meyer lhm 2015 0925 sl
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www.macroadvisers.com www.twitter.com/macroadvisers The forecasts provided herein are based upon sources believed by Macroeconomic Advisers, LLC, to be reliable and are developed from models that are generally accepted as methods for producing economic forecasts. Macroeconomic Advisers, LLC, cannot guarantee the accuracy or completeness of the information upon which this Report and such
forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.
Laurence H. Meyer
Senior Managing Director
Global Interdependence Center’s Central Banking Series
Federal Reserve Bank of St. Louis
September 25, 2015
What are They Waiting For?
Why Not September?
• “Recent global and financial developments… are
likely to put further downward pressure on inflation in
the near term.” -FOMC Statement, September 17, 2015
• “In light of the heightened uncertainties abroad and a
slightly softer expected path for inflation, the
Committee judged it appropriate to wait for…some
further improvement in the labor market…” -Chair Yellen, Press Conference, September 17, 2015
•“These developments… have not led… to a significant
change in the Committee’s outlook for the U.S.
economy.” -Chair Yellen, Press Conference, September 17, 2015
September, 2015 1 ©2015 Macroeconomic Advisers, LLC
*Bolding added by MPI
Source: Federal Reserve.
2015 2016 2017 2018
Growth of Real GDP
September Projections 2.1 2.3 2.2 2.0
June Projections 1.9 2.5 2.3 N.A.
MA 2.3 2.5 2.2 N.A.
Unemployment Rate
September Projections 5.0 4.8 4.8 4.8
June Projections 5.3 5.1 5.0 N.A.
MA 5.1 4.8 4.7 N.A.
Core PCE Inflation
September Projections 1.4 1.7 1.9 2.0
June Projections 1.3 1.8 2.0 N.A.
MA 1.4 1.7 1.8 N.A.
September, 2015 ©2015 Macroeconomic Advisers, LLC 2
Macro Outlook
The Broad Contours of the Forecast
Note: For FOMC projections, values correspond to the medians of FOMC participants' projections. Values are Q4/Q4 rates (growth and inflation) and Q4
averages (unemployment rate). Source: MPI/Macroeconomic Advisers, Federal Reserve.
Basic Contours of Forecast Unchanged
September, 2015 3 ©2015 Macroeconomic Advisers, LLC
FOMC’s Revision to Q4/Q4 Real GDP Growth
Source: MPI/MA, Federal Reserve.
FOMC’s Revision to Q4/Q4 Core PCE Inflation
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
2015 2016 2017
pp pp
-0.2
-0.1
0.0
0.1
0.2
2015 2016 2017
pp pp
Gap Between Actual and Potential Growth
September, 2015 4 ©2015 Macroeconomic Advisers, LLC
Source: MPI/MA, BEA.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2014 2015 2016 2017
Percentage Points
Gap Between Actual and Potential GDP
Growth
2015 2016
Longer-
Run
MA 1.5 1.4 2.0
Board Staff 1.5 1.5 ?
FOMC
Participants ? ? 2.0
Forecasts for the Growth of Potential GDP
Financial Conditions Deteriorate
September, 2015 5 ©2015 Macroeconomic Advisers, LLC
1800
1900
2000
2100
2200
2300
2014 2015 2016 2017
Index
H F
S&P 500
current
forecast
last
forecast
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4
Percent different from June Forecast
Revision to Nominal Trade-
Weighted Dollar
0
5
10
15
20
25
30
35
40
45
50
55
60
15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4
Revision to BAA Spread
Over Ten-Year Treasury
Basis Point difference from June Forecast
Source: MPI/MA.
80
85
90
95
100
105
110
115
120
2011 2012 2013 2014 2015 2016 2017
Index, 13:Q4 = 100
Nominal
Trade-Weighted Dollar
H F
80
85
90
95
100
105
110
115
120
2011 2012 2013 2014 2015 2016 2017
Index, 13:Q4 = 100
Nominal
Trade-Weighted Dollar
40
50
60
70
80
90
100
110
120
130
2011 2012 2013 2014 2015 2016 2017
$ per barrel
Brent Crude Oil Price
H F
Global Forces as Downside Risks
September, 2015 6 ©2015 Macroeconomic Advisers, LLC
1.5
2.0
2.5
3.0
3.5
2012 2013 2014 2015 2016 2017 2018
Percent
Trade-Weighted Rest-of-World Growth
current
forecast
last
forecast
July 8, 2014
forecast
-2.1
-1.8
-1.5
-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Net Exports
contribution to growth
pp
H F
current
forecast
July 8, 2014
forecast
last
forecast
40
50
60
70
80
90
100
110
120
130
2011 2012 2013 2014 2015 2016 2017
$ per barrel
Brent Crude Oil Price
H F
Source: MPI/MA.
Source: MPI/MA, BEA.
A Setback to Firming Core Inflation
Core PCE in Hand at Next Two Meetings
September, 2015 7 ©2015 Macroeconomic Advisers, LLC
Core PCE Set to Rebound This Fall
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0 Percent, annual rate
6-month
12-month
H F 6-mo 12-mo
September 1.66 1.24
October 1.66 1.31
December 1.50 1.37
The Phillips Curve and Inflation Dynamics
September, 2015 8 ©2015 Macroeconomic Advisers, LLC
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Percentage points H F
Phillips Curve Projection/Decomposition of Core PCE Inflation
inertia
Pull from
inflation
expectations
shock
dollar
Source: MPI/MA.
slack
oil
2014 2015 2016
Phillips Curve:
𝜋 = −𝛿 𝑈3− 𝑈3∗ + 𝜋𝑒 + 𝛾𝜋𝑡−1 + 𝑆𝑆
Loss Function:
ℒ = 𝛼(𝑈6 − 𝑈6∗)2 + 𝛽(𝜋 − 𝜋∗)2
What Does Full Employment Mean?
September, 2015 9 ©2015 Macroeconomic Advisers, LLC
Not Enough Improvement Yet!
September, 2015 10 ©2015 Macroeconomic Advisers, LLC
Source: MPI/MA, BLS.
0
2
4
6
8
10
0
125
250
375
500
625
2012 2013 2014 2015 2016 2017
Thousands
Unemployment Rate
(right axis) Nonfarm Payrolls
avg. monthly change
(left axis)
Percent H F
Unemployment Rate and NFP Growth
Why Not September?
September, 2015 11 ©2015 Macroeconomic Advisers, LLC
“While the unemployment rate is close to most
FOMC participants‟ estimates of the longer-run
normal level, the participation rate is still below
estimates of its underlying trend, involuntary
part-time employment remains elevated, and
wage growth remains subdued.”
-Chair Yellen‟s Press Conference, September 17, 2015
*Bolding added by MPI
Source: Federal Reserve.
What‟s Yellen Waiting For?
September, 2015 12 ©2015 Macroeconomic Advisers, LLC
Source: MPI/MA, BLS.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Gap relative to „94-‟07 average
Part-time Employment for Economic
Reasons
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Gap relative to „94-‟07 average
U3
U6
Gap Between U3 and U6 Continues to
Narrow
What‟s Yellen Waiting For?
September, 2015 13 ©2015 Macroeconomic Advisers, LLC
Source: MPI/MA.
62
63
63
64
64
65
65
66
66
67
67
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Percent
Labor Force
Participation Rate
H F
Cyclical Rebound in Participation Rate to
Slow Decline in the Unemployment Rate
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0 Percent
Employment
Cost Index
H F
Wage Growth Expected to Pickup
FOMC Still Sees 2015 As Most Likely Liftoff
September, 2015 14 ©2015 Macroeconomic Advisers, LLC
Sources: MPI/Macroeconomic Advisers, Federal Reserve.
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2014.5 2015 2015.5
Median dots consistent with
one 25-basis-point hike this
year (most likely December)
The dots indicate that 13 of 17 participants still expect a rate hike this year.
Liftoff Probabilities
September, 2015 15 ©2015 Macroeconomic Advisers, LLC
Percent
*Implied by fed funds futures quotes from September 21, 2015.
Sources: MPI/Macroeconomic Advisers, Bloomberg
At Which FOMC Meeting Is Liftoff Most Likely?
0
10
20
30
40
50
60
October December
MPI
Market*
Market*
MPI
Liftoff Probabilities
September, 2015 16 ©2015 Macroeconomic Advisers, LLC
Percent
*Implied by fed funds futures quotes from September 8, 2015.
Sources: MPI/Macroeconomic Advisers, Bloomberg
What’s the Probability of a Rate Hike by Each Meeting?
0
10
20
30
40
50
60
70
October December
MPI
Market*
Market*
MPI
After Liftoff: Pace of Rate Hikes
September, 2015 17 ©2015 Macroeconomic Advisers, LLC
Three Views on Pace
Source: MPI/Macroeconomic Advisers, Bloomberg, and Federal Reserve.
Note: For each year in question, a dot represents an FOMC participant's view on the appropriate year-end
value of the funds rate—dark dots denote the median view. OIS forward rates are for the one-month rate at
the end of the year in question. The MPI path is our expected year-end value.
2015 2016 2017
Percent
OIS
MPI
-1
0
1
2
3
4
5
2014 2015 2016 2017 2018 2019Longer Run
*Bolding added by MPI
Source: MPI/Macroeconomic Advisers, BLS, Federal Reserve
End Game: Undershoot the NAIRU?
September, 2015 18 ©2015 Macroeconomic Advisers, LLC
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1994 1997 2000 2003 2006 2009 2012 2015
Percent, 4th/4th
H F
Overshooting the (Core)
Inflation Target?
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
1994 1997 2000 2003 2006 2009 2012 2015
Undershooting the NAIRU
Percent
H F
“A lot of people that are currently long term unemployed, they’ve been out of work for a very long
time. This is obviously very bad for them, but it’s also very bad for the economy as a whole.
Allowing the economy to run a little hot would make it more likely that inflation would actually
move up towards the 2 percent objective. And two, it would pull some of these long term
unemployed back into the workforce.”
- President Dudley, October 6, 2014
Source: MPI/Macroeconomic Advisers, Federal Reserve
How Does the FOMC Respond?
September, 2015 19 ©2015 Macroeconomic Advisers, LLC
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
1994 1997 2000 2003 2006 2009 2012 2015
Percent
*The actual or prescribed fed funds rate (or its forecast) minus the estimate of the long-run fed funds rate (r* + 2%) at that time.
H F
Yellen (2012) Rule Gap
Funds Rate Gap
FOMC Raises Funds Rate Above the LR Equilibrium Rate
The Buffer and the Inflation Objective
September, 2015 20 ©2015 Macroeconomic Advisers, LLC
Frequency of Hitting the Zero Lower Bound
Size of the Buffer 2½ 3½ 4½
Frequency 20% 9% 5% These probabilities are derived from Williams (2009). Williams used data from 1968-2002.
Source: Williams (2009), MPI/MA.
Buffer
Frequency
of Hitting
the ZLB
2½ 2 4½ 5
1½ 2 3½ 9
1½ 3 4½ 5
½ 2 2½ 20
½ 3 3½ 9
½ 4 4½ 5 These probabilities are derived from Williams (2009). Williams used data from 1968-2002.
Combinations of r* and
September, 2015 21 ©2015 Macroeconomic Advisers, LLC
Source: Williams (2009), MPI/MA.
Source: Federal Reserve. Bolding added by MPI.
Statement of Strategy of Monetary Policy
In setting monetary policy, the Committee seeks to mitigate
deviations of inflation from its longer run goal and deviations of
employment from its maximum level. These objectives are generally
complementary. However, under circumstances in which the
Committee judges that the objectives are not complementary, it
follows a balanced approach in promoting them, taking account of
the magnitude of the deviations and the potentially different
time horizons over which employment and inflation are projected
to return to levels judged consistent with its mandate
- FOMC “Statement on Longer-run Goals and Monetary Policy Strategy,” adopted
effective as of Jan 24, 2012, and amended effective as of January 27, 2015
September, 2015 22 ©2015 Macroeconomic Advisers, LLC