fed challenge presentation (1)

Board of Governors

Staff Report to the FOMC

Agenda

❖ GDP growth has improved

❖ Inflation remains below 2% target

❖ Unemployment is down

❖ Recommend keeping interest rates near zero

Inflation LaborMonetary

PolicyGDP

GDP has returned to its former growth rates,

but still trends below potential

Consumption and investment spur GDP growth, while

net exports and government spending slow GDP growth

U.S. Consumption is slowly

recovering from the Great Recession

❖ Slow growth of household’s wealth

❖ Weak income expectations

❖ Less spending on discretionary

service

❖ Low consumer confidence

❖ Restricted terms for borrowingR

eal exp

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in

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n

Source: Bureau of Economic Analysis

Forecast: Real GDP growth moving

gradually back toward its longer-run rate

❖ Projections

● 2014 (2nd half) & 2015: above longer-run rate

● 2016 & 2017: somewhat above longer-run rate

● Long Run: 2.0 to 2.3

❖ Risks

● Weak consumer spending

● China and Germany


PolicyGDP

Inflation takes a slight month-to-month dip:

still well below Fed target

1.43

1.48

Nominal Wages not growing by much at all:

No help in meeting Inflation goals

1.43

1.95

Financial markets skeptical of any increase in Inflation

Forecasts: Inflation is expected to

hit 1.6-1.9% in 2015 and 1.7-2.0% in 2017

❖ Projections:

● Inflation Expectations remain anchored

● Unemployment rate shows improvement

○ Inflation will reach 2% by 2017

❖ Inflation concerns:

● Imports and Oil Prices

● Sticky Nominal Wages

○ Inflation is unlikely to rapidly increaseInflation Labor

Monetary

PolicyGDP

Labor market has shown continued

improvement in past months

❖ Unemployment down to 5.8%

❖ Measures of underutilization falling

❖ Hires, job openings, and quits all rising


PolicyGDP

Improvement: U3 Unemployment

down 0.1% in October


PolicyGDP

Improvement: Part-Time Employment for

Economic Reasons continuing to decline


PolicyGDP

Improvement: Long-Term Unemployment

down 28% from last year


PolicyGDP

Improvement: Hires, Job

Openings, and Quits all rising

Forecast: Unemployment will continue

falling over next several years

❖ Projections

● U3 rate will continue downward trend

● Long-run rate around 5.2-5.5%

❖ Risks

● Negative shocks

○ Wealth Shock to Demand


PolicyGDP

Expectations for the Dual Mandate

❖ Maximum Sustainable Employment

● Labor market will continue improving

❖ Stable Prices

● Inflation is steady and predicted to slowly move toward 2.0%


PolicyGDP

Committee Policy Action

❖ With the completion of QE3,

● Continue to reinvest principal interest payments on MBS/ABS and roll

over long-term Treasury securities

❖ Keep interest rates near zero

● Significant risks to raising interest rates prematurely

● Moderate risks to maintaining low interest rates

● Rate increases will be “data driven”


PolicyGDP

Risks of raising rates prematurely

❖ Stifles demand

❖ Disinflation or deflation

❖ Premature Contraction

● Great Depression

● Japan (1990’s to the present)

● 2011 Eurozone Crisis

❖ Lack of tools for expanding money supply

● Stuck at Zero Lower Bound


PolicyGDP

ECB’s response to inflation was premature

Risks of maintaining low rates

❖ Fear of excessive inflation

● The Federal Reserve has tools to limit inflation

● Brief inflation slightly above target is tolerable

● Current conditions do not suggest an excessive rise in inflation


PolicyGDP

Conclusion

❖ Use forward guidance to maintain that rate increases will be “data

driven”

❖ Risks to both actions

● We have tools to address the consequences of keeping rates low

● We don’t have tools for addressing the consequences of a premature

rate raise


PolicyGDP

Nonresidential investment contributes more

to growth than residential investment

Inflation Expectations are well-anchored

3.0

Changes in Employment and Changes in LFPR

Both Impact Unemployment Rate

Shape of Beveridge Curve indicates

Job Openings are being filled

Improvement: Quits Per Layoff Rising Steadily

Reinvest principal interest payments on MBS and

roll over Long-Term Treasury Securities

ECB’s response to inflation was premature

ECB’s raising of interest rates led to decline in output

Real Interest Rate

fed challenge presentation (1)

Economy & Finance