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Spring 2018 Annual Report: Our Mission, Our Work KC Fed HQ: 10 Years at 1 Memorial Drive Diversity and Inclusion Report THE HOUSING EFFECT STUDYING THE IMPACT ON COMMUNITIES, INCOME, JOBS Spring 2018 THE HOUSING EFFECT Studying the impact on communities, income, jobs .........................................................4 Research, analysis and community development partnerships demonstrate that stable, affordable housing greatly benefits the broader economy. On the cover: Cris White, executive director and chief executive officer of the Colorado Housing and Finance Authority. Photo by David Tejada FEATURES 10 YEARS AT 1 MEMORIAL DRIVE A decade after moving, Tenth District HQ is center of service, growth ........ 9 Today the Federal Reserve Bank of Kansas City’s head office houses 1,600 employees, nearly twice the number that moved into the newly constructed facility in the spring of 2008. MEET THE NEW DIRECTORS Tenth District welcomes five business leaders to key advisory roles ........... 12 As they begin their service, the newest members of the Fed’s Kansas City, Denver, Oklahoma City and Omaha boards of directors discuss what they expect to contribute—and what they want to learn. COMMITMENT TO DIVERSITY AND INCLUSION 2017 Report to Congress ..................................................................... 28 The Office of Minority and Women Inclusion, established under the Dodd-Frank Act, ensures that the Kansas City Fed’s business practices represent the range of backgrounds and experiences that make up the Tenth District. 2017 ANNUAL REPORT ...................................................... 32 A detailed look at the operations of the Federal Reserve Bank of Kansas City, along with listings of directors, advisory councils, roundtables, officers and more. IN EVERY ISSUE 1 PRESIDENT’S MESSAGE 18 MAKING A CONNECTION 24 NOTES President’s message Steady, Measured Steps Needed to Sustain Expansion here is a lot going on at the Fed even as the economy has right now. At January’s Federal Open experienced above-trend T Market Committee meeting, we said growth and a tightening our farewells to Janet Yellen, whose job market. This has term as Fed chair has ended. In February, Jay helped workers by Powell took the oath of office as the Fed’s new allowing wage increases chairman. He is an experienced Fed governor to outpace inflation. whose service on the Board of Governors began Year-over-year inflation in 2012. Having worked with him the past is currently running several years, I think you can expect that Fed just under the Federal policy will continue along its current path, and Reserve’s objective of I expect a smooth transition. 2 percent, although I Amid these changes at the Federal Reserve, expect it will begin to the fundamentals of the U.S. economy are rise as labor markets sound. Preliminary estimates suggest that real tighten further and global demand pushes up GDP—our broadest measure of economic import prices. activity—grew at an annual rate of just under Taken together, these current conditions 3 percent in the second half of last year with and the near-term outlook appear quite robust consumer activity and a solid increase in rosy. You might think in a scenario like this, business spending on fixed investment. Federal Reserve policymakers would have an This current expansion has been a long one opportunity to relax a bit. Unfortunately, that and it has drawn millions of Americans into the is not the case. workforce as labor markets have strengthened. Hiring remains solid with payroll employment Near-term challenges gains averaging 192,000 per month over the last Although the financial crisis is now well three months. But the pace of payroll gains has behind us, and we have largely achieved our been gradually slowing since the peak in 2014, objectives for employment and inflation, and I expect those numbers will decelerate the stance of monetary policy remains quite further as labor markets continue to tighten accommodative. The federal funds rate, which and firms find filling job openings increasingly is the overnight interest rate we target, remains difficult. As labor markets have tightened, well below estimates of its longer-run value of compensation for workers has increased. This is around 3 percent. a welcome development because wage growth In addition, the Federal Reserve’s has been fairly modest through much of the balance sheet remains extraordinarily large by current expansion. historical standards due to the Federal Open Another favorable aspect of the current Market Committee’s (FOMC) large-scale expansion is that inflation has remained low purchases of longer-term Treasury and agency SPRING 2018 • TEN 1 debt beginning in 2007. These programs, In the longer run commonly referred to as quantitative easing or While threading this policy needle will be a QE, ended in October 2014 and the process key challenge over the next couple of years, there of shrinking the Fed’s balance sheet to reduce are also a number of structural developments these holdings started last fall. By the end of that could pose challenges over the longer run. this year, only about a quarter of the increase The nature of these structural issues is beyond to the Fed’s balance sheet resulting from the the scope of monetary policy to address, but first round of large-scale asset purchases will they will nevertheless have implications for be unwound. economic growth, employment and inflation As monetary policy accommodation is and deserve careful monitoring. gradually withdrawn, the economy is getting Among these is the slowdown that we a boost from fiscal policy related to the recent have seen over the last several years in the tax bill. How much of a boost is hard to tell at economy’s potential growth rate. This is the this stage. rate of growth consistent with maintaining the In our surveys of manufacturers across Fed’s dual mandate of price stability and full our District, the expectations of future activity employment. By most estimates, this rate was have increased since the bill was signed. This is falling before the financial crisis and is currently potentially good news for Wichita, where the believed to be about one-half of what it was economy is heavily reliant on manufacturing, a in the 1990s. This slowdown in the economy’s sector that experienced a net job loss last year. potential growth stems from slower growth Overall, I expect that lower personal tax rates in the size of the potential workforce and the will boost aggregate demand, and that a lower productivity of that workforce. Due largely to corporate tax rate and the more favorable tax demographic changes, especially the retiring of treatment of investment spending will increase the baby boom generation, the annual growth aggregate supply, although it is difficult to rate of our labor force is only a little better than predict exactly how and when consumers and one-third of what it was in the 1990s. At the businesses will respond. same time, productivity growth is about one- The result is that an uncertain degree half what it was in the 1990s. Both of these of fiscal stimulus is arriving at the same time unfavorable trends are projected to persist over the economy is operating at or beyond full the next decade. While these projections are employment and monetary policy remains highly uncertain, if they prove accurate, we can accommodative. And because of that, it is expect, among other things, a slower rate of important that the FOMC continues on its improvement in living standards relative to the current path of policy normalization with pre-crisis period. gradual increases in the target federal funds Slower potential growth also has some rate. The median projection from the FOMC’s troubling implications from a monetary Summary of Economic Projections calls for policy perspective. For one thing, it has led about three, 25-basis-point hikes in the federal many economists to lower their estimate of funds rate this year and about the same number the interest rate that is consistent with full next year. This is a reasonable baseline unless employment and price stability. Currently, the the outlook changes materially. FOMC’s median projection for the longer-run 2 SPRING 2018 • TEN federal funds rate is around 3 percent, which point to the possibility of slower economic is considerably below what it was only a few growth and higher fiscal deficits. These years ago. This means that a future FOMC structural developments have the potential to may have substantially less room to lower the complicate monetary policy. If the neutral rate federal funds rate should conditions warrant of interest remains historically low, monetary an increase in monetary stimulus. In such policy may have less scope to stimulate situations, for example a future recession, it the economy in a downturn without again might prove helpful for fiscal policy to step in resorting to unconventional policies such as and provide a countercyclical stimulus. asset purchases. A natural response to such But that leads me to another structural a situation would be to rely more heavily on challenge—the unsustainable trend of fiscal policy. However, the longer-run fiscal government debt. This will make it difficult for outlook suggests that fiscal policy may be fiscal policy to play that countercyclical role. similarly constrained. Thus, it is critical that The federal budget deficit increased as the longer-run budget issues associated with a share of GDP for the third straight year our aging population be addressed sooner in fiscal 2017, and it was widely expected rather than later. to creep higher over time even before the In the near term, the good news is that recent tax cuts. Demographic trends will raise the U.S. economy is currently growing at a government spending as an increasing share of moderate pace, with full employment and the population receives retirement and health- price stability.