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 RecommendationLabor 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
ContinuouslyCompoundedAnnualRateofChange
GDP(in$trillions)
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
Consumption(in2009$trillions)
1.7
1.9
2.1
2.3
2.5
2.7
2.9
2005 2007 2009 2011 2013 2015
PrivateInvestment(in2009$trillions)
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
Index
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
Index
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
Exports(in$billions)
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
Index(January11977=100)
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
Index
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
Percent
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
Persons(millions)
11

0
1
2
3
4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Persons(millions)
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
Participationrate(percent)
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
ParticipationRate(percent)
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
Full-timeworkers(millions)
22
23
24
25
26
27
28
29
2007 2008 2009 2010 2011 2012 2013 2014 2015
Part-timeworkers(millions)
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
Weeks
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
ECIGrowth(percentchange)
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
QuitsRate(percentchange)
ECIWages(percentchange)
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
Percentchange
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
Percentchange
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
PercentChange
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

0
1
2
3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
HousingUnits(millions)
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
PTER(inmillionsofworkers)
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
CompoundedAnualRateofChange
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
Percentchange
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
LogRealImportedOilPrice/Barrel
PercentChange
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
PercentChange
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
$trillions
Total Assets Securities Held Outright
$4.5 trn
Recent Balance Sheet Trends
$4.2 trn
34

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