U.S. Economic Outlook · Data and Outlook 2. Still, saving remains above where we might expect...

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U.S. Economic Outlook

Daniel Cooper

Federal Reserve Bank of Boston

October 14, 2015

The views expressed in this presentation are those of the author and do not necessarily represent

the views of the Federal Reserve Bank of Boston or the Federal Reserve System.

Cooper (Boston Fed) NCSL October 14, 2015 1 / 49

Outline

1 Background on the Federal Reserve

2 Current Economic Indicators and Outlook

3 The Road Ahead


Background

1. What is the Federal Reserve?

The Federal Reserve is the central bank of the U.S. and has severalresponsibilities:

Monetary policy

Lender of last resort

Bank regulation

Payments system


Background

1. What is the Federal Reserve?


Background

1. What determines monetary policy?

Price level, inflation, output, and financial stability

Required by congress: maximum employment, stable prices, andmoderate long-term interest rates

First two goals known as “dual mandate”

What does historically?

Inflation, unemployment, output growth, and financial instability


Background

1. Dual Mandate.

Two Goals:

Stable prices (low inflation)

Inflation goal: 2 percent per year

Maximum (sustainable) employment

Target often stated in terms of the unemployment rate relative to theso-called natural rate of unemployment or NAIRU (non-acceleratinginflation rate of unemployment)


Background

1. How can monetary policy achieve these goals?Monetary policy: “Actions undertaken by a central bank, such as theFederal Reserve, to influence the availability and cost of money andcredit to help promote national economic goals.”(Source: http://www.federalreserve.gov/monetarypolicy/fomc.htm)


Background

1. Has the FOMC been successful historically?

Fighting Inflation Fighting Unemployment

−5

05

1015

20P

erce

nt, a

nnua

l rat

e

1960q1 1970q1 1980q1 1990q1 2000q1 2010q1 2015q3

Federal Funds (effective) RateCore PCE InflationUnemployment Gap

Source: FRB/BEA/BLS/CBO/Haver Analytics

The FOMC and the Dual Mandate


Background

1. How does the FOMC “set” the “interest rate”?

The Federal Reserve requires banks to hold a minimum level ofreserves based on their deposits, which can influence banks’ fundsavailable for lending

Banks with excess reserves (liquidity) can lend to banks needingreserves to cover deposit shortfalls/lending needs.

The FOMC sets a target for the Federal Funds Rate (FFR) — theovernight interest rate used by banks to borrow/lend reserve balances


Background

1. The banking system: A stylized example.

Citizen sells amachine for $100.

Bank 110%

reserves

CheckingAccount 1:+$100

Another citizenborrows $90

to buy a machine.

Bank 210%

reserves

CheckingAccount 2:

+$90

And another cit-izen borrows $81to buy a machine.

And soon...

Deposits into bank

Loan: $90

Seller deposits into bank

Loan: $81

Seller deposits into bank

The initial $100 deposit has been followed by creation of $171 in newmoney. Bank reserves have increased by $19.


Background

1. The transmission of monetary policy in action.

05

1015

Per

cent

, ann

ual r

ate

1985q1 1990q1 1995q1 2000q1 2005q1 2010q1 2015q3

Federal Funds (effective) Rate10−Year Treasury Note Yield at Constant Maturity

Source: Federal Reserve Board/Haver Analytics

Monetary Policy Transmission Mechanism


Data and Outlook

The Labor Market


Data and Outlook

2. The U.S. labor market has improved notably since the

Great Recession. Unemployment is down...5

1015

20P

erce

nt

1995m1 2000m1 2005m1 2010m1 2015m9

Unemployment RateU−6: Unemployed, marginally attached, & part−time for econ reasons

Source: Bureau of Labor Statistics/Haver AnalyticsNote: Seasonally Adjusted, 16 years−old and older

Unemployment Rates


Data and Outlook

2. ...and the long-term unemployment rate is much

improved.0

2000

4000

6000

8000

Tho

usan

ds

1980m1 1985m1 1990m1 1995m1 2000m1 2005m1 2010m1 2015m9Source: Bureau of Labor Statistics/Haver AnalyticsNote: Seasonally Adjusted

Long Term Unemployed


Data and Outlook

2. Nonfarm payroll gains also have been strong, although

payroll growth has slowed a bit recently.0

100

200

300

400

Tho

usan

ds

2012m1 2013m1 2014m1 2015m1 2015m9

6−month moving average

Source: Bureau of Labor Statistics/Haver AnalyticsNote: Seasonally Adjusted

Monthly Change in Nonfarm Payroll Employment


Data and Outlook

2. In comparison, public sector employment has improved

in recent months.−

40−

200

2040

Tho

usan

ds

2012m1 2013m1 2014m1 2015m1 2015m9

6−month moving average

Source: Bureau of Labor Statistics/Haver AnalyticsNote: Seasonally Adjusted

Monthly Change in Public Payroll Employment


Data and Outlook

2. Still, the labor force participation rate is quite low...

6263

6465

6667

Per

cent

1980m1 1985m1 1990m1 1995m1 2000m1 2005m1 2010m1 2015m9Source: Bureau of Labor Statistics/Haver AnalyticsNote: Seasonally Adjusted, 16 years−old and older

Labor Force Participation Rate


Data and Outlook

2. ...and the number of workers employed part-time for

economic reasons remains elevated.20

0040

0060

0080

0010

000

Tho

usan

ds

1995m1 2000m1 2005m1 2010m1 2015m9Source: Bureau of Labor Statistics/ Haver AnalyticsNote: Seasonally Adjusted

Employed Part−Time for Economic Reasons


Data and Outlook

Inflation


Data and Outlook

2. PCE inflation is subdued despite the labor market

improvement. Even core PCE inflation, which excludesvolatile food and energy goods, is low.

−1

01

23

44−

quar

ter

Per

cent

Cha

nge

2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2015m9

Core PCE InflationTotal PCE Inflation

Source: Bureau of Economic Analysis/Haver AnalyticsNote: Seasonally Adjusted, 2009=100

Total PCE Inflation and Core PCE Inflation


Data and Outlook

2. Transitory factors—such as oil prices and import

prices—are thought to be holding down core PCE inflation.

40

60

80

10

01

20

Do

lla

rs p

er

Ba

rre

l

01

23

4−

qu

art

er

Pe

rce

nt

Ch

an

ge

2010m1 2011m1 2012m1 2013m1 2014m1 2015m1

Core PCE Inflation

West Texas Intermediate Crude

Source: BLS/Energy Information Administration/Haver Analytics

Core PCE Inflation vs. Oil Prices

90

10

01

10

12

0In

de

x

01

23

4−

qu

art

er

Pe

rce

nt

Ch

an

ge

2010m1 2011m1 2012m1 2013m1 2014m1 2015m1

Core PCE Inflation

Broad−Trade Weighted $ Exchange Rate

Source: BLS/JP Morgan/Haver Analytics

Core PCE Inflation vs. U.S. $ Exchange Rate


Data and Outlook

2. Wage growth also has yet to pick up substantially.

01

23

45

4−qu

arte

r P

erce

nt C

hang

e

2005m1 2007m1 2009m1 2011m1 2013m1 2015m9Source: Bureau of Labor Statistics/Haver AnalyticsNote: Seasonally Adjusted

Average Hourly EarningsProduction and Nonsupervisory Workers


Data and Outlook

2. Inflation expectations remain stable and reasonably well

anchored, but are being closely watched.2

2.5

33.

5P

erce

nt, a

nnua

l rat

e

1995q12000q1

2005q12010q1

2015q1

Survey of Professional ForecastersUniversity of Michigan Survey

Source: University of Michigan/Federal Reserve/Federal Reserve Board of Governors/Haver Analytics

10−year Ahead Median Inflation Expectations


Data and Outlook

Household Sector


Data and Outlook

2. House prices have rebounded from their post-recession

lows...12

014

016

018

020

0In

dex:

Jan

uary

200

0 =

100

2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q3Source: CoreLogic/Haver AnalyticsNote: Seasonally Adjusted

National House Price Index


Data and Outlook

2. ...and foreclosures are way down...

.05

.1.1

5.2

.25

Per

cent

2000q1 2005q1 2010q1 2015q3Source: FRBNY Consumer Credit Panel/Equifax/Haver Analytics

Consumers with New Foreclosures


Data and Outlook

2. ...but housing starts and residential investment remain

at low levels...5

00

10

00

15

00

20

00

25

00

Th

ou

sa

nd

s o

f u

nits

1990m1 1995m1 2000m1 2005m1 2010m1 2015m9Source: Census Bureau/Haver AnalyticsNote: Seasonally Adjusted Annual Rate, 3−month moving average

Housing Starts

30

05

00

70

09

00

Billio

ns o

f 2

00

9 d

olla

rs

2003q1 2006q1 2009q1 2012q1 2015q3Source: Bureau of Economic Analysis/Haver AnalyticsNote: Seasonally Adjusted Annual Rate

Real Private Residential Fixed Investment


Data and Outlook

2. ...perhaps due to subdued household formation rates.

1000

0010

5000

1100

0011

5000

1200

0012

5000

Tho

usan

ds

2000 2005 2010 2015

Actual Number of Households

Predicted − Base 2001

Predicted − Base 2009

Source: Author’s calculations using Census data

Number of U.S. Households


Data and Outlook

2. Indicators of consumer demand, such as vehicle sales,

have been strong recently...10

1214

1618

Mill

ions

of u

nits

1990q1 1995q1 2000q1 2005q1 2010q1 2015q1Source: Bureau of Economic Analysis/Haver AnalyticsNote: Seasonally Adjusted Annual Rate

Light Weight Vehicle Sales


Data and Outlook

2. ...and households’ future income expectations have

moved a good bit higher in recent months.

0.5

11.

52

2.5

33.

5P

erce

nt

01

23

45

6P

erce

nt

2003m1 2005m1 2007m1 2009m1 2011m1 2013m1 2015m9

Mean Median

Source: Survey of Consumers/University of MichiganNote: 6−month moving average

Expected Change in Income


Data and Outlook

2. Consumer sentiment has declined some recently, but

remains at a high level.

4550

5560

6570

7580

8590

9519

66Q

1 =

100

6070

8090

100

110

120

1966

Q1

= 1

00

2003m1 2005m1 2007m1 2009m1 2011m1 2013m1 2015m9

Current economic conditionsConsumer expectations

Source: University of Michigan/Haver AnalyticsNote: Seasonally Adjusted, 3−month moving average

Consumer Sentiment


Data and Outlook

2. Real consumption (PCE) growth has been strong, and

is forecast to remain strong in the near-term.−

20

24

Per

cent

2007 2008 2009 2010 2011 2012 2013 2014 2015q12015q22015q32015q4

Source: Bureau of Economic Analysis/Macroeconomic Advisers/Haver AnalyticsNote: Seasonally Adjusted Annual Rate

Real PCE Growth Rate

Annual GrowthForecast of Real PCE Growth (Annual Rate)


Data and Outlook

2. Still, saving remains above where we might expect given

current levels of net worth, which poses a downside risk tothe consumption outlook.

55.

56

6.5

Rat

io

24

68

10P

erce

nt, a

nnua

l rat

e

1995q12000q1

2005q12010q1

2015q1

Saving Rate Wealth−to−Income Ratio

Source: BEA/FRB/Haver Analytics

Saving and Wealth


Data and Outlook

Government Spending


Data and Outlook

2. State and local government spending was a big drag on

output in the early part of the recovery.

0.08

0.41

0.21

−0.32−.4

−.2

0

.2

.4

.6

Pe

rce

nta

ge

1975q1 1982q4 1991q1 2009q2 Source: Bureau of Economic Analysis/Haver AnalyticsNote: Dates indicate end of recession

State/Local Gov. Spending, Average Contribution to GDP growth 12 quarters into the recovery

State/Local Government

0.13

0.60

−0.28

−0.00

−.4

−.2

0

.2

.4

.6

Pe

rce

nta

ge

1975q1 1982q4 1991q1 2009q2 Source: Bureau of Economic Analysis/Haver AnalyticsNote: Dates indicate end of recession

Federal Government Spending, Average Contribution to GDP growth 12 quarters into the recovery

Federal Government


Data and Outlook

2. State and local government spending has improved

recently, even as overall government spending has fallen asa share of GDP.

5560

6570

Per

cent

of G

over

nmen

t Spe

ndin

g

67

89

1011

Per

cent

of G

DP

1980q1 1985q1 1990q1 1995q1 2000q1 2005q1 2010q1 2015q3

Gov. spending share of GDPState and Local share of Gov. Spending

Source: Bureau of Economic Analysis/Haver Analytics

Government Spending Share in GDP


Data and Outlook

2. Indeed, government spending has made small positive

contributions to GDP growth in recent quarters.−

9−

8−

7−

6−

5−

4−

3−

2−

10

12

34

5P

erce

nt

2007q1 2009q1 2011q1 2013q1 2015q3

Government Spending GDP Growth

Source: Bureau of Economic Analysis /Haver AnalyticsNote: Seasonally Adjusted Annual Rate

Contribution of Government Spending to GDP growth


Data and Outlook

2. Local and federal budget deficits have also improved.

−1500

−1000

−500

0

500

Fed

eral

Bill

ions

of d

olla

rs

−200

−150

−100

−50

0

50

Loca

l/Sta

teB

illio

ns o

f dol

lars

1980 1985 1990 1995 2000 2005 2010 2015

StateLocalFederal

Source: Bureau of Economic Analysis/Haver Analytics

Government Savings


Data and Outlook

Output (GDP)


Data and Outlook

2. Output during this recovery has been sluggish compared

to previous ones...10

011

012

013

0B

usin

ess

Cyc

le T

roug

h =

100

0 4 8 12 16 20 24Quarters from business cycle trough

Real GDP, recent recession

2001:Q4

1991:Q1

1982:Q4

Source: Bureau of Labor Statistics /Haver Analytics

Output: Current versus Previous Business Cycles


Data and Outlook

2. Consumption and investment have made positive

contributions to GDP growth in recent quarters.

−10

−8

−6

−4

−2

0

2

4

6

Per

cent

2007

q1

2008

q1

2009

q1

2010

q1

2011

q1

2012

q1

2013

q1

2014

q1

2015

q1

Source: Bureau of Economic Analysis /Haver AnalyticsNote: Seasonally Adjusted Annual Rate

Contribution to real GDP growth

C contribution I contributionG contribution NX contribution


Data and Outlook

2. Net exports will act as a drag on output in the

near-term...

−90

0−

800

−70

0−

600

−50

0−

400

−30

0B

il.$

9095

100

105

110

115

120

Jan1

997=

100

2005q1 2010q1 2015q1 2017q4date

Trade−Weighted Exchange Value of the US$Net Exports of Goods and Services

(Exchange Rate) Source: Federal Reserve Board /Haver Analytics(Net Exports) Source: Bureau of Economic Analysis /Haver Analytics(Forecasts) Source: Macroeconomic Advisers /Haver Analytics

Exchange Rate and Net Exports


Data and Outlook

2. ...but overall GDP should continue to grow moderately

as consumer spending is forecast to remain strong.−

4−

20

24

Per

cent

2007 2008 2009 2010 2011 2012 2013 2014 2015q12015q22015q32015q4

Source: Bureau of Economic Analysis/Macroeconomic Advisers/Haver AnalyticsNote: Seasonally Adjusted Annual Rate

Real GDP Growth Rate

Annual GrowthForecast of Real GDP Growth (Annual Rate)


Road Ahead

The Road Ahead


Road Ahead

3. The evolution of the FOMC’s outlook

Core PCE Inflation (%)

2015 2016 2017 2018

Dec. 2014 1.7 1.9 1.9 n.a.March 2015 1.4 1.7 1.9 n.a.June 2015 1.3 1.8 2.0 n.a.Sept. 2015 1.4 1.7 1.9 2.0

Real GDP Growth (%)

Dec 2014 2.8 2.8 2.4 n.a.Mar 2015 2.5 2.5 2.3 n.a.June 2015 1.9 2.5 2.3 n.a.Sept. 2015 2.1 2.3 2.2 2.0

Unemployment Rate (%)

Dec 2014 5.3 5.1 5.1 n.a.Mar 2015 5.1 5.0 4.9 n.a.June 2015 5.3 5.1 5.0 n.a.Sept. 2015 5.0 4.8 4.8 4.8

Source: FOMC Summary of Economic Projections.

Note: Table reports the median projection of FOMC participants.


Road Ahead

3. The current policy debate.

The labor markets have improved and the unemployment rate is closeto the natural rate.

Inflation is subdued, and the longer-run inflation outlook has softeneda bit.

Output growth is expected to be moderate over the next few years.

There is some downside risk to the outlook in the near-term fromglobal economic conditions and financial market volatility.

The key question is when the FOMC should begin raising the FederalFunds rate. This year? Next year?


Road Ahead

3. The vast majority of FOMC participants in September

anticipated “lift-off” in 2015.−

.50

.51

1.5

22.

53

3.5

44.

55

Tar

get L

evel

for

the

Fed

eral

Fun

ds R

ate

2019m11

Source: Board of Governors of the Federal Reserve System

Appropriate Pace of Policy Firming

2015 2016 2017 2018 Longer Run


Road Ahead

3. However, the Federal Funds rate is anticipated to rise

more gradually than previously thought.0

12

34

Per

cent

2013q3 2015q1 2016q3 2018q1 2019q3

July 2015 August 2015September 2015 October 2015

Source: IHS Economics/Haver Analytics

Effective Federal Funds Rate


Road Ahead

Thank You


U.S. Economic Outlook · Data and Outlook 2. Still, saving remains above where we might expect...

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