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Final Presentation (2)
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- 2. Economic Policy Team Directorof Research Vice President of Research Assistant Policy Advisor Senior Economist Economic Policy Analyst Financial Economist Dr. Tsang: J Breuer : Abdi Jima : Elijah Fiore : Mateo Carrasco : Devon Norton :
- 3. Current Economic Conditions •The third quarter posted the highest GDP percent increase since 2014 at 2.9%. Previously rates hovered between 0.8 and 2.0%. • Recognized surveys reported mixed interpretations over the past quarter posting slightly favorable economic conditions for a rate hike.
- 4. National Reports Strengthening Reports 1.Empire State Manufacturing Survey a. Sub-zero results across the board for third month in succession b. Both upstream and selling prices have experienced upward pressure c. 6-month outlook is positive 1. Kansas City Fed Manufacturing Index a. Exports, backlogs, shipments, and export orders are up 2. Purchasing Managers’ Manufacturing Index a. Strongest since October of 2015 3. Philadelphia Fed Business Outlook Survey a. Strongest report, 1 ½ year high 4. Dallas Manufacturing Survey a. Modestly positive expectations of future business strength Mixed Reports Weakening Reports 1. Richmond Fed Manufacturing Index a. Sluggish numbers but better reports than previous months
- 5. Current Economic Conditions- Currency Rates Exchange Rate Report • Dollar hit 9 month high against pound • Pound, Euro • USD lost value against the Yen • Brexit - The Downfall of the Pound • Q2 → Q3, the Pound lost value against major currencies • US Exports are expected to slow down due to the strong dollar £ and € ¥
- 6. Current Economic Conditions- Trade Deficit The US current account deficit • Q1 2016 - $131.8 Billion • Q2 2016 - $119.9 Billion Goods and services deficit • Decreased 1.3% in 2016 from the same period in 2015
- 7. International Economic Conditions- Growth Rates • Growth rates of other developed countries The E.U growth rate of GDP was 0.3% in Q2 2016 The Japanese growth rate 0.2% in Q2 2016 and is forecasted to grow at 0.5% in Q3 • Growth rates of key emerging economies India’s GDP grew by 7.6% in Q2 2016 China’s GDP grew 6.7% in in Q2 2016 and is forecasted to slow down to 6.2% in 2017
- 8. Inflation - CurrentEconomic Conditions • BEA August Personal Income and Outlays • Dallas Fed calculates trimmed mean PCE inflation using BEA releases Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 PCE 0.8 4.0 2.1 1.4 0.4 1.7 Core PCE 0.8 2.4 2.0 1.0 1.5 2.2 Trimmed PCE 1.8 2.3 1.9 1.4 1.4 1.6
- 9. Inflation - Projections •Fed’s inflation forecasts • Cleveland Fed Inflation Nowcast • Q4 2016 quarterly annualized PCE inflation at 2.41% and core PCE inflation is at 1.59% • FOMC median projections (Sept. 2016) Forecast 2016 2017 2018 2019 Long Run PCE Inflation 1.3 1.9 2.0 2.0 2.0
- 10. Inflation - Expectations •Expected inflation has been declining since 1982, while the Inflation Risk Premium (IRP) has stayed level • With a stable IRP, investors can expect inflation to not rise or fall more than expected over the period in which they hold a bond • The Cleveland Fed’s latest estimate of 10-year expected inflation is 1.69% • The public expects the inflation rate to be less than 2% on average over the next decade
- 11. 10 Year TIPSVersus Trimmed PCE Source: US Department of the Treasury and FRED
- 12. Employment - CurrentEconomic Conditions • Employment Situation for September (Oct. release) • Household Survey Data • Unemployment August:4.9% • Unemployment September: 5.0% • Participation rate up to 62.9% • Those unemployed less than 5 weeks rose 284,000 up to 2.6 million • Long term unemployed remained about 2.0 million, 24.9% of total
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- 14. Unemployment - Projections •Trading Economics • ARIMA projection of unemployment • FOMC median projections (Sept. 2016) Forecast Actual Q4/16 Q1/17 Q2/17 Q3/17 2020 Unemployment Rate 5.0 5.1 5.2 5.3 5.3 6.0 Forecast 2016 2017 2018 2019 Long Run Unemployment Rate 4.8 4.6 4.5 4.6 4.8
- 15. Unemployment - Implications •NAIRU and economic stability • Natural rate of unemployment estimated at 4.8% by St. Louis Fed • Unemployment under this level could increase inflationary pressures • Inflation trends could signify a possible target rate hike in the near future
- 16. Financial Markets -Projections • Investor expectations lean towards rate hike in December • November rate hike effects: • Volatility Index (VIX) • Unpredictability • Higher cost of borrowing
- 17. International Conditions -Projections British Pound Implications • GDP projections for 2017 dropped 1.5 points from 2.3 to 0.8 post Brexit • Imports, Business Investment, and Housing Investment are forecasting negative changes • Most projections are expecting the economy to recover in 2018 • The central bank is welcoming a more aggressive stance on expansionary monetary policy throughout 2017-2018 • Unemployment forecasts remained the same • Credit rating downgrade to AA • Delicate economic conditions with special care and attention required throughout Brexit negotiations • Soft vs. Hard exit
- 19. Key Economic Indicators MonetaryPolicy Important Economic Variables • Given the following reports, we propose to hold the federal funds rate between 0.25-0.50%. • Interest rates on excess reserves to be held at 0.5% • GDP Forecast • Economic surveys indicate a general consensus on the strengthening economy • Inflation Expectations • Atlanta Fed’s Business Inflation Expectations • Philadelphia Fed’s Survey of Professional Forecasters • New York Fed’s Survey of Consumer Expenditures • Employment • Positive vs. negative signs
- 20. Indicators to Followfor December Meeting Attention Needed For the Following Metrics • Revised GDP • Inflation Expectations • U6 Unemployment • Economic Surveys • Brexit • Negotiations • Hard vs. Soft exit • GPB/USD • CME Group Market Expectations • Volatility Index