The Fed and the Economic Outlook
Mark L. J. Wright Research Director Federal Reserve Bank of Minneapolis
March 28, 2018 Disclaimer
The views expressed are my own and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
minneapolisfed.org Today’s Talk
. Overview of the Federal Reserve System and of the Federal Reserve Bank of Minneapolis . Discuss the national economy and the thinking behind recent monetary policy decisions . Compare national economy to: . State economies of Minnesota and Wisconsin . Twin Cities metro economy The Federal Reserve System The Federal Reserve System
. Central bank of the U.S. . Established by Act of Congress in 1913
. Two previous U.S. central banks: . First Bank of the United States (1791-1811) Promoted by Alexander Hamilton, the first Secretary of the Treasury
. Second Bank of the United States (1816-1836) Ended when President Andrew Jackson vetoed reauthorization of the bank
Responsibilities of the Federal Reserve System
. Supervise and regulate banks . Mainly large bank holding companies . JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup . Provide financial services . Manage (‘clear’) financial payments . Help banks meet short-term demands for cash . “Lender of Last Resort” . Set monetary policy Structure of the Federal Reserve System
12 “District” banks carry out operating duties of Federal Monetary Reserve policy BOG Chair, Jerome Powell The Federal Reserve Banks Minneapolis Fed’s Ninth District
The Minneapolis Fed’s job is to: • Supervise banks & offer financial services in this district • Monitor developments in this regional economy • Represent the interests of the 9th district when monetary policy is set in Washington D.C. 8 times per year The Federal Open Market Committee (12 Voting Members) Board of Governors 7 Governors = 7 votes 4 seats currently unfilled
District bank presidents = 5 votes • NY Fed permanent vote • 4 rotating votes among remaining 11 District banks Minneapolis Fed President Neel Kashkari not voting 2018 FOMC = 7 + 1 + 4 Currently: 3 + 1 + 4 The Federal Open Market Committee
Monetary Policy: The Dual Mandate
. In 1977, Congress directed the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to set monetary policy in order to promote the goals of: . “maximum employment” . “stable prices”
. Known as the “dual mandate” Maximum Employment National Unemployment Rate percent Unemployment rate (U-3)* Under-employment rate (U-6)* 19
17
15
13
11
9
7
5
*Dashed lines indicate 2006-2007 average. 3 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Unemployment Rate percent * * * 19 12
17 11
15 10 9 13 8 11 7 9 6 7 5 5 4 *Dashed lines indicate 2006-2007 average. 3 3
Source: Bureau of Labor Statistics National and Regional Unemployment Rates percent U-3 U-6 12 18 11 16 10 9 14 8 12 7 6 10 5 8 4 3 6
Source: Bureau of Labor Statistics Local Unemployment Rates U-3 only, percent Rochester Twin Cities 9
8
7
6
5
4
3
2 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Employment-population and Labor Force Participation Ratios percent E/P* LFP* 68
66
64
62
60
58
*Dashed lines indicate 2006-2007 average. 56 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Employment-population and Labor Force Participation Ratios 25-54, percent E/P LFP 84
82
80
78
76
*Dashed lines indicate 2006-2007 average. 74 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Employment-population and Labor Force Participation Ratios percent E/P LFP 72 75
70 73
68 71
66 69
64 67
62 65
60 63
58 61
56 59
Source: Bureau of Labor Statistics Stable Prices PCE Inflation 12-month percent change Headline Target Core 4.0
3.0
2.0
1.0
0.0
-1.0 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Economic Analysis Annualized Monthly Changes in Core PCE
4
3
2
% 1
0
-1
-2
Source: Bureau of Economic Analysis. Consumer Price Index 4-quarter percent change US Minneapolis-St Paul Milwaukee-Racine 6
5
4
3
2
1
0
-1
-2 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Survey-based Inflation Expectations percent UMich, next 5 to 10 years* SPF, 10 years PCE 3.5
3.0
2.5
2.0
1.5 2006 2008 2010 2012 2014 2016 2018
*3-month moving average. Source: Survey of Consumers, University of Michigan; Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia Market-based Inflation Expectations weekly averages, percent 5yr/5yr Swaps 2yr/3yr Swaps 3.5
3.0
2.5
18th percentile 2.0
30th percentile 1.5
1.0 2004 2007 2010 2013 2016
Source: Bloomberg Labor Costs 12-month or 4-quarter percent change
Compensation Per Hour Average Hourly Earnings Employment Cost Index 6.0
5.0
4.0
3.0
2.0
1.0
0.0 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Average Weekly Earnings 12-month percent change, 3-month moving average US MN WI 10
5
0
-5 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Average Weekly Earnings 12-month percent change, 3-month moving average Rochester Twin Cities 25
20
15
10
5
0
-5
-10
-15 2006 2008 2010 2012 2014 2016 2018
Source: Bureau of Labor Statistics Take-Aways
. National economy continues to get stronger . Are we at maximum employment? . Prices are stable and are expected to remain so . Wages and compensation growth remain modest . Comparatively speaking, MN and Twin Cities metro: . Are doing better than national economy . Wages growth remains strong, but has slowed down recently Thank you!
Questions?
Twitter: @MarkLJWright @MinneapolisFed