The Role of the Federal Reserve Metropolitan Research Group UM-D

Transcription

1 The Role of the Federal Reserve Metropolitan Research Group UM-D Federal Reserve Bank of Chicago January 24, 2017 Paul Traub Senior Business Economist

2 The Federal Reserve System 1

3 Functions of the Federal Reserve Financial services to the public, financial institutions, U.S. government, and foreign official institutions -- a major role in the payments system Supervising and regulating banking institutions to ensure safety and soundness of the banking system and to protect credit rights of consumers Conduct monetary policy 2

4 The Dual Mandate In 1977, Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as: "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates. 3

5 Goals of Monetary Policy Price stability - Since 2012, explicit 2% objective for PCE inflation - Target is for an average over medium term it is not a ceiling - Explicit statement should help anchor expectations Full employment - The appropriate employment goal may change over time for nonmonetary reasons - Seek an economy operating at its level of potential output - June 2016 FOMC median projection: 4.8% Balanced approach - Take balanced approach when shocks push the economy away from objectives - Takes account of lags in effects of monetary policy and other limits 4

6 Unemployment Rate & PCE Inflation Percent Unemployed, PCE % Change Yr./Yr. Percent 11.0 Unemployment Percent 3.0 PCE Inflation % Nov % Dec % '09 '10 '11 '12 '13 '14 '15 ' '09 '10 '11 '12 '13 '14 '15 '16 Actual Target Annual Actual Target Source: U.S. Department of Labor: Bureau of Labor Statistics, Bureau of Economic Analysis and the Federal Reserve 5

7 Importance of Price Stability Price stability gets great emphasis Price stability improves the workings of the price system -- high and variable inflation disrupts the economy Price stability provides the environment necessary to meet all the other goals of monetary policy Price stability makes planning easier Price stability may also lower long-term interest rates by reducing uncertainty 6

8 Sustainable Growth The Federal Reserve can t make the economy grow faster than its potential in the long run Trying to over-stimulate the economy results in increasing inflation that contributes to short boom-bust cycles Steady, sustainable growth is the key to improved living standards 7

9 Tools of Monetary Policy Reserve requirements: funds that depository institutions must hold in reserve against deposits Discount Rate: the interest rate charged to commercial banks when they borrow reserves from a Federal Reserve Bank o Banks who are in better financial shape can borrow at the Primary Credit rate (currently at 100 basis points above the Fed Funds rate) and those that are not as solid can borrow at the Secondary Credit rate (currently 150 basis points above the Fed Funds rate) Open market operations: influencing the level of reserves by buying and selling U.S. government securities in the open market -- done by trading desk at the New York Fed o Currently the desk operates by targeting the interest rate on Federal Funds 8

10 Importance of an Independent Fed Policymakers, academics, and other informed observers around the world agree that the goals of monetary policy should be established by the political authorities, but the conduct of monetary policy in pursuit of those goals should be free from political influence.* The Fed has congressionally mandated goals of price stability, maximum employment, and moderate long-term interest rates. Many studies support that central banks able to conduct day-to-day monetary policy operations free of political pressure tend to deliver better inflation outcomes, without compromising economic growth. Achieving monetary goals can at times take substantial time, this requires that monetary policy makers take a longer-term perspective when making their decisions. * Source: Board of Governors of the Federal Reserve 9

11 Importance of an Independent Fed (con t) In contrast, short-term political influences may cause pressure to over stimulate the economy resulting in output and employment gains that exceed the economy s underlying potential. Such gains may look good at first, but they are not sustainable and will likely create an inflationary environment that is detrimental to longerterm economic growth. In short, monetary policy interference can generate boom-bust cycles with high inflation and less stable economic activity. Additionally, a government that controls the central bank could abuse the central bank s money-creation powers to help finance government budget deficits which would inevitably lead to high inflation and interest rates and a volatile economy. 10

12 Current Economic Conditions 11

13 U.S. Real GDP Billions Chained $2009, % Change Q/Q at SAAR $ Billions 18,000 17,000 Q3 16 $16,727 Percent , , % ,000 13, ,000 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16-1 Source: U.S. Bureau of Economic Analysis 12

14 U.S. Real GDP Index = 100 by Sector Index Q '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Consumption Private Domestic Investment Government Net Exports 13

15 Real Personal Consumption Expenditures Billions Chained $2009, % Change Q/Q at SAAR $ Billions 12,500 12,000 11,500 11,000 10,500 Q3 16 $11,569 Percent ,000 9,500 9,000 8,500 8,000 7,500 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 3.0% Source: U.S. Bureau of Economic Analysis 14

16 Real Personal Consumption Expenditures Index, Q = 100 Index Q '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Durables Nondurables Services Source: Author s calculations using data from the BEA 15

17 Real DPI & Personal Savings Rate As Percent of Personal Income Percent Real Disposable Personal Income - $ Percent Personal Savings Rate Percent of DPI '60's '70's '80's '90's '00's '10's '60's '70's '80's '90's '00's '10's Source: U.S. Bureau of Economic Analysis 16

18 Consumer Credit and Interest Payments As a Percent of Disposable Personal Income Percent Revolving & Non-revolving Credit Nov % 19.0% 12.0 '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '15 Total Credit Total Less Government Held Student Loans Source: Federal Reserve Bank - Board of Governors January 24, 2017 Federal Reserve Bank of Chicago 17

19 Real Gross Private Domestic Investment Billions Chained $2009, % Change Q/Q at SAAR $ Billions 3,250 Percent 5 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Q3 16 $2, % Source: U.S. Bureau of Economic Analysis 18

20 Real Domestic Fixed Investment Billions Chained $2009, Index 2005 = 100 Index Q '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Fixed Investment Nonresidential Residential Source: U.S. Bureau of Economic Analysis 19

21 U.S. Housing Starts In Thousands of Units (SAAR) November Average YTD Data (000) s 2,400 2,000 2,080 1,827 1,600 1,370 1, ,103 1, '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Note: The United States averaged 1.5 million housing starts per year 1990 to Source: U.S. Census Bureau 20

22 U.S. Housing Starts & Household Formation In Thousands of Units Averages by Decade 2,000 1,800 1,600 1,400 1,200 1, ,758 1,512 1,550 1,498 1,537 1,407 1,372 1,331 1,210 1,104 1, 's 1970's 1980's 1990's 2000's 2010's Starts Formation Source: U.S. Census Bureau Single Family Starts and Households by Age 21

23 The U.S. Trade Weighted Dollar Index 2010 = 100 Index Stronger Jan 11, Weaker '10 '11 '12 '13 '14 '15 '16 Source: Federal Reserve Board and Haver Analytics 22

24 Global Outlook for 2016 & 2017 IMF Forecast for Growth, % Chg. Yr./Yr. 6.0 Percent Change 2016 / 2015 Percent Change 2017 / World Advanced Emerging World Advanced Emerging January October Forecast Month January October Forecast Month Source: IMF World Economic Outlook 23

25 Fiscal Stimulus Remains Uncertain President elect s plan includes large tax cuts and increased spending - Details still lacking in many areas - Final package depends on Administration and Congressional priorities Estimates of fiscal impact range from 0.5 to 1.0 percent on level of GDP by end of 2018, falling to zero by 2020 Potential offsets to long-run growth from other policies - Trade restrictions - Immigration legislation - Affordable Care Act - Federal Reserves response to stronger demand and higher inflation Some analysts have elected not to change previous projections 24

26 U.S. Real GDP Blue Chip Forecast Annual Percent Change Chained $2009 Percent Bottom 10 Average Top 10 Source: January 2017 Blue Chip Economic Indicators 25

27 U.S. Real GDP Actual and Potential Billions Chained $2009 and Percent of Actual $Billions 18,000 17,000 16,000 15,000 14,000 13,000 12,000 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Gap (Right) Actual (Left) Potential (Left) Q3 16 $16,961 $16, % $234 Percent Source: Bureau of Economic Analysis and the U.S. Congressional Budget Office 26

28 Economic Potential by Decade Real GDP Percent Change Annual Average Percent 's 1970's 1980's 1990's 2000's 2010's Dec '15 Projection Source: U.S. Congressional Budget Office 27

29 Labor and Productivity Growth Labor Force and Real Output Per Hour Average Annual Growth Percent 3.5 Labor Force Percent 3.5 Real Output Per Hour 's 60's 70's 80's 90's 00's 10's 50's 60's 70's 80's 90's 00's 10's Source: U.S. Department of Labor: Bureau of Labor Statistics 28

30 Labor Force Participation Rate Percent of Noninstitutionalized Civilian Population Annual Average '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 29

31 Working Age Population by Age Select Age Categories, Percent of Total, Index 1960 = 100 Index Values Index Percent % % 16.7% 27.2% to to to and Over Source: U.S. Census Bureau Table HH-3, Households by Age 30

32 Labor and Productivity Growth Labor Force and Real Output Per Hour % Change Yr./Yr. Percent Q2 Q4 Q Q2 Q3 Q Q2 Q3 Q4 Labor Force Output Per Hour -0.3 Source: U.S. Department of Labor: Bureau of Labor Statistics 31

33 Federal Reserve Bank of Chicago Research Department 32

34 Federal Reserve Bank of Chicago Research Department Economic Data Research Periodicals Working Papers Conferences and Seminars Research Economists Policy Professionals 33

35 Federal Reserve Bank of Chicago Economic Data Chicago Fed National Activity Index (CFNAI) Chicago Fed Survey of Business Conditions (CFSBC) Midwest Economic Index (MEI) National Financial Conditions Index (NFCI) Detroit Economic Activity Index (DEAI) U.S. Light Vehicle Incentives Analysis 34

36 Std. Dev. Units Std. Dev. Units Std. Dev. Units Economic Data Index Index Chicago Fed National Activity Index '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Midwest Economic Index '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 MEI Relative MEI Trend Index Index Survey of Business Conditions Activity Index GDP CFSBC National Financial Conditions Index '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 NFCI ANFCI

37 Midwest Economic Index MEI & Relative MEI Std. Dev. Units Above Average Below Average Nov '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 MEI Relative MEI Trend Source: Federal Reserve Bank of Chicago 36

38 Midwest Economic Index Contribution by State Index Nov '15 F M A M J J A S O N D '16 F M A M J J A S O N D Illinois Indiana Iowa Michigan Wisconsin Relative MEI Source: Federal Reserve Bank of Chicago 37

39 Midwest Economic Index Contribution by Sector Index Nov '15 F M A M J J A S O N D '16 F M A M J J A S O N D Manufacturing Construction Services Consumer MEI Source: Federal Reserve Bank of Chicago 38

40 Midwest Economic Index Michigan s Contribution by Sector Index Nov '15 F M A M J J A S O N D '16 F M A M J J A S O N D Manufacturing Construction Services Consumer MEI Source: Federal Reserve Bank of Chicago 39

41 Relative Midwest Economic Index Michigan s Contribution by Sector Index Nov '15 F M A M J J A S O N D '16 F M A M J J A S O N D Manufacturing Construction Services Consumer MEI Source: Federal Reserve Bank of Chicago 40

42 Detroit Home Price Index Median Price, Index 2005 = 100, 12 MMA Dec '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Residential Condo Combined Source: Author's calculations using RealComp II, LTD data. 41

43 Detroit Economic Activity Index Index, Zero Equals Long-Term Trend Growth Std. Dev. Units Jun Nov '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Detroit City Detroit-Warren-Dearborn MSA Source: Federal Reserve Bank of Chicago / Federal Reserve Bank of St. Louis. 42

44 Detroit Economic Activity Index GMP Growth Rate, Index December 1997 = 100 Index Trend = MSA Trend Growth Jun Nov '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Detroit City Detroit-Warren-Dearborn MSA Source: Federal Reserve Bank of Chicago / Federal Reserve Bank of St. Louis. 43

45 Detroit Economic Activity Index Based to Real Per Capita Income, Index December 1997 = 100 Index Trend = Detroit Real PCI Trend Growth Nov Jun '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Federal Reserve Bank of Chicago and American Community Survey 44

46 Detroit Real Per Capita Income Inflation Adjusted $2009 $16,500 $16,169 $16,000 $15,500 $15,000 $15,042 $15,284 $14,721 $15,611 $14,500 $14,000 $14,213 $13,965 $13,500 $13,000 $12,500 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Federal Reserve Bank of Chicago and American Community Survey 45

47 U.S. Total Vehicle Sales Millions of Units Millions '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Note: Total 2016 Light Vehicle Sales: 17,465,020 / Including M/H: 17,866,260. Source: Ward s Automotive and BEA 46

48 U.S. Light Vehicle Incentives As Percent of Transaction Price - SA Percent Dec % '10 '11 '12 '13 '14 '15 '16 Source: Author s calculation using Ward s Automotive and J.D Power data. 47

49 Light Vehicle Transaction Price Annual Average & Percent Change Yr./Yr. Dollars $32, $31,151 Percent 6.0 $30,000 $28, $26,000 $24, $22,000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 ' % Chg. Yr/Yr (Right) Transaction Price (Left) -4.0 Source: Author s calculation using J.D Power data. 48

50 Finance Term Length of Loan in Months '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: J.D Power data. 49

51 Reasons for Buying Conditions for Vehicles University of Michigan Good / Bad Reason: Why do you say so? Low Prices Prices Will Increase Low Interest Rates Rising Interest Rates Time's good Fuel Efficiency Prices High High Interst Rates Can't Afford Uncertain Future Gas Prices Poor Selection Note: May add to more than a 100 due to multiple mentions. Source: University of Michigan Survey of Consumers

52 Light Vehicle Trend Stock Adjustment Model Drivers 1. Household Formation 2. Vehicles Per Household 3. Vehicles in Operation 4. Scrappage 51

53 Light Vehicle Trend Stock Adjustment Model Drivers Millions Millions Number of Households Actual Trend Vehicles in Operation Actual Trend Source: Author s calculations using Wards, U.S. DOT, and U.S. Census Bureau Units Millions Vehicles Per Household Actual Trend Actual Scrappage Trend

54 Light Vehicle Sales and Trend Thousands of Units Thousands 18,000 16, , ,550 14,000 12,000 10,000 8,000 This implies that at the end of 2016 there remains is 1,200,000 units of pent-up demand. 6, Actual Trend Source: Author s calculations using Wards, U.S. DOT, and U.S. Census Bureau. 53

55 Light Vehicle Pent-up Demand Thousands of Units Thousands 12,000 10,000 8,000 6,000 4,000 2, ,000-4,000-6,000-8,000 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 Source: Author s calculations using Wards, U.S. DOT. 54

56 Thank You!