The Outlook and Current Policy Challenges

Transcription

1 The Outlook and Current Policy Challenges NAHEFFA Spring Conference May 7, 18 Jeff Fuhrer EVP and Senior Policy Advisor Federal Reserve Bank of Boston 1

2 Disclaimer: The views represented in this presentation are solely those of the author, and do not reflect the views of the Federal Reserve Bank of Boston, the Board of Governors of the Federal Reserve System, or the Federal Open Market Committee

3 Thousands of jobs, - month avg. Labor market strength continues Spending data a bit weaker for the first quarter Slower consumption growth, but moderate investment spending Still, the underpinnings for growth are good Income, wealth, financial conditions, tax cuts, federal spending, ROW growth Employment growth Sustainable growth rate (rate of entry into labor force) 16:Jan 16:Jul 17:Jan 17:Jul 18:Jan Contributions to GDP growth 17 18:Q1 Consumer spending Investment spending 8 Residential investment Net exports Inventory accumulation Sources: Bureau of Labor Statistics (employment), Bureau of Economic Analysis (GDP), author s calculations, Haver Analytics

4 Index, start of recovery = 1. Index, start of recovery = 1. Income, wealth, financial conditions are still supporting Sentiment highest since 4 Fiscal policy: both tax cuts and increased federal spending boost GDP ROW growth improved, but flattening Sources: Flow of Funds (wealth), BEA (income), Wall Street Journal (stock prices), Federal Reserve (Treasury yield, exchange rate), Haver Analytics Household income and wealth Household wealth Consumer sentiment HH income (inflation-adjusted) Apr 9:Q 1:Q4 1:Q 1:Q4 15:Q 16:Q4 18:Q Financial conditions: accommodative Stock prices 1-year Treasury yield Exchange value of the dollar 4

5 16:Jan 16:Mar 16:May 16:Jul 16:Sep 16:Nov 17:Jan 17:Mar 17:May 17:Jul 17:Sep 17:Nov 18:Jan 18:Mar Now approximately at our % goal Earlier, temporary factors held down inflation Those have faded Core inflation (PCE) currently at 1.9% for past 1 months.5% for past 6 months, annualized Core inflation trends, PCE -month 6-month 1-month Source: BEA (PCE inflation), Haver Analytics 5

6 Above-trend growth For 18, 19 At or a bit below trend in? Falling unemployment To the mid- s? Gradually rising inflation Near % this year (by Q4) A bit higher later on All conditioned on gradually rising interest rates 4 GDP growth Range of submissions 4-qtr. GDP growth Unemployment Range of submissions Unemployment rate Forecast Forecast Sources: BEA (GDP), BLS (unemployment), Summary of Economic Projections (Board of Governors), Haver Analytics 6

7 Agricultural Livestock Forestry Fish Oil&Gas Minerals Food Beverages&tobacco Textiles and fabrics Apparel Leather Chemicals Plastics Primary Metals Fabricated metals Machinery Computers and Elec. Eqpt and Transportation eqpt Furniture Services imports $ Billions Old news: Aluminum, steel (<% of imports) New news: Exemptions from steel, aluminum tariffs for allies Newer news: US tariffs on Chinese imported goods IP related? No details yet. Newest news: China preemptively raising tariffs on imports from US (mostly agricultural) Fast-changing; mostly small changes; hard to gauge net impact Imports from China Total Chinese imports = $54B Trade facts Trade Balance China Imports EU Goods Services Sources: Bureau of the Census (trade data), Haver Analytics 7

8 Average growth =.% Slow by historical standards Yet it produced a dramatic drop in unemployment Why so slow? Productivity growth has been slow Labor force growth slow Thus potential or sustainable growth has been slow Probably will be for a while GDP growth Productivity growth, 5-year Unemployment rate (right) Avg. for post-196s recoveries Avg. for this recovery Sources: BEA (GDP growth), BLS (Productivity growth, unemployment rate), Haver Analytics 8

9 15:Dec 16:Jan 16:Feb 16:Mar 16:Apr 16:May 16:Jun 16:Jul 16:Aug 16:Sep 16:Oct 16:Nov 16:Dec 17:Jan 17:Feb 17:Mar 17:Apr 17:May 17:Jun 17:Jul 17:Aug 17:Sep 17:Oct 17:Nov 17:Dec 18:Jan 18:Feb 18:Mar 18:Apr Percent of the labor force Our responsibilities, as delegated to us by Congress: The Dual Mandate : low inflation, maximum (sustainable) employment Where are we in achieving these goals? First, employment: Measures of labor market slack Civilian unemployment rate "U-6" (broader measure of unemployment (right scale)) Estimates of long-run sustainable rate Sources: Bureau of Labor Statistics (unemployment, employment, AHE wage growth, nonfarm compensation), Haver Analytics 9

10 16:Jan 16:Mar 16:May 16:Jul 16:Sep 16:Nov 17:Jan 17:Mar 17:May 17:Jul 17:Sep 17:Nov 18:Jan 18:Mar You saw this chart before What s our goal? % How close are we? Pretty darned close Dip below % appears to have been temporary If unemployment dips well below 4%, will nothing happen? Expect gradual rise to % and a bit above Core inflation trends, PCE -month 6-month 1-month Sources: Bureau of Economic Analysis, Haver Analytics 1

11 Market-based probability Fed s predictions of rate increases versus reality Number of increases expected in next calendar year Actual (next year) (March) As of December FOMC meeting in year indicated, except for March Financial market assessments of future Fed policy (4//18) 1.75-% increases or more this year 4 increases or more this year More than 4 June September December FOMC meeting, 18 Source: Summary of Economic Projections, 9//17, Federal Reserve Board, CME Group FedWatch tool 11

12 1949:Q1 195:Q 1956:Q1 1959:Q 196:Q1 1966:Q 197:Q1 197:Q 1977:Q1 198:Q 1984:Q1 1987:Q 1991:Q1 1994:Q 1998:Q1 1:Q 5:Q1 8:Q 1:Q1 15:Q Low rates imply falling unemployment In every episode post WW II, unemployment slipping too far below normal leads to a recession and/or financial upheaval We d prefer a stable, sustained recovery Difference between unemployment rate and natural rate Sources: Bureau of Labor Statistics (unemployment rate), Congressional Budget Office (natural rate of unemployment), Haver Analytics 1

13 The idea: How much room do monetary and fiscal policy have to operate? i.e. How much capacity to stabilize the economy in the event of a recession? What to do about these constraints? Publicly-held debt to GDP ratio, with CBO projections Monetary policy cushion Median decline in funds rate, SEP long-run funds rate (inverted) Months Projection Sources: CBO (debt projections), Wall Street Journal (funds rate), Board of Governors (SEP long-run rate), Haver analytics 1

14 Fiscal policy Up to Congress Given near-certain and immediate increases in Medicare and Social Security expenses, sooner is better Monetary policy Raise the inflation goal (increase cushion ) Adopt a flexible inflation goal (likewise) Use QE? Sources: CBO (outlays), author s calculations Using the policy cushion (.5% real rate) 4% inflation goal % % Year Year 1 Year Year Year 4 14

15 Change at the top What does it mean? Mostly, continuity, on Monetary Policy, and Regulation Other openings Jay Powell Janet Yellen Vice Chairman of the Board of Governors (Clarida, new!) Three other Governor slots (one community banker nominated!) President of the NY Fed (Williams, new!) 15