District 3 - District 3 - PHILADELPHIAPHILADELPHIA

President – Charles I. PlosserPresident – Charles I. Plosser

Presented byMallory Holden & Colette

Dubicki

Charles I. PlosserCharles I. Plosser

INFLATION HAWK!INFLATION HAWK!

BEWAREBEWARE

Decreased consumer spending Decreased consumer spending decreasing overall:decreasing overall:

Retail Sales Retail Sales Domestic Tourism Domestic Tourism Service IndustryService Industry

Increase in the input costs to produce Increase in the input costs to produce goods:goods:

Increasing prices of manufacturing and Increasing prices of manufacturing and retail goodsretail goods

Overall prices have increasedOverall prices have increased Causing moderate pressure to increase Causing moderate pressure to increase

wageswages Real estate markets continue to appear Real estate markets continue to appear

dimdim Inventory of homes remains highInventory of homes remains high Financing is becoming harder to attainFinancing is becoming harder to attain New construction has slowed New construction has slowed

State of the National State of the National EconomyEconomy

• Manufacturers have experienced Manufacturers have experienced a steady rate of business a steady rate of business

• Several manufacturing industries Several manufacturing industries • Others reported an increase Others reported an increase

• Retail sales continue to fallRetail sales continue to fall• Auto sales have also decreased Auto sales have also decreased • In the financial market: In the financial market:

• Banks are limiting loans made for real estate Banks are limiting loans made for real estate projects projects

• Credit quality has decreased Credit quality has decreased • Outstanding loans have increased Outstanding loans have increased • Consumer lending has increased slightlyConsumer lending has increased slightly

• Residential real estate has shown some Residential real estate has shown some signs of increase in home salessigns of increase in home sales

• Inventory of houses on the market remains Inventory of houses on the market remains highhigh

• Commercial real estate has decreasedCommercial real estate has decreased• Prices have risen Prices have risen

• The price of imports has gone up. The price of imports has gone up. • A reduction in expansion and business activityA reduction in expansion and business activity

State of District 3’s State of District 3’s EconomyEconomy

Headline Inflation

Increased by 0.6%

Core Inflation

Increased by 0.2%

Inflation in the National EconomyInflation in the National Economy

The Job of the FedThe Job of the Fed

The Federal Reserve’s main responsibilities lie in The Federal Reserve’s main responsibilities lie in providing our nation with price stability and providing our nation with price stability and promoting sustainable economic growth.  promoting sustainable economic growth.  

““Indeed, ensuring price stability is one of the most Indeed, ensuring price stability is one of the most important contributions a central bank can make important contributions a central bank can make toward promoting sustainable economic growth”.toward promoting sustainable economic growth”.

This is done by changing interest rates.  This is done by changing interest rates.  

Remember:Remember: When you lower interest rates there is When you lower interest rates there is a higher demand to hold money which in turn leads a higher demand to hold money which in turn leads to higher liquidity of money and higher inflation. to higher liquidity of money and higher inflation. 

The economy cannot constantly be stimulated for The economy cannot constantly be stimulated for growth since it has no long-term advantages. growth since it has no long-term advantages.

It does not decrease unemployment nor increase It does not decrease unemployment nor increase output; it just leaves us with higher levels of output; it just leaves us with higher levels of inflation which hinders economic growth because:inflation which hinders economic growth because:– The change in prices are hard to determine why – The change in prices are hard to determine why –

whether it’s for higher demand or just due to inflation whether it’s for higher demand or just due to inflation – It creates uncertainties about future inflation which It creates uncertainties about future inflation which

makes business reluctant to expand operations makes business reluctant to expand operations – Fixed values become distorted Fixed values become distorted – It tends to redistribute wealth from lenders to borrowers It tends to redistribute wealth from lenders to borrowers

The Job of the FedThe Job of the Fed

More importantly, because everyone is combating More importantly, because everyone is combating their time, energy, and resources against their time, energy, and resources against inflation, more productive opportunities are inflation, more productive opportunities are missed. This is why price stability is so important missed. This is why price stability is so important and why we must fight the inflation that we are and why we must fight the inflation that we are facing today. facing today. 

““The best way for central banks to foster The best way for central banks to foster sustainable economic growth and prevent sustainable economic growth and prevent instability is to keep inflation under control”. instability is to keep inflation under control”.

We must not have the public lose confidence in We must not have the public lose confidence in the Fed as was the case in the 1970s otherwise it the Fed as was the case in the 1970s otherwise it will be a downward spiral.will be a downward spiral.

  

The Job of the FedThe Job of the Fed

Remember:Remember: Monetary policy works Monetary policy works with a lag so we cannot depend on it with a lag so we cannot depend on it to solve all of our problems.to solve all of our problems.

The markets will have to solve their The markets will have to solve their own problems which is going to take own problems which is going to take time, but the Fed can help by time, but the Fed can help by promoting financial stability.promoting financial stability.

The Job of the FedThe Job of the Fed

What Should Be Done?What Should Be Done?

Raise the Federal Funds Rate 25 basis Raise the Federal Funds Rate 25 basis pointspoints

How much should we raise the Federal

Funds Rate?

How much should we raise the Federal

Funds Rate?

How much should we raise the Federal

Funds Rate?This much!

How much should we raise the Federal

Funds Rate?This much!

2.25%2.25%

From 2% to…

The state of the economy is weak, but slowly The state of the economy is weak, but slowly looking optimistic. However, we cannot allow public looking optimistic. However, we cannot allow public confidence to wane as was the case throughout the confidence to wane as was the case throughout the 70s. Otherwise this will put a damper on economic 70s. Otherwise this will put a damper on economic growth. If the public is more concerned with inflation, growth. If the public is more concerned with inflation, other, more productive measures are wasted.other, more productive measures are wasted.

We cannot control the actions the market takes We cannot control the actions the market takes against rising energy and food prices, but we can against rising energy and food prices, but we can help by ensuring price stability and restoring help by ensuring price stability and restoring consumer confidence.consumer confidence.

Business cycle trends are hard to predict or Business cycle trends are hard to predict or influence, because productivity determines them, influence, because productivity determines them, but in the long run they equalize. The only way to but in the long run they equalize. The only way to influence them is by allowing productivity to not be influence them is by allowing productivity to not be focused mainly on inflation.focused mainly on inflation.

StatementStatement

ReferencesReferences

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