U.S. Economic Outlook and Monetary Policy

Transcription

1 U.S. Economic Outlook and Monetary Policy March 26, 21 Craig S. Hakkio Senior Vice President and Special Advisor on Economic Policy

2 Overview U.S. growth remains strong, though temporary factors are likely to slow growth in Q1. Key factors in the outlook are the decline in oil prices and rise in the dollar. Labor markets continue to improve rapidly. Inflation remains below 2 percent and faces temporary headwinds. U.S. monetary policy is likely to begin normalizing this year.

3 Labor market conditions continue to improve Index, >=above average Index, >=above average Level of activity Indicator Momentum Indicator Source: Federal Reserve Bank of Kansas City

4 Wage inflation has been modest, but is likely to pick up y/y %chg %, sa Wages and salaries of civilian workers (L) Net % of firms planning to raise worker compensation in the next 3 mos (R) Source: NFIB, BLS, Haver Analytics

5 Housing continues to improve, but slowly Units, ths (sa) 2 Units, ths (sa) Single-family housing starts (lhs) Multifamily housing starts (rhs) Source: Census Bureau, Haver Analytics

6 U.S. Oil Market Developments

7 Longer-term trends in energy production significantly changed in the previous decade Quadrillion Btu Quadrillion Btu Petroleum production Natural gas production Natural gas liquids production Source: Energy Information Administration, Haver Analytics 7

8 leading to a significant decline in imports of petroleum and natural gas Quadrillion Btu 7 Quadrillion Btu Net imports Petroleum, natural gas liquids, natural gas production Petroleum, natural gas liquids, natural gas consumption 3 Source: Energy Information Administration, Haver Analytics 8

9 Energy prices have fallen cents/gal $/barrel Retail gasoline price (L) WTI spot price (R) Source: Energy Information Administration, Haver Analytics

10 a boost to consumers June 214: Consumption of gasoline 9 million barrels / day Retail price $3.7 / gallon Value $1, million / day $38 billion (annual rate) February 21: Consumption of gasoline 8.7 million barrels / day Retail price $2.2 / gallon Value $6 million / day $22 billion (annual rate) Gain since June 214 = $16 billion (annual rate) 1 percent of GDP. 1

11 but a drop in oil and gas investment. Units Units Active oil rig count Source: Baker Hughes, Haver Analytics

12 On net, the decline should be positive for the U.S. Overall positive for some and negative for others Saudi Arabia Libya Iraq Venezuela United Arab Emirates Iran Russia Canada Mexico United States Europe China Japan Greece Net oil exports as share of GDP Note: Production - Consumption of oil in 213 (mb/d), converted to $ using WTI price of oil in June 214 ($1.79), divided by GDP in 213. Source: U.S. Energy Information Administration, International Monetary Fund World Economic Outlook.

13 Dollar appreciation

14 There is a divergence in the global economic outlook % % Bars: January 21 forecast Diamonds: October 214 forecast U.S. Euro Area China Mexico Source: IMF, World Economic Outlook, January 21 and October

15 Global CPI Inflation trending down y/y % chg y/y % chg Advanced Economies Inflation Asia-Pacific Inflation Source: Haver Analytics 1

16 Divergence of global monetary policy: Asset purchase program ended in the U.S., continues in Japan, started in Euro Area, % 7 % 7 Federal Reserve Assets/GDP 6 ECB Assets/GDP 6 Bank of Japan Assets/GDP Source: Federal Reserve Board, Haver Analytics 16

17 Over % of the world s population lives in a country that has eased monetary policy in 21 Source: FRB KC 17

18 All this contributes to an appreciation of the dollar Index (Mar-73=1) Index (Mar-73=1) Nominal trade-weighted value of the dollar against major currencies Source: Federal Reserve Board, Haver Analytics

19 leading to falling import prices and rising export prices y/y % chg 6 y/y % chg Import prices Export prices (in foreign economies) Note: Export price increases equal the percent change in dollar export prices plus appreciation of the US dollar. Source: BLS, Federal Reserve Board, and Haver Analytics -2

20 and falling new export orders Index, sa (>=increasing) 6 Index, sa (>=increasing) ISM Manufacturing: New Ordrers Index KC Fed Mfg Survey: New Orders for Exports: Expected in 6 Months 4 Source: Kansas City Fed, ISM, and Haver Analytics

21 U.S. monetary policy is likely to begin normalizing this year

22 Headline inflation may turn negative later this spring, though it is projected to gradually rise toward the 2% goal. y/y % chg FOMC projections (Mar. 21) y/y % chg Core PCE inflation Headline PCE inflation Source: BEA, Federal Reserve Board, and Haver Analytics -2

23 Unemployment is expected to decrease %, sa Midpoint of longer-run unemployment rate projection (FOMC - Mar. 21) FOMC projections (Mar. 21) %, sa Unemployment rate Source: BEA, Federal Reserve Board, Haver Analytics

24 The federal funds rate target is expected to rise beginning this year. % % 7 FOMC 7 6 Projections (Mar. 21) Federal funds target rate Longer Run Source: Federal Reserve Board, Haver Analytics 24

25 The Federal Reserve s balance sheet has stabilized near $4. trillion Tn $ Assets Federal Reserve Balance Sheet Short term lending, targeted lending programs, and rescue operations Other MBS & agency debt Treasury securities Currency Reserves Other -4. Liabilities Tn $ Source: Federal Reserve Board, Haver Analytics 2

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