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Monetary Policy

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Monetary Policy A Perspective on Monetary Policy March 23, 2017 David Oppedahl Senior Business Economist Bloomington, IL 312-322-6122 [email protected] The path of this recovery has been below past deep recession recovery cycles Business cycle recovery path index- business cycle trough = 100 140 140 1981-82 135 135 130 average annualized growth: 5.4% 130 125 125 average annualized growth: 5.3% 120 120 115 average annualized growth: 2.4% 1974-75 115 2008-09 110 110 105 105 100 100 95 95 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 quarters before trough quarters after trough Confidence rising as uncertainty persists Economic Policy Uncertainty Index Consumer Confidence (Conf. Board) 250 150 200 100 150 50 100 50 0 '01 '03 '05 '07 '09 '11 '13 '15 '17 '01 '03 '05 '07 '09 '11 '13 '15 '17 1999 1999 Record stock markets Real S&P 500 stock index Index: 1990 = 100 400 350 300 250 200 150 100 50 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Federal Reserve System How does the Fed affect agriculture? • Interest rates • Price level (inflation) • National income (GDP) • Exchange rates (indirectly) What is the Federal Reserve System? • Twelve District Banks • Board of Governors • Federal Open Market Committee (FOMC) • Functions of the Fed – Monetary policy – Regulator of financial institutions – Provides banking services for U.S. government – Electronic funds transfer & financial services – Protect credit rights of consumers Board of Governors of the Federal Reserve System 1 2 Janet L. Yellen Stanley Fischer Chair Vice Chair 3 4 5? 6? 7? Daniel K. Tarullo Jerome Powell Lael Brainard Vacant Vacant Presidents of the Federal Reserve Banks 1 2 3 4 Eric S. Rosengren William C. Dudley Patrick T. Harker Loretta J. Mester First District - Boston Second District - New York Third District - Philadelphia Fourth District - Cleveland 5 6 7 8 Jeffrey M. Lacker Interim President Charles L. Evans James B. Bullard Fifth District - Richmond Sixth District - Atlanta Seventh District - Chicago Eighth District - St. Louis 9 10 11 12 Neel Kashkari Esther George Robert S. Kaplan John C. Williams Ninth District - Minneapolis Tenth District - Kansas City Eleventh District - Dallas Twelfth District - San Francisco Goals of Monetary Policy • Price stability -- low and stable inflation • Low unemployment • Economic growth • Moderate interest rates Chicago Fed National Activity Index shows hesitant growth since 2009 2 (standard deviation from trend growth, Above 3-month moving average) Trend 1 Growth 0 Below -1 Trend Growth -2 -3 -4 -5 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 Chicago Fed National Financial Conditions Index 3 2 1 Tighter Conditions 0 -1 Looser Conditions -2 2001 '03 '05 '07 '09 '11 '13 '15 '17 Quantitative easing was necessary Assets of the Federal Reserve Billions of dollars 4,500 4,000 3,500 3,000Maiden Lane II & III Term Asset-Backed Securities 2,500 Loan Facility AIG Support 2,000 Central Bank Swaps 1,500 Commercial Paper Facility 1,000 Maiden Lane Securities Held Outright 500 Term Auction Credit 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Recent Monetary Policy Actions • Tapering of asset purchases began in December 2013 • No additional asset purchases after November 2014, while continuing to reinvest assets as they mature • In December of 2015 & 2016 and March 2017, raised the range of the Fed Funds Rate by 0.25% points • The FOMC will monitor economic conditions to tailor future actions to meet objectives of maximum employment and 2% inflation In March 2017, the FOMC raised the Fed Funds rate target to a range from 0.75% to 1.00% 7 Federal Funds Rate (effective), Yields in percent per annum 6 5 4 3 2 1 0 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 Contributions to real GDP growth of 1.9% in the 4th quarter of 2016 • Consumption 2.0% • Residential Investment 0.4% • Business Investment 0.2% • Inventories 0.9% • Government 0.1% • Net Exports -1.7% The FOMC consensus outlook has output rising at about its trend over the next few years Real gross domestic product percent change from a yearearlier 6 5 4 3 FOMC 2 1 0 -1 -2 -3 -4 -5 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Food price changes now well below core inflation (less food and energy) (Consumer Price Index, percent change from year ago) 8 6 4 2 0 -2 1991 1996 2001 2006 2011 2016 CPI Less Food and Energy CPI for Food Real Cash Crop Prices ($/bushel, adjusted by CPI-U for January 2010) 40 30 20 10 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Corn Soybeans Real USDA Livestock Prices ($/hundredweight, adjusted by CPI-U for January 2010) 250 200 150 100 50 0 1976 1981 1986 1991 1996 2001 2006 2011 2016 Hogs Cattle Oil prices plummeted and lower gas prices boosted consumer saving/spending (2010 $/barrel) 150 100 50 0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Natural gas prices have moderated Real Natural Gas Price {2010 $/mmbtu} 15 10 5 0 1997 2002 2007 2012 2017 Even including the volatile food and energy components, inflation remains contained Personal consumption expenditure - chain price index percent change from a year earlier 6 5 4 3 FOMC 2 1 0 -1 -2 1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Employment fell by over 8.7 million jobs between December 2007 and February 2010, and finally recovered all the lost jobs in May 2014 Total employment percent 6 4 2 0 -2 -4 Percent change from a year earlier -6 Monthly change (saar) -8 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Alternative measures of unemployment Still high including discouraged workers and part-time employment for economic reasons Unemploymentrate percent 18 16 U-6 14 12 U-5 10 8 U-4 6 U-3 4 2 0 1994 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 The share of those unemployed more than 6 months remains significantly high Unemployed for 27 weeks or more percent 50 45 40 35 30 25 20 15 10 5 0 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 The FOMC forecasts that the unemployment rate will be under the natural rate through 2019 Unemployment rate percent 11 10 9 8 7 6 5 FOMC 4 3 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Wages and benefit cost increases remain low Employment cost index percent change from year ago 8 benefit costs 7 6 5 4 3 2 wages and salaries 1 0 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Stronger productivity after the recession, but weak results recently Productivty percent change (20-qtr rate) 5 4 3 2 1 0 -1 1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Poor business investment explains much of the lower productivity levels Real private nonresidential fixed investment percent 20 10 0 -10 Percent change from a year earlier -20 Quarterly change (saar) -30 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Manufacturing is growing again; orders for capital goods moving up ISM purchasing managers index Nondefense capital goods ex. aircraft (net percent reporting increase) (orders in millions of dollars, 3-month moving average) 65 75 60 70 55 65 50 60 45 55 40 50 35 30 45 '01 '03 '05 '07 '09 '11 '13 '15 '17 '01 '03 '05 '07 '09 '11 '13 '15 '17 1999 1999 Industrial production is forecast to improve, yet remain below its historic rate of growth Total industrial production percent 10 Percent change from a year earlier 5 0 Q4-2016 -5 -10 Blue Chip IP Forecast Actual Forecast -15 2016 2017 2018 -0.1 2.3 2.3 -20 Quarterly change (saar) -25 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Vehicle sales are anticipated to edge lower Vehicle sales millions of units 18 17 16 15 14 13 Blue Chip Light-Vehicle Sales Forecast 12 Actual Forecast 2016 2017 2018 11 17.5 17.4 17.3 10 1980 '85 '90 '95 '00 '05 '10 '15 Housing starts (millions of units, 3 Housing market tanked, moving up slowly 2.5 2.0 -month moving average, SAAR) 1.5 1.0 0.5 1999 Home mortgage rate (percent, effective rate for all loans closed) '01 '03 9 '05 '07 8 '09 7 '11 '13 6 '15 5 '17 4 3 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 House Price Indexes (expanded data from the Federal Housing Finance Agency) 250 U.S. 200 Illinois 150 100 50 1991 1994 1997 2000 2003 2006 2009 2012 2015 The burden of mortgages has been receding Mortgage debt as a percentage of disposable income percent 100 90 80 70 60 50 40 30 1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 Although improving, delinquencies on mortgages remain elevated Delinquencies on Mortgages percent of loans 90 or more days past due or in foreclosure 10 9 8 7 6 5 4 3 2 1 0 1980 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 Lending standards for mortgages have been easing recently Senior Loan Officer Opinion Survey netpercentage of domestic respondents tightening mortgage loan s tandards 80 60 40 20 0 -20 1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 The dollar’s exchange value peaked in 2002, before falling below earlier range and rallying (Real Broad Trade-Weighted Exchange Value of the US$) {March 1973=100} 120 110 100 90 80 1991 1996 2001 2006 2011 2016 U.S.
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