Long Run: 2.0 to 2.3
❖ Risks
● Weak consumer spending
● China and Germany
Inflation LaborMonetary
PolicyGDP
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Inflation takes a slight month-to-month dip:
still well below Fed target
1.43
1.48
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Nominal Wages not growing by much at all:
No help in meeting Inflation goals
1.43
1.95
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Financial markets skeptical of any increase in Inflation
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Forecasts: Inflation is expected to
hit 1.6-1.9% in 2015 and 1.7-2.0% in 2017
❖ Projections:
● Inflation Expectations remain anchored
● Unemployment rate shows improvement
○ Inflation will reach 2% by 2017
❖ Inflation concerns:
● Imports and Oil Prices
● Sticky Nominal Wages
○ Inflation is unlikely to rapidly increaseInflation Labor
Monetary
PolicyGDP
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Labor market has shown continued
improvement in past months
❖ Unemployment down to 5.8%
❖ Measures of underutilization falling
❖ Hires, job openings, and quits all rising
Inflation LaborMonetary
PolicyGDP
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Improvement: U3 Unemployment
down 0.1% in October
Inflation LaborMonetary
PolicyGDP
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Improvement: Part-Time Employment for
Economic Reasons continuing to decline
Inflation LaborMonetary
PolicyGDP
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Improvement: Long-Term Unemployment
down 28% from last year
Inflation LaborMonetary
PolicyGDP
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Improvement: Hires, Job
Openings, and Quits all rising
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Forecast: Unemployment will continue
falling over next several years
❖ Projections
● U3 rate will continue downward trend
● Long-run rate around 5.2-5.5%
❖ Risks
● Negative shocks
○ Wealth Shock to Demand
Inflation LaborMonetary
PolicyGDP
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Expectations for the Dual Mandate
❖ Maximum Sustainable Employment
● Labor market will continue improving
❖ Stable Prices
● Inflation is steady and predicted to slowly move toward 2.0%
Inflation LaborMonetary
PolicyGDP
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Committee Policy Action
❖ With the completion of QE3,
● Continue to reinvest principal interest payments on MBS/ABS and roll
over long-term Treasury securities
❖ Keep interest rates near zero
● Significant risks to raising interest rates prematurely
● Moderate risks to maintaining low interest rates
● Rate increases will be “data driven”
Inflation LaborMonetary
PolicyGDP
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Risks of raising rates prematurely
❖ Stifles demand
❖ Disinflation or deflation
❖ Premature Contraction
● Great Depression
● Japan (1990’s to the present)
● 2011 Eurozone Crisis
❖ Lack of tools for expanding money supply
● Stuck at Zero Lower Bound
Inflation LaborMonetary
PolicyGDP
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ECB’s response to inflation was premature
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Risks of maintaining low rates
❖ Fear of excessive inflation
● The Federal Reserve has tools to limit inflation
● Brief inflation slightly above target is tolerable
● Current conditions do not suggest an excessive rise in inflation
Inflation LaborMonetary
PolicyGDP
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Conclusion
❖ Use forward guidance to maintain that rate increases will be “data
driven”
❖ Risks to both actions
● We have tools to address the consequences of keeping rates low
● We don’t have tools for addressing the consequences of a premature
rate raise
Inflation LaborMonetary
PolicyGDP
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Nonresidential investment contributes more
to growth than residential investment
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Inflation Expectations are well-anchored
3.0
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Changes in Employment and Changes in LFPR
Both Impact Unemployment Rate
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Shape of Beveridge Curve indicates
Job Openings are being filled
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Improvement: Quits Per Layoff Rising Steadily
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Reinvest principal interest payments on MBS and
roll over Long-Term Treasury Securities
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ECB’s response to inflation was premature
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ECB’s raising of interest rates led to decline in output
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78.77
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Real Interest Rate
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