The Federal Reserve, Monetary Policy, and Economic Indicators

Transcription

1 The Federal Reserve, Monetary Policy, and Economic Indicators Megan Williams Associate Economist Federal Reserve Bank of Kansas City, Oklahoma City Branch

2 The Creation of the Fed The first two national banks, The need for a standard currency The Federal Reserve System is created in 1913 by President Woodrow Wilson The Fed opened for business in 1914 across 12 different cities

3 Map of Fed Districts

4 The Mission of the Fed The Fed was created to: Influence the supply of money and credit through monetary policy Regulate and supervise financial institutions Provide financial services to local institutions Serve as a banking and fiscal agent for the U.S. government

5 Federal Reserve System Structure Board of Governors (7 members appointed by President, confirmed by Senate) Federal Open Market Committee (Board of Governors and five Reserve Bank Presidents) Advisory Councils Consumer Advisory Council Federal Advisory Council Thrift Institutions Advisory Council Federal Reserve Banks (Twelve district Banks operate as arms of the central Bank)

6 Board of Governors Supervises and regulates the Reserve Banks Sets reserve requirements Approves changes in the discount rate Submits reports to Congress on state of economy

7 The Basics of Monetary Policy

8 Monetary policy decisions are forward-looking Based on historical experience, the FOMC knows that policy changes made today will affect economic growth and inflation with a lag of 6 or more months. So, the FOMC is largely concerned with what the economy might look like 6 months to 2 years ahead.

9 Federal Open Market Committee FOMC meets eight times each year Reviews economic and financial conditions Determines appropriate stance of monetary policy Assesses the risk to its long-term goals of price stability and economic growth 12 voting members (seven Board of Governors, president of New York Fed, and four presidents from remaining 11 Federal Reserve Banks on a one-year rotating basis)

10 Monetary Policy Goals Inflation Significant wage increases Significant price increases Recession Significantly high unemployment Significantly shrinking business profits

11 Monetary Policy Tools Reserve requirements Discount rate Open market operations

12 Reserve Requirements and Discount Rate Reserve Requirements Monies banks have to set aside with the Fed By raising or lowering, can affect the money supply Discount Rate Interest Rate charged to banks to borrow money from Fed By raising or lowering, can affect banks supply of money

13 Open Market Operations Influences interest rates Buys or sells Treasury securities Buys Lowers Fed Funds rate, money supply up Sells Raises Fed Funds rate, money supply down

14 Effect of Policy on the Economy Raise Fed Funds rate Economy slows Fewer loans Business revenues decrease More business failures Prices fall Greater unemployment Lower Fed Funds rate Economy heats up More loans Business revenues increase More workers hired Prices increase Workers wages increase

15 Mechanics of the FOMC Discuss current economic conditions Decide on what action to take regarding rate Issue directive to trading desk Issue a statement Release minutes of the meeting

16 Key Economic Indicators

17 At mid-year, GDP was growing at about its long-term trend, but differed by sector Growth in Components of Real GDP 2 Percent change from the previous period, SAAR 15 1 Q1 213 Q2 213 Q Total GDP Consumer spending Residential investment Business investment Exports Government spending Source: U.S. Bureau of Economic Analysis, Macroeconomic Advisors

18 Recent data suggest faster U.S. growth, and employment gains have been solid U.S. Private Payroll Employment and Business Indexes 6 Change from previous month, thousands Index Private Employment (left axis) ISM Manufacturing Index (right axis) ISM Non-Manufacturing Index (right axis) Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Source: Institute for Supply Management, Bureau of Labor Statistics

19 GDP growth was solid in 213 and is projected to be even stronger through 216 Real Gross Domestic Product 8 Percent change, year-over-year 8 6 Dec. FOMC Forecast Ranges in Yellow Long Term Source: U.S. Bureau of Economic Analysis, FOMC

20 Unemployment continues to fall and could reach long-term levels by Percent Unemployment Rate Seasonally Adjusted 12 1 Dec. FOMC Forecast Ranges in Yellow Long Term Sources: U.S. Bureau of Labor Statistics, FOMC

21 Inflation was low in 213 and is expected to rise to around its long-term target by 215 PCE Inflation Index 8 Percent change, year-over-year Dec. FOMC Forecast Ranges in Yellow Long Term Sources: U.S. Bureau of Labor Statistics, FOMC

22 Most FOMC participants project the first federal funds rate increase in Percent Federal Funds Rate Year-end target Long Term 8 6 Dec. FOMC Forecast Ranges in Yellow 6 4 (12) (3) 4 2 (2) Note Number of participants who project the initial increase will occur in the specified year in parenthesis Sources: Federal Reserve Board, FOMC

23 The Fed s balance sheet is now set to grow slightly slower in 214 than in 213 Federal Reserve Balance Sheet 5 4 $Trillions Assets Short term lending, targeted lending programs, and rescue operations Other MBS & agency debt Treasury securities Currency Reserves Other Liabilities Sources: Federal Reserve Board

24 Unlike the nation, employment has risen above pre-recession levels in Oklahoma 12 Index: Jan-8=1 Level of Payroll Employment Through November OK U.S Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan Source: U.S. Bureau of Labor Statistics

25 Rig counts have slipped somewhat but still remain relatively high 25 2 Number of rigs Oklahoma Active Drilling Rig Count Seasonally Adjusted Oil Natural Gas Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: Baker Hughes

26 And oil and gas production in the state has continued to increase Oklahoma Oil and Gas Production 35 Thousand barrels/day Bcf/month 21 3 Oil (left) Natural gas (right) Q3 28 Q3 29 Q3 21 Q3 211 Q3 212 Q3 213 Source: EIA

27 Drought conditions have improved since last year, helping some areas of the state U.S. Drought Monitor, January 214 Source: USDA

28 Residential construction has continued to increase, despite higher mortgage rates Single-Family Housing Permits Seasonally adjusted 16, Number of permits, 3-month moving avg. 1,6 14, 12, U.S. (left axis) OK (right axis) 1,4 1,2 1, 1, 8, 8 6, 6 4, 4 2, 2 Nov-3 Nov-4 Nov-5 Nov-6 Nov-7 Nov-8 Nov-9 Nov-1 Nov-11 Nov-12 Nov-13 Source: U.S. Census Bureau

29 But the government shutdown had some negative impacts in several states Federal Shutdown Economic Growth Reduction Q4 213 Source: Wells Fargo Securities, Pew Center

30 High energy, government, and low high-tech activity make Oklahoma different from U.S. Oklahoma and U.S. Employment Share by Industry, 212 Percent of Total Employment Industry OK U.S. Location Quotient Natural Resources & Mining Federal Government State & Local Government Construction Education & Health Trade, Transportation & Utilities Manufacturing Leisure & Hospitality Financial Activities Professional and Business Services Information Note - Location quotient is the division of local employment share by national employment share Source: U.S. Bureau of Labor Statistics

31 Want to Know More? Board of Governors of the Federal Reserve System Federal Reserve Bank of Kansas City Federal Reserve Education