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Twelfth Federal Reserve District
FedViews
January 9, 2014
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
Also available upon release at
http://www.frbsf.org/economic-research/publications/fedviews/
Mark Spiegel, vice president at the Federal Reserve Bank of San Francisco, provides his views on current
economic developments and the outlook.
•
Recent data continue to indicate a strengthening recovery. Third-quarter GDP growth was revised
upwards to 4.1% at an annual rate. Recent data also suggest a stronger outlook for consumption and
improved figures on net trade driven largely by falling oil imports. We expect a modest dip in GDP
growth in the fourth quarter of 2013 and the first quarter of 2014, due in part to inventory adjustments
in the wake of exceptionally strong accumulation during the third quarter. Nevertheless, we still
expect more solid growth overall for 2014.
•
We continue to see signs of strengthening in labor markets, although substantial slack still exists.
Payroll employment growth averaged about 200,000 jobs per month from August through November,
slightly above the pace over the past few years. However, the unemployment rate remains well
above our estimate of the natural or equilibrium rate of unemployment.
•
Improvements in the real economy and the labor picture have reassured consumers. Indexes from the
Conference Board and Thomson Reuters/University of Michigan both rebounded strongly from their
recent dips around the time of the October federal government shutdown.
•
Inflation remains below the Federal Open Market Committee’s (FOMC) longer-run goal of 2%. This
is due in part to lower inflation in energy and medical expenses, which we expect to be temporary. As
the temporary factors dissipate and economic slack narrows, we expect inflation to rise gradually
towards the 2% objective over the next two years.
•
In its December meeting, the FOMC announced that the pace of asset purchases would be reduced
beginning in January. The Committee will add to its holdings of mortgage-backed securities at a pace
of $35 billion a month rather than $40 billion a month, and will add to its holdings of longer-term
Treasury securities at a pace of $40 billion a month rather than $45 billion per month. The statement
noted that asset purchases are not on a preset course. The Committee also indicated that it now
anticipates that it likely will be appropriate to maintain the current target range for the federal funds
rate well past the time that unemployment declines below 6.5%.
•
The market response to the December announcements was relatively modest. For the day, 10-year
Treasury yields rose 6 basis points, while three-month yields did not rise. This contrasts with market
responses on earlier news days, such as the May 22, 2013, Congressional testimony by Chairman
Bernanke when he discussed the possibility of the onset of tapering. Following that news, 10-year
yields on U.S. Treasuries rose 11 basis points on that day and rose 92 basis points between then and
the September 2013 FOMC meeting.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco.
They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally
appears around the middle of the month. The next FedViews is scheduled to be released on or before February 18, 2014.
•
The recent response among emerging market assets, which had moved even more aggressively after
the May testimony, was also muted. Yields on the JP Morgan Emerging Market Bond Index for
global sovereign yields rose less than 1 basis point on the day of the December 18 FOMC
announcement. Still, yields on emerging market assets remained quite elevated, having risen
substantially since discussions about the onset of tapering of FOMC asset purchases began in May
2013. Many emerging market economies experienced “sudden stops” in international capital inflows
shortly thereafter, as previously large capital inflows were rapidly reversed and became substantial
outflows.
•
Economic conditions played an important role in determining the severity of capital flow reversals.
Exchange rate movements among emerging market economies between the first and third quarter of
2013 were highly correlated with current account positions held on average between 2010 and 2013.
Countries that ran large current account deficits found themselves particularly vulnerable to the
changes in market expectations concerning global interest rates.
•
Many countries whose currency values were threatened felt obligated to tighten monetary policy to
stave off further depreciation. Four of the five countries dubbed the “fragile five” by private-sector
analysts—Turkey, Brazil, India, and Indonesia—have all raised their policy rates since the May
testimony by Chairman Bernanke, even though these countries generally continue to exhibit
considerable slack in their domestic economies.
Recovery remains on track
Labor upturn continues
Nonfarm payroll employment
Gross domestic product (GDP)
Percent
Percent change at seasonally adjusted annual rate
FRBSF
Forecast
Q3
Millions
Millions of employees; seasonally adjusted
140
5
Monthly Changes
0
Aug.
Sep.
Oct.
Nov.
238.0 K
175.0 K
200.0 K
203.0 K
Nov
138
136
134
132
-5
130
2007
2008
2009
2010
2011
2012
2013
-10
2014
Confidence rebounded in December
Consumer sentiment and consumer confidence
128
2007
2008
2009
2010
2011
2012
2013
Inflation remains below target
Index
120
PCE price inflation
100
Consumer sentiment**
D
Percent
Percent change from four quarters earlier
Overall
PCE Price
Index
80
4
60
2
40
Consumer confidence*
Core PCE
20
2007
2008
2009
2010
2011
2012
2013
-2
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Modest response to December FOMC
Capital flows reversed after earlier news
Bond and equity fund flows to emerging market economies
Long-term bond yields
3.0
2.5
Bernanke testimony
Sept FOMC Dec FOMC
Bernanke testimony
7
6
Emerging markets
(right scale)
US
0
0
2014
Sources: *Conference Board, **Thomson Reuters/U of Michigan
3.5
Q3
5
UK
$ billions
40
30
Emerging Asia
Latin America
20
4
10
3
0
1.0
2
-10
0.5
1
-20
0.0
0
2.0
1.5
Germany
-30
-40
Source: Bloomberg
1/12
7/12
Source: Powell (2013)
1/13
7/13
Impact dependent on EME fundamentals
10
MYS
RUS
PHL
THA
BRA
IND
ARG
IDN
CHL PAK
PERCOL
5
KOR
CHN
0
MEX
ZAF
-5
TUR
-10
-15
-10
-5
0
Current account (% GDP, 2010-2013)
Source: IMF WEO, IFS
5
Exchange rate change (Q1-Q3)
Exchange rate appreciation vs current account
balance
Percent
Changed conditions force policy tightening
“Fragile Five” central bank policy rates
Percent
Bernanke testimony
Brazil
10
Turkey
India
Indonesia
8
6
South Africa
4
1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13 10/13 11/13 12/13
Source: Bloomberg