final - fed challenge presentation 2014 (new)
TRANSCRIPT
FEDERAL RESERVE CHALLENGE 2014
Jameel Ahmed, Evgeniia Cherepenina, Magdalena Lowisz, Nicole McFadden,
Ken Nichols, Adam Peña, Faizan Qadeer, Jakub Studzinski, Eliana Yun
AGENDA
• Analysis of Current State of the US Economy
• Areas of Concern for Monetary Policy
• Monetary Policy Prescription
CONTRIBUTIONS TO REAL GDP GROWTH RATE
Q3 2012 Q42012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014-4
-3
-2
-1
0
1
2
3
4
5
6
1.32 1.322.45
1.23 1.392.51
0.831.75 1.22
0.45 0.96
0.42
0.741.01
0.95
0.031.45
0.170.52
-1.2 -0.75
0.040.04
-0.71
-0.15
0.31
0.83
0.39 0.79
-0.08
-0.54
0.59
1.08
-1.66
-0.34
1.32
-0.19
-1.80
0.70 0.301.49
-0.34
-1.16
1.42
-0.57
Consumption Investment Government Spending Net Exports
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/07/2014
Real G
DP
Gro
wth
Rate
CONTRIBUTIONS TO GDP Q3 2014Investment
15.4%
Government Spending
17.3%
Net Exports2.7%
Durable Goods 7.1%
Nondurable Goods14.5%
Services43.0%
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/07/2014
CHANGE IN PRIVATE INVENTORIES AND GROSS PRIVATE DOMESTIC INVESTMENT
-250.0
-200.0
-150.0
-100.0
-50.0
0.0
50.0
100.0
150.0
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0Inventory Change (Billions) Investment (Billions)
Source: U.S. Department of Commerce: Bureau of Economic AnalysisDate Accessed:11/8/2014
Ch
an
ge in
pri
vate
in
ven
tori
es
Gro
s s
Pri
vate
Dom
est
ic I
n-
vest
men
t
FEDERAL GOVERNMENT: TOTAL EXPENDITURES
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0Contribution to GDP: Federal
Federal Government: Total Expenditures
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed:11/8/2014
% C
on
trib
uti
on
to G
DP
Gro
wth
Perc
en
t C
han
ge f
rom
Year
Ag
o
NET EXPORTS10/0
1/2
010
04/0
1/2
011
10/0
1/2
011
04/0
1/2
012
10/0
1/2
012
04/0
1/2
013
10/0
1/2
013
04/0
1/2
014
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Exports Imports
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/07/2014
Perc
en
t C
on
trib
uti
on
to G
DP
LABOR MARKET CONDITIONS INDEX
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
2.4
Source: Board of Governors of the Federal Reserve SystemAccessed: 11/07/2014
NON-FARM PAYROLL
10/1/2
013
11/1/2
013
12/1/2
013
1/1/2
014
2/1/2
014
3/1/2
014
4/1/2
014
5/1/2
014
6/1/2
014
7/1/2
014
8/1/2
014
9/1/2
014
10/1/2
0140
50
100
150
200
250
300
350Total Nonfarm Payroll Employment
Source: U.S. Department of Labor: Bureau of Labor StatisticsAccessed: 11/7/14
Net
Change (
in t
housa
nds)
JOB OPENINGS RATE01
/01/
2004
05/0
1/20
0409
/01/
2004
01/0
1/20
0505
/01/
2005
09/0
1/20
0501
/01/
2006
05/0
1/20
0609
/01/
2006
01/0
1/20
0705
/01/
2007
09/0
1/20
0701
/01/
2008
05/0
1/20
0809
/01/
2008
01/0
1/20
0905
/01/
2009
09/0
1/20
0901
/01/
2010
05/0
1/20
1009
/01/
2010
01/0
1/20
1105
/01/
2011
09/0
1/20
1101
/01/
2012
05/0
1/20
1209
/01/
2012
01/0
1/20
1305
/01/
2013
09/0
1/20
1301
/01/
2014
05/0
1/20
14
1.0
1.5
2.0
2.5
3.0
3.5
1.6
3.4
Source: U.S. Department of Commerce: Bureau of Labor StatisticsAccessed: 11/07/2014
QUITS VS LAYOFFS & DISCHARGES: RATE
01/0
1/20
04
07/0
1/20
04
01/0
1/20
05
07/0
1/20
05
01/0
1/20
06
07/0
1/20
06
01/0
1/20
07
07/0
1/20
07
01/0
1/20
08
07/0
1/20
08
01/0
1/20
09
07/0
1/20
09
01/0
1/20
10
07/0
1/20
10
01/0
1/20
11
07/0
1/20
11
01/0
1/20
12
07/0
1/20
12
01/0
1/20
13
07/0
1/20
13
01/0
1/20
14
07/0
1/20
141.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
Quits Layoffs & Discharges
Source: U.S. Department of Labor: Bureau of Labor Statistics Accessed: 11/07/2014
CIVILIAN LABOR FORCE PARTICIPATION
56
58
60
62
64
66
6867.3
62.7
Source: U.S. Department of Commerce: Bureau of Labor StatisticsAccessed: 11/07/2014
Perc
en
t
30-YEAR FIXED MORTGAGE RATES
10/0
7/20
04
04/0
7/20
05
10/0
7/20
05
04/0
7/20
06
10/0
7/20
06
04/0
7/20
07
10/0
7/20
07
04/0
7/20
08
10/0
7/20
08
04/0
7/20
09
10/0
7/20
09
04/0
7/20
10
10/0
7/20
10
04/0
7/20
11
10/0
7/20
11
04/0
7/20
12
10/0
7/20
12
04/0
7/20
13
10/0
7/20
13
04/0
7/20
14
10/0
7/20
140
1
2
3
4
5
6
7
86.7
3.9
Source: Freddie MacAccessed: 11/07/2014
Perc
en
t
CASE-SHILLER INDEX
100
120
140
160
180
200
220206.61
169.68
Source: S&P Dow Jones Indices LLC Accessed: 11/08/2014
12 Month Moving Average
Jan
2000 I
nd
ex
=100
DELINQUENCY RATE ON SINGLE-FAMILY RESIDENTIAL MORTGAGES
04/0
1/20
04
10/0
1/20
04
04/0
1/20
05
10/0
1/20
05
04/0
1/20
06
10/0
1/20
06
04/0
1/20
07
10/0
1/20
07
04/0
1/20
08
10/0
1/20
08
04/0
1/20
09
10/0
1/20
09
04/0
1/20
10
10/0
1/20
10
04/0
1/20
11
10/0
1/20
11
04/0
1/20
12
10/0
1/20
12
04/0
1/20
13
10/0
1/20
13
04/0
1/20
140
2
4
6
8
10
12 11.3
7.4
Source: Board of Governors of the Federal Reserve SystemAccessed: 11/07/2014
Perc
en
t
STOCK PRICES
0
500
1000
1500
2000
2500
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Source: S&P Dow Jones Indices LLC Accessed: 11/07/2014
S&P 500
S&
P 5
00
In
dex
Dow
Jon
es I
nd
ex
QE1 QE2
QE3Operation Twist
CORE PCE PRICE INDEX EXCLUDING FOOD AND ENERGY
10/01/2
004
04/01/2
005
10/01/2
005
04/01/2
006
10/01/2
006
04/01/2
007
10/01/2
007
04/01/2
008
10/01/2
008
04/01/2
009
10/01/2
009
04/01/2
010
10/01/2
010
04/01/2
011
10/01/2
011
04/01/2
012
10/01/2
012
04/01/2
013
10/01/2
013
04/01/2
014
10/01/2
0140.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1.4
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/08/2014
Com
poun
ded
Ann
ual R
ate
of C
hang
e
GDP PREDICTIONS
0
0.5
1
1.5
2
2.5
3
3.5
Accessed: 11/8/2014
GDP 2014 GDP 2015
Percen
t
8-15-14 9-17-14 10-15-1410-7-14
FOMC ESTIMATES
2014 2015 2016 2014 2015 20160
0.5
1
1.5
2
2.5
3
2
2.62.3
0.2
0.4
0.2
1.5 1.61.8
0.1 0.30.2
Source: Board of Governors of the Federal Reserve SystemAccessed: 11/07/2014
Perc
en
t
FEDERAL RESERVE’S BALANCE SHEET
11/0
5/20
04
05/0
5/20
05
11/0
5/20
05
05/0
5/20
06
11/0
5/20
06
05/0
5/20
07
11/0
5/20
07
05/0
5/20
08
11/0
5/20
08
05/0
5/20
09
11/0
5/20
09
05/0
5/20
10
11/0
5/20
10
05/0
5/20
11
11/0
5/20
11
05/0
5/20
12
11/0
5/20
12
05/0
5/20
13
11/0
5/20
13
05/0
5/20
14
11/0
5/20
140
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
Source: Board of Governors of the Federal Reserve SystemAccessed: 11/07/2014
Million
s o
f D
ollars
QE2
QE3
Operation Twist
QE1
AGENDA
• Areas of Concern for Monetary Policy
•Existence and level of slack in Labor Market
•Persistently Low Inflation
LABOR FORCE PARTICIPATION RATES
72
74
76
78
80
82
84
86
25
27
29
31
33
35
37
39
41
43
Source: U.S. Department of Labor: Bureau of Labor Statistics Accessed: 11/07/2014
Age 25-54 Age 55 and over
Perc
en
t of
Ag
e G
rou
p:
25
-54
Perc
en
t of
the A
ge G
rou
p:
55
an
d
over
LONG- TERM UNEMPLOYED
15
20
25
30
35
40
45
5045.3
32.0
Source: US Department of Labor: Bureau of Labor Statistics Accessed:11/8/2014
Perc
en
t U
nem
plo
yed
CBO PREDICTIONS OF THE NATURAL RATE OF UNEMPLOYMENT
4.5
4.7
4.9
5.1
5.3
5.5
5.75.5
Source: U.S. Congress: Congressional Budget OfficeAccessed: 11/07/2014
Perc
en
t
THE GAP BETWEEN U3 AND U612
/01/
1899
12/0
1/19
0212
/01/
1905
12/0
1/19
0812
/01/
1911
12/0
1/19
1412
/01/
1917
12/0
1/19
2012
/01/
1923
12/0
1/19
2612
/01/
1929
12/0
1/19
3212
/01/
1935
12/0
1/19
3812
/01/
1941
12/0
1/19
4412
/01/
1947
12/0
1/19
5012
/01/
1953
12/0
1/19
5612
/01/
1959
12/0
1/19
6212
/01/
1965
12/0
1/19
6812
/01/
1971
12/0
1/19
7412
/01/
1977
12/0
1/19
8012
/01/
1983
12/0
1/19
8612
/01/
1989
12/0
1/19
9212
/01/
1995
12/0
1/19
9812
/01/
2001
12/0
1/20
0412
/01/
2007
12/0
1/20
1012
/01/
2013
0
2
4
6
8
10
12
14
16
18
20
Series1 Series2
Source: US Department of Labor: Bureau of Labor Statistics Accessed:11/8/2014
Perc
en
t
7.3%
5.7%
U3U6
UNEMPLOYMENT BY DURATION
10/01/2007 10/01/2008 10/01/2009 10/01/2010 10/01/2011 10/01/2012 10/01/2013 10/01/20140
1000
2000
3000
4000
5000
6000
70005 to 14 weeks 15 to 26 weeks 27 weeks and over
Source: US Department of Labor Bureau of Labor StatisticsAccessed:11/8/2014
Th
ou
san
ds o
f P
eop
le
NON-FARM PAYROLL REVISIONS
08/0
1/20
04
02/0
1/20
05
08/0
1/20
05
02/0
1/20
06
08/0
1/20
06
02/0
1/20
07
08/0
1/20
07
02/0
1/20
08
08/0
1/20
08
02/0
1/20
09
08/0
1/20
09
02/0
1/20
10
08/0
1/20
10
02/0
1/20
11
08/0
1/20
11
02/0
1/20
12
08/0
1/20
12
02/0
1/20
13
08/0
1/20
13
02/0
1/20
14
08/0
1/20
14-250
-200
-150
-100
-50
0
50
100
150
200
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/07/2014
Hu
nd
red
s
CORE PCE (PI) VS LONG & SHORT RUN AVERAGES
10/01/2
004
04/01/2
005
10/01/2
005
04/01/2
006
10/01/2
006
04/01/2
007
10/01/2
007
04/01/2
008
10/01/2
008
04/01/2
009
10/01/2
009
04/01/2
010
10/01/2
010
04/01/2
011
10/01/2
011
04/01/2
012
10/01/2
012
04/01/2
013
10/01/2
013
04/01/2
014
10/01/2
0140.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5CORE PCE (PI) Long Run (3.3) Short Run (1.6)
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/08/2014
Com
poun
ded
Ann
ual R
ate
of C
hang
e
3.3
1.6
HOURLY WAGE GROWTH
-5.5
-3.5
-1.5
0.5
2.5
4.5
6.5
8.5
10.5
2.1
Source: U.S. Department of Labor: Bureau of Labor Statistics Accessed: 11/07/2014
Hourly Wage
Perc
en
t C
han
ge
BRENT CRUDE OIL PRICES
75
80
85
90
95
100
105
110
115
120
125118.29
84.9
Source: U.S. Energy Information and AdministrationDate Accessed:11/8/2014
Pri
ce P
er
Barr
el in
US
D
UNIVERSITY OF MICHIGAN INFLATION EXPECTATIONS
01/0
1/20
04
07/0
1/20
04
01/0
1/20
05
07/0
1/20
05
01/0
1/20
06
07/0
1/20
06
01/0
1/20
07
07/0
1/20
07
01/0
1/20
08
07/0
1/20
08
01/0
1/20
09
07/0
1/20
09
01/0
1/20
10
07/0
1/20
10
01/0
1/20
11
07/0
1/20
11
01/0
1/20
12
07/0
1/20
12
01/0
1/20
13
07/0
1/20
13
01/0
1/20
14
07/0
1/20
140.0
1.0
2.0
3.0
4.0
5.0
6.0
3.0
Source: Thomson Reuters/University of MichiganAccessed: 11/07/2014
Perc
en
t
AGENDA
• Monetary Policy Prescription
• Increase Target for Federal Funds Rate
• Date-driven Schedule
• Start: End of Q1 2015• Increase of 25 basis points
UNIVERSITY OF MICHIGAN: CONSUMER SENTIMENT INDEX
50
60
70
80
90
100
110
84.1
Source: Thomson Reuters/University of MichiganAccessed: 11/07/2014
IND
EX
: 100=
1966
TARGET FEDERAL FUNDS RATE: 1.2-1.25%
0
1
2
3
4
5
6
7
8
9
Source: U.S. Department of Commerce: Bureau of Economic AnalysisAccessed: 11/07/2014
Effective Federal Funds Rate
Perc
en
t
DATE-DRIVEN SCHEDULE 2015FOMC Meetings: Revision in Fed Funds Target Rate
Date Fed Funds Target Rate
January 2015 No change
March 2015 Increase in 25 basis points
April 2015 Increase in 25 basis points
June 2015 Increase in 25 basis points
July 2015 Increase in 25 basis points
September 2015 Increase in 25 basis points
October 2015 Possible Revision
December 2015 Possible Revision
SIGNALS FOR POSSIBLE REVISIONSDeceleration considered if:
-Inflation drops below 1.2%
-Unemployment exceeds 6.2%
-GDP drops to 2.2% annualized rate for the year
Acceleration considered if:
-Inflation exceeds 2.5%
-Unemployment falls below 5.2%
SUMMARY• Increase Target for Federal Funds Rate
• Date- driven Schedule
• Possible Revisions at Future FOMC Meetings