PDF2013 Spring TEN Magazine

FEDERAL RESERVE BANK OF KANSAS CITY PHOTO BY GARY BARBER GARY BY PHOTO SPRING 2013 ANNUAL REPORT ISSUE ASSESSING THE IMPACT U.S. student loan debt reaches $1 trillion .......................................................................12 Most students don’t think about the money they borrow for college until they get the bill. And the bills are piling up. Estimates show that outstanding student loan debt in the United States has reached $1 trillion. FE ATURES POLARIZING AFFECT Occupational shift changes America’s workforce ............................................6 The labor force in the United States has shifted from middle-skill occupations to high-skill and low-skill occupations over the past three decades. Economists call this shift in the composition of occupations “job polarization.” STABILIZING THE ECONOMY Evaluating the effects of industrial diversity ....................................................18 State and local officials have sought to stabilize local economies by diversifying the mix of industries in their regions. Economic theory predicts that industrial diversity can reduce economic volatility; however, views vary on the affects industrial diversity has on long-term growth. 2012 ANNUAL REPORT ........................................................................36 Listings of the Federal Reserve Bank of Kansas City’s officers, directors, advisory councils, roundtable groups, and more, including a look at the organization’s inner workings. COMMITMENT TO DIVERSITY: 2012 Report to Congress ..................................................................................53 The Office of Minority and Women Inclusion (OMWI), established in late 2010 as a result of the Dodd-Frank Act, continues a long tradition of diversity at the Kansas City Fed. IN EVERY ISSUE 1 PRESIDent’S MESSAGE 22 COMMON CENTS 28 BOARD OF DIRECTORS’ PrOFILES 32 NOTES President’s message Monetary Policy Risks and Challenges uring my first full year of serving as presi- leaders, financial market dent of the Federal Reserve Bank of Kan- professionals and others in sas City, I have participated in meetings our seven-state region, who of the Federal Open Market Committee provide real-time perspec- (FOMC) and traveled thousands of miles around tives on the economy and the region and globe. In doing so, I have gained give me a forward-looking insights on the state of the economy in this re- view of economic condi- gion, in the nation and around the world, from tions. And those perspec- sawmill operations in Hulett, Wyo., to interna- tives contribute importantly tional conversations in China. to my policy views at the I also would note that although I have worked Federal Reserve’s monetary for the Kansas City Fed for more than 30 years, policy deliberations. I have developed, in this broader role, a renewed Although each of appreciation for the Federal Reserve’s structure, the 19 participants of the which provides 12 independent regional views on FOMC engages fully in the the economy in addition to the seven members of discussions regarding mon- the Board of Governors in Washington. As a poli- etary policy, only five of the 12 regional Re- cymaker and Reserve Bank president, I have ben- serve Bank presidents vote at each meeting in a efited tremendously from the insights of business given year. I am a voting member this year. Given the current state of the world, much may change between each committee meeting. Nevertheless, I would like to share with you my outlook for the U.S. economy and its ongoing recovery from a deep recession, and outline my perspective on the current stance of monetary policy and the challenges ahead. The pace of recovery We are now in the fourth year of the economic recovery. It has been a slow and uneven recovery. The unemployment rate remains a relatively high 7.8 percent, and most estimates for gross domestic product (GDP) growth going forward suggest a modest 2 percent rate. There are several reasons why this recovery has been slower than in the past. For example, Presidents of all 12 regional Federal Reserve Banks, along with consumers have been deleveraging, perhaps the Federal Reserve governors, participate in each meeting of the wisely so. Based on analysis by staff at the Kan- Federal Open Market Committee. Although the media often makes sas City Fed, the percentage of consumers tak- a distinction between members who vote on policy and those who do ing on more debt fell sharply during the last not, all members take an active part in policy deliberations. recession and has only modestly recovered. SPRING 2013 • TEN 1 This reduction in debt has occurred across a wide variety of income groups and among individuals with varying access to credit. This reduced willingness to borrow, even at the current low interest rates, reflects recognition among households of the need to repair their balance sheets and restore their credit standing. Its effect also then is to slow consumer demand and to constrain GDP growth. Consumers’ balance sheet adjustments are not the only factor hampering the pace of the economic recovery. Corporations also have been strengthening balance sheets, hoarding cash and often times borrowing to buy back shares or build cash reserves rather than build productive President George addresses a financial stability and banking capacity. And among these corporations are our supervision forum on Sept. 28, 2012, in Beijing, China. At nation’s largest banks, which, during most of the the forum, hosted by the Bank for International Settlements past four years, have focused on repairing their and the China Banking Regulatory Commission, George own balance sheets while struggling with per- discussed the need to address policies that shift financial sistent double-digit delinquency rates on home losses away from those responsible. loans and trying to manage the legal and regulatory uncertainties related to mortgage lending. progress is notable given the debt burden our These factors have impeded their willingness to economy carries and the depths of the financial lend for growth. Indeed, the four largest bank- crisis and recession we have suffered. ing companies are 30 percent larger today than Our economy’s production of goods and ser- they were at the start of the financial crisis, but vices is back to its pre-recession level. Key sectors their business lending still has not returned to its of the economy are showing marked improve- 2008 peak. ment and are strengthening as we enter 2013. In And finally, it is hard to find any news report particular, the housing sector has been showing that does not highlight the global uncertainty af- convincing signs of healing after its fall during fecting business and consumer choices and their the crisis. House prices are now about 5 percent willingness to hire and spend. Concerns about fis- higher than a year ago and construction activity cal policy here in the United States, or the sover- is steadily picking up. The auto sector is also ben- eign debt crisis in Europe all are playing a role in efitting from strengthening demand. Auto sales making this a difficult economic recovery. for 2012 came in 13 percent higher than in 2011 with 14.5 million vehicles sold—the highest Room for optimism level in about five years. Manufacturing activity If you look a little closer, however, you also has also held up reasonably well near the end of will see a recovery that is building momentum last year, despite concerns that the United States despite the barriers impeding progress—and the might go over the so-called fiscal cliff. 2 SPRING 2013 • TEN Part of the improvement in housing and ture policy actions. Taken together, the monetary auto sales reflects some improvement in the labor policy actions of the past few years have provided market. Employment growth averaged a bit more the economy with an unprecedented level of ac- than 150,000 jobs per month in 2012—enough commodation and a commitment to maintain an to keep up with population growth and slowly extraordinary level of accommodation well into absorb some of those who are unemployed. To the future. be sure, unemployment remains high and growth At its last meeting, the FOMC announced during this recovery has been only moderate de- that, provided the inflation outlook does not spite more than four years of zero interest rates move above 2½ percent, it expects to keep the and aggressive large-scale asset purchases by federal funds rate close to zero until the unem- the Federal Reserve. ployment rate reaches 6½ percent. In addition, Pulling all these factors together and sorting the committee decided to continue purchasing through the fog of uncertainty, I expect that the $85 billion in securities each month. economy will continue to grow a bit more than 2 Large-scale asset purchases were first intro- percent in 2013 and that the level of unemploy- duced as an emergency measure in response to ment will continue to decline, perhaps by another the financial crisis in 2008. The policy was con- half a percentage point. This of course will de- tinued into the following years to speed up the pend on what happens in the Congress and across recovery, most recently with the announcement the globe. The economy also will be affected both of open-ended purchases of both Treasury and in the short run and long run by Federal Reserve agency mortgage-backed securities. policies. So, let me turn now to monetary policy. These purchases, as intended, add reserves to the banking system and are designed to lower longer-term interest rates, affecting investments Monetary policy challenges and borrowing. The policies have been support- The deep recession of 2007-2009 and the ive for the housing and auto sectors, as consumers slow pace of the subsequent recovery prompted are more likely to borrow and purchase a home forceful action by the Federal Reserve and other or new car when interest rates are low.

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