OUTLOOK FOR THE U.S. ECONOMY AND MONETARY POLICY

Transcription

1 OUTLOOK FOR THE U.S. ECONOMY AND MONETARY POLICY MassDevelopment Conference Current Topics in Tax-Exempt Financing Boston, MA November 3, 2017 Mary A. Burke Senior Economist Federal Reserve Bank of Boston Disclaimer: The views expressed here are those of the speaker and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System.

2 About the Federal Reserve Bank of Boston Part of Federal Reserve System Board of Governors (Washington., DC) 12 regional banks (including Boston) Conducts monetary policy, supervises and regulates banks Boston Fed s role Advise on monetary policy decisions Assist with banking supervision and regulation Monitor regional economy and inform public policy in region New England Public Policy Center, within Boston Fed

3 Jantoo Cartoons

4 Preview Current economic situation Have we fully recovered from the Great Recession? The current challenge for monetary policy Making sense of slow wage growth & slow inflation Achieving a soft landing for the economy Outlook Is higher inflation on the horizon? What can (or can t) monetary policy do to boost growth?

5 Relative to Pre-Recession Peak, Economic Activity Up ~20%; Payroll Jobs up 6% Indexed to Pre-recession peaks Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Recession Economic Activity Payroll Jobs Source: Federal Reserve Bank of Philadelphia / Bureau of Labor Statistics / Haver Analytics

6 GDP Growth Accelerated in Q2, Driven by Final-Goods Consumption

7 Unemployment Rate Back to Pre-Recession Low; Broader U-6 Rate Still Elevated Percent Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Recession Monthly U-3 Quarterly U-6 Source: Bureau of Labor Statistics / Haver Analytics

8 Core PCE Inflation Still Below 2%, Has Slipped in Past Year Source: Bureau of Economic Analysis/ Haver Analytics

9 Consumer Price Inflation (CPI) Up Since 2015, But Still Moderate Percent Change from year Earlier Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Recession US Source: Bureau of Labor Statistics / Haver Analytics

10 Wage Growth Still Modest Despite Low Unemployment Quarter Percent Change of ECI U3 Rate Percentage 0 0 Q3-04 Q3-05 Q3-06 Q3-07 Q3-08 Q3-09 Q3-10 Q3-11 Q3-12 Q3-13 Q3-14 Q3-15 Q3-16 Q3-17 Recession Empl. Cost Index (Private-Industry Wages & Salaries) U3 Rate Source: Bureau of Labor Statistics / Haver Analytics

11 Why Aren t Wages and Prices Rising Faster? Slow wage growth predicts low price inflation Low price inflation eases pressure on wages mutually reinforcing cycle Possible causes of low price inflation Globalization Big tech firms achieve cost reductions via scale Possible causes of slow wage growth Slow productivity growth Decline in workers bargaining power Slack still left in labor market

12 Stagnant Labor Force Participation Rate and Employment Rate: Hidden Labor Slack? Percent Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Recession Labor Force Participation Rate Employment-to-Population Source: Bureau of Labor Statistics / Haver Analytics

13 Average Productivity Growth Just 0.4 Percent Possible explanations: Weaker physical capital investment Slower increase in educational attainment Slower pace of technological change

14 Wage Growth Net of Productivity Not Far Below 2 Percent, Consistent with Inflation Target Source: Bureau of Labor Statistics / Haver Analytics

15 Why Do We Care? Isn t Low Inflation a Good Thing? Reason for low inflation matters for policy If economy below full employment, Fed should maintain stimulus (keep rates low) If economy at or above full employment, Fed should remove stimulus (raise rates) Inflation below target erodes Fed credibility Positive inflation enables higher interest rate than zero inflation Gives Fed ammunition in case of recession

16 Two Views on Monetary Policy

17 Raise Fed Funds Rate Soon or Wait? Charles Evans (President, Chicago Fed): We need to see clear signs of building wage and price pressures before taking the next step in removing accommodation. Eric Rosengren (President, Boston Fed): Advises regular and gradual removal of monetary accommodation. Rationale: inflation reacts to policy with a lag; could get too high if rates stay low.

18 The Proverbial Soft Landing

19 FOMC Projections: GDP Growth Slows to 2% by 2019; at 1.8% in Long-Run Source: Minutes of the Federal Open Market Committee September 20,

20 FOMC: Unemployment Rate Falls Further in , Rebounds to 4.6% in Long-Run Source: Minutes of the Federal Open Market Committee September 20,

21 FOMC: Inflation Picks Up in 2018; Reaches 2% by 2019 Source: Minutes of the Federal Open Market Committee September 20,

22 FOMC Members Assessments of Appropriate Federal Funds Rate: Below 4 Percent Through 2020; at 3.5 Percent or Below in Equilibrium Source: Minutes of the Federal Open Market Committee September 20,

23 Risks to the Economic Outlook Upside risks to growth Consumer spending on rise, fueled by strong job market and rising house and stock prices Fiscal policy (tax changes and/or gov t spending) could boost investment, productivity growth Could alter potential growth rate, unlike monetary policy Downside risks Fed could get rate path wrong, trigger recession International geopolitical risks Stock market correction

24 House Prices Increased 6-7% in Past Year, Following 4 Previous Years of Gains Percent Change from Year Earlier Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Q2-12 Q2-13 Q2-14 Q2-15 Q2-16 Q2-17 Recession US FHFA-Purchase Only US S&P Case-Shiller Source: FHFA, NBER, S&P/ Case-Shiller / Haver Analytics

25 Major Stock Indexes Above Pre- Recession Highs by 50% or More Sources: Dow Jones, The Wall Street Journal/Haver Analytics

26 Consumer Confidence Exceeds Pre- Recession Highs Indexed to U.S. Average of Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Recession US Source: The Conference Board / Haver Analytics

27 Recessions Tend to Follow Fed Tightening Cycles (Causality Uncertain!)