fed final v.f

Economic Overview and

Monetary Policy

College Fed Challenge - Federal Reserve Bank of Boston

November 6, 2015 1

AGENDA

1. Economic Overview

2. Dual Mandate

a. Labor Market and Wages

b. Inflation

3. Policy Recommendation:

Raise Target Federal Funds Rate by 25 bps

2

Economy Overview Inflation Policy Recommendation Labor Market

-10

-8

-6

-4

-2

0

2

4

6

12

13

14

15

16

17

18

19

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Con

tin

uo

usly

Com

po

un

de

d A

nn

ua

l R

ate

of C

ha

ng

e

GD

P (

in $

tri

llio

ns)

GDP Real GDP growth

Source: Federal Reserve Economic Data

U.S. GDP has risen steadily at an average

rate of 2% in 2015

3


9

10

10

11

11

12

2005 2007 2009 2011 2013 2015

Co

ns

um

pti

on

(in

20

09

$ tri

llio

ns)

1.7

1.9

2.1

2.3

2.5

2.7

2.9

2005 2007 2009 2011 2013 2015

Pri

va

te I

nve

stm

en

t (i

n 2

00

9 $

tri

llio

ns)


Real consumption increased at

an annual rate of 3% in the three

months ending in August…

…and real private

investment has been

increasing at a moderate pace

4



90.0

40

50

60

70

80

90

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ind

ex

University of Michigan Consumer Sentiment Index

Rising consumer confidence signals optimism about

the strengthening domestic economy

5



Manufacturing sector is at its 34th consecutive

month of expansion

30

33

36

39

42

45

48

51

54

57

60

63

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ind

ex

ISM Manufacturing PMI Composite Index

50.1

6


-900

-800

-700

-600

-500

-400

-300

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Exp

ort

s (

in $

billio

ns)


Real exports have experienced a decrease but

remain above pre-recession levels

7



90

95

100

105

110

115

120

125

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ind

ex (

Ja

nu

ary

1 1

97

7 =

10

0)

Trade Weighted U.S. Dollar Index

119.6

Appreciation in the US Dollar is driven by low

commodity prices and a slowdown in China

8



14.2

Recently US and international markets have

been less volatile

0

10

20

30

40

50

60

70

80

90

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ind

ex

VIX

9



Unemployment rate is approaching long-run norms

0

2

4

6

8

10

12

14

16

18

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nt

U3 = 5.1%

U4 = 5.4%

U6 = 10.0%

10



Total nonfarm payrolls employment is increasing and

has surpassed pre-recession levels

120

125

130

135

140

145

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rso

ns (

millio

ns)

11


0

1

2

3

4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rso

ns (

millio

ns)

Layoffs and Discharges, Total Nonfarm Quits, Total Nonfarm


Workers are increasingly and voluntarily leaving jobs

12


Current Concerns About the Labor Market

Elevated Number of

Part-Time Workers

Long-Term

Unemployment

Low Labor Force

Participation

13



Decreasing unemployment rate has been attributed to a

decreasing labor force participation rate

60

61

62

63

64

65

66

67

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pa

rtic

ipa

tion

ra

te (

pe

rce

nt)

62.4%

14


Declining Labor Force Participation Rate

Cyclical Attributes

(~14%)

Unexplained

(~36%)

Structural Attributes

(~50%)

Source: “Opportunities and Challenges in the U.S. Labor Market: An Update”, Jason Furman

15


0

10

20

30

40

50

60

70

80

90

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pa

rtic

ipa

tion

Rate

(p

erc

en

t)

16 to 19 years 20 to 24 years 25 to 54 years 55 years and over


Structural changes in the labor force explain much

of the low LFPR

55 years and over

16 to 19 years

20 to 24 years

16


Source: Bureau of Labor Statistics

Most of the jobs created in the

expansion are full-time jobs…

…while the number of part time

workers remained stagnant

103

105

107

109

111

113

115

117

119

121

123

2007 2008 2009 2010 2011 2012 2013 2014 2015

Fu

ll-t

ime

wo

rke

rs (

millio

ns)

22

23

24

25

26

27

28

29

2007 2008 2009 2010 2011 2012 2013 2014 2015

Pa

rt-t

ime

wo

rke

rs (

millio

ns)

17



Duration of unemployment has decreased by about

30% over the recovery

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

We

eks

Median Duration of Unemployment

11.4

weeks

18


Wage Stagnation

Pent-up wage

deflation

hypothesis

Can improve as the

economy improves

Elevated PTER

Decreased

participation

among prime-age

workers

Remaining Slack in the

Labor Market Other factor

19


Source: Federal Reserve Economic Data, BLS

Pent-up wage deflation hypothesis:

Wages have reacted slowly to the improvements in the labor

market

0

0.5

1

1.5

2

2.5

3

3.5

4

0 2 4 6 8 10 12

EC

I G

row

th (

pe

rce

nt ch

an

ge

)

Unemployment Rate (percent)

Jan ‘07

Gap: -1%

Jan ‘15

20



According to Chicago Fed researchers, as the Quits Rate rises, ECI

should increase as well

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

1

2

3

4

5

2001 2003 2005 2007 2009 2011 2013 2015

Qu

its R

ate

(p

erc

en

t ch

an

ge

)

EC

I W

ag

es (

pe

rce

nt ch

an

ge

)

ECI Wages (left axis) Quits Rate (right axis)

21


Core PCE provides a more accurate view of the current

inflationary state than Headline PCE

Source: US. Bureau of Economic Analysis

1.3%

0.2%

-2

-1

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nt ch

an

ge

Headline Core

22


Inflation in the Service Sector is at the long-term 2% goal

while Durable Goods inflation continues to be negative

-4

-3

-2

-1

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nt ch

an

ge

Services Durables

Source: US. Bureau of Economic Analysis

1.9%

- 2.2%

23


0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nt C

ha

ng

e

U. of Mich. Consumer Inflation Expectations FRB Business Inflation Expectations

Business Inflation Expectations remain near long-term target

and consumer inflation expectations remain high

3.1%

1.8%

Source: Federal Reserve Bank of Atlanta

24


Reasoning:

1. Zero bound policy is a last resort

2. The fundamentals of domestic economy are strong

3. The labor market is “on track”

4. Inflation will likely pick up as transitory headwinds dissipate

Policy Recommendation

1. Raise Federal Funds Rate target range by 25 bps

2. Continue to reinvest principal payments in agency

mortgage-backed securities

25

APPENDIX

26


0

1

2

3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ho

usin

g U

nits (

millio

ns)

Total Privately-Owned Housing Starts

Activity in the housing sector remains on a gradual

upward trend

Source: U.S. Department of Housing and Urban Development

27



Part-time work due to slack has decreased since the

recession

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

PT

ER

(in

millio

ns o

f w

ork

ers

)

Slack Only found Part Time

Cyclical

Structural

28


Different age groups have different reasons for working

part-time voluntarily

0 10 20 30 40 50 60 70 80

Partially retired

Normal for occupations

Family

Other

Health

School

Share of Age Group (percent)

16-25 26-55 56+

Source: Federal Reserve Bank of Atlanta Data

29


0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Com

po

un

de

d A

nu

al R

ate

of C

ha

ng

e

AHE ECI


Measures of wage growth: AHE vs ECI

30


-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nt ch

an

ge

Rent CPI Case-Shiller HPI

May 2006, the peak of

the housing market

There is little evidence that housing price inflation has significantly

outpaced rent inflation since the housing market peak in 2006


31


3

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

4.8

5

-2

-1

0

1

2

3

4

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Lo

g R

ea

l Imp

orte

d O

il Pric

e/B

arre

l P

erc

en

t C

ha

ng

e

Headline Inflation Log Real Imported Oil Price

Real imported oil prices per barrel have had historically

high correlation with inflation recently

Source: Federal Reserve Economic Data and U.S. Energy Information Administration

32


TIPS Spreads offer a market view of predicted

inflation


1.18%

1.50%

-2

-1

0

1

2

3

4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nt C

ha

ng

e

5-year Break Even Inflation Rate 10-year Break Even Inflation Rate

33


0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2007 2008 2009 2010 2011 2012 2013 2014 2015

$ t

rillio

ns

Total Assets Securities Held Outright

$4.5 trn

Recent Balance Sheet Trends

$4.2 trn


34

fed final v.f

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