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The Outlook and Current Policy Challenges
NAHEFFA Spring Conference
May 7, 2018
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
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
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208223
50
100
150
200
250
300
2016:Jan 2016:Jul 2017:Jan 2017:Jul 2018:Jan
Th
ou
san
ds
of
job
s, 3
-m
on
th a
vg.
Employment growth
Sustainable growth rate (rate of entry into labor force)
Sources: Bureau of Labor Statistics (employment), Bureau of Economic Analysis (GDP), author’s calculations, Haver Analytics
0.0
1.0
2.0
3.0
4.0
2017 2018:Q1
Contributions to GDP growth
Consumer spending
Investment spending
Residential investment
Net exports
Inventory accumulation
Income, wealth, financial conditions are still supporting Sentiment
highest since 2004
Fiscal policy: both tax cuts and increased federal spending boost GDP
ROW growth improved, but flattening
4
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2009:Q2 2010:Q4 2012:Q2 2013:Q4 2015:Q2 2016:Q4 2018:Q2
Ind
ex
, st
art
of
reco
very
= 1
.0
Household income and wealthHousehold wealth
Consumer sentiment
HH income (inflation-adjusted)Apr
0.61.01.41.82.22.63.03.43.84.2
Ind
ex,
start
of
reco
very
= 1
.0
Financial conditions: accommodativeStock prices10-year Treasury yieldExchange value of the dollar
Sources: Flow of Funds (wealth), BEA (income), Wall
Street Journal (stock prices), Federal Reserve (Treasury
yield, exchange rate), Haver Analytics
Now approximately at
our 2% goal
Earlier, temporary
factors held down
inflation
Those have faded
Core inflation (PCE)
currently at 1.9% for
past 12 months
2.25% for past 6
months, annualized
5
0
0.5
1
1.5
2
2.5
3
2016:J
an
2016:M
ar
2016:M
ay
2016:J
ul
2016:S
ep
2016:N
ov
2017:J
an
2017:M
ar
2017:M
ay
2017:J
ul
2017:S
ep
2017:N
ov
2018:J
an
2018:M
ar
Core inflation trends, PCE
3-month
6-month
12-month
Source: BEA (PCE inflation), Haver Analytics
Above-trend growth For 2018, 2019
At or a bit below trend in 2020?
Falling unemployment To the mid-3’s?
Gradually rising inflation Near 2% this year (by Q4)
A bit higher later on
All conditioned on gradually rising interest rates
6
0
1
2
3
4 GDP growthRange of submissions
4-qtr. GDP growth
2
3
4
5
6 Unemployment
Range of submissions
Unemployment rate
Forecast
Sources: BEA (GDP), BLS (unemployment), Summary of Economic Projections (Board of Governors), Haver Analytics
Forecast
Old news: Aluminum, steel (<2% 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 pre-emptively raising tariffs on imports from US (mostly agricultural)
Fast-changing; mostly small changes; hard to gauge net impact
7Sources: Bureau of the Census (trade data), Haver Analytics
020406080
100120140160180200
Agr
icult
ura
l…
Liv
esto
ck
Fo
rest
ry
Fis
h
Oil&
Gas
Min
eral
s
Fo
od
Bev
erag
es&
tob
acco
Tex
tile
s an
d f
abri
cs
Ap
par
el
Lea
ther
Ch
emic
als
Pla
stic
s
Pri
mar
y M
etal
s
Fab
rica
ted m
etal
s
Mac
hin
ery
Co
mp
ute
rs a
nd…
Ele
c. E
qp
t an
d…
Tra
nsp
ort
atio
n e
qp
t
Furn
iture
Ser
vic
es im
po
rts
$ B
illi
on
s
Imports from China
Total Chinese
imports = $524B
GoodsServices
-500
0
500
1000
China EU
Trade factsTrade Balance Imports
Average growth = 2.2%
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
8
3
4
5
6
7
8
9
10
11
-5
-4
-3
-2
-1
0
1
2
3
4
5
GDP growth
Productivity growth, 5-year
Unemployment rate (right)
Avg. for this
recovery
Avg. for post-1960s
recoveries
Sources: BEA (GDP growth), BLS (Productivity growth, unemployment rate), Haver Analytics
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:
Sources: Bureau of Labor Statistics (unemployment, employment, AHE wage growth, nonfarm compensation), Haver Analytics 9
7.6
8.1
8.6
9.1
9.6
10.1
3.8
4.0
4.2
4.4
4.6
4.8
5.0
5.2
2015:D
ec
2016:J
an
2016:F
eb
2016:M
ar
2016:A
pr
2016:M
ay
2016:J
un
2016:J
ul
2016:A
ug
2016:S
ep
2016:O
ct
2016:N
ov
2016:D
ec
2017:J
an
2017:F
eb
2017:M
ar
2017:A
pr
2017:M
ay
2017:J
un
2017:J
ul
2017:A
ug
2017:S
ep
2017:O
ct
2017:N
ov
2017:D
ec
2018:J
an
2018:F
eb
2018:M
ar
2018:A
pr
Perc
en
t o
f th
e l
ab
or
forc
e
Measures of labor market slack
Civilian unemployment rate
"U-6" (broader measure of unemployment (right scale))
Estimates
of long-run
sustainable rate
You saw this chart before
What’s our goal? 2%
How close are we? Pretty darned close
Dip below 2% appears to have been temporary
If unemployment dips well below 4%, will nothing happen?
Expect gradual rise to 2% and a bit above
Sources: Bureau of Economic Analysis, Haver Analytics 10
0
0.5
1
1.5
2
2.5
3
2016:J
an2016:M
ar2016:M
ay2016:J
ul
2016:S
ep2016:N
ov
2017:J
an2017:M
ar2017:M
ay2017:J
ul
2017:S
ep2017:N
ov
2018:J
an2018:M
ar
Core inflation trends, PCE
3-month
6-month
12-month
11Source: Summary of Economic Projections, 9/20/17, Federal Reserve Board, CME Group FedWatch tool
http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/
0
10
20
30
40
50
60
70
80
90
100
June September December
Mark
et-
base
d
pro
bab
ilit
y
FOMC meeting, 2018
Financial market assessments of future Fed policy (4/30/18)
1.75-2%3 increases or more this year4 increases or more this yearMore than 4
3-4
0
1
2
3
4
5
2014 2015 2016 2018(March)
As of December FOMC meeting in year indicated, except for March 2018
Fed’s predictions of rate increases versus reality
Number of increases expected innext calendar yearActual (next year)
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
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1949:Q
11952:Q
31956:Q
11959:Q
31963:Q
11966:Q
31970:Q
11973:Q
31977:Q
11980:Q
31984:Q
11987:Q
31991:Q
11994:Q
31998:Q
12001:Q
32005:Q
12008:Q
32012:Q
12015:Q
3
Difference between unemployment rate and natural rate
Sources: Bureau of Labor Statistics (unemployment rate), Congressional Budget Office (natural rate of unemployment), Haver Analytics12
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?
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020406080
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1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Publicly-held debt to GDP ratio, with CBO projections Projection
-6-5-4-3-2-10
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29Months
Monetary policy “cushion”
Median decline in funds rate, 1960-2008SEP long-run funds rate (inverted)
Sources: CBO (debt projections), Wall Street Journal (funds rate), Board of Governors (SEP long-run rate), Haver analytics
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?
14
0
1
2
3
4
5
Year 0 Year 1 Year 2 Year 3 Year 4
Using the policy cushion (0.5% real rate)
4% inflation goal
3%
2%
Sources: CBO (outlays), author’s calculations.