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Monetary Policy as the
Economy Approaches the
Fed’s Dual Mandate
Eric S. Rosengren
President & CEO
Federal Reserve Bank of Boston
February 15, 2017
New York Association for Business Economics
New York, New York
bostonfed.org
Continued Moderate Expansion
▶ Economy has continued to gradually improve
▶ Expecting growth somewhat faster than 2 percent
▶ Expecting gradual reduction in unemployment and
continued movement towards the Federal Reserve’s 2
percent inflation target
▶ This growth forecast is consistent with recent data, but
at a different “starting point” than a few years ago
▶ Current unemployment rate is 4.8 percent, at or close to
estimates of full employment
▶ Inflation is nearing the 2 percent target
▶ Potential of imbalances manifesting themselves in asset
prices
2
Implications of Approaching Federal
Reserve’s Dual Mandate
▶ Likely to be appropriate to raise short-term
interest rates at least as quickly as SEP
median, and possibly even a bit more rapidly
than that forecast
▶ If GDP grows faster than potential, and we
reach both elements of the dual mandate, we
risk overshooting
▶ Want to avoid potentially jeopardizing the
significant progress made since the financial
crisis
3
Figure 1: Initial Claims for Unemployment
Insurance
January 8, 2005 - February 4, 2017
700
Thousands
600
500
400
300
200
100
0
08-Jan-05
28-Apr-07
15-Aug-09
03-Dec-11
22-Mar-14
09-Jul-16
Recession
Note: Four-week moving average
Source: U.S. Department of Labor, NBER, Haver Analytics
4
Implications of Rising Quits Rate
▶ Workers more confident of job prospects and
willing to leave current job to improve
employment situation
▶ Wages for workers may rise to reduce the
incentive to quit in search of higher wages
▶ Evidence that workers believe that the labor
market is robust
5
Figure 2: The Quits Rate
January 2005 - December 2016
2.6
Percent
2.2
1.8
1.4
1.0
Jan-2005
Jan-2008
Jan-2011
Jan-2014
Recession
Note: The quits rate is the number of quits during the entire month as a percent of total employment.
Pictured above is the three-month moving average.
Source: BLS, NBER, Haver Analytics
6
Figure 3: Change in Payroll Employment
January 2005 - January 2017
400
Thousands of Jobs
200
0
-200
-400
-600
-800
Jan-2005
Jan-2009
Jan-2013
Jan-2017
Recession
Note: Three-month moving average
Source: BLS, NBER, Haver Analytics
7
Figure 4: Civilian Unemployment Rate
January 2005 - January 2017 and Forecasts for
2017:Q4 and 2018:Q4
12
Percent
10
8
6
4
Civilian Unemployment Rate (U-3)
2
SEP Median Forecast
Blue Chip Consensus Forecast
0
Jan-2005
Jan-2009
Jan-2013
Jan-2017
Recession
Source: BLS; NBER; Blue Chip Economic Indicators, February 10, 2017; FOMC, Summary of Economic
Projections (SEP), December 14, 2016; Haver Analytics
8
Figure 5: Labor Force Participation Rate
January 2005 - January 2017
67
Percent
66
65
64
63
62
Jan-2005
Jan-2009
Jan-2013
Jan-2017
Recession
Note: The labor force participation rate is the share of the working-age population (16 and older) that is either
working or actively seeking work.
Source: BLS, NBER, Haver Analytics
9
Figure 6: Median Duration of Unemployment
January 2005 - January 2017
30
Weeks
25
20
15
10
5
Jan-2005
Jan-2009
Jan-2013
Jan-2017
Recession
Source: BLS, NBER, Haver Analytics
10
Labor Market is Continuing to Improve
▶ My own assessment is that there is very
limited slack remaining
▶ Unemployment is now at the SEP median
forecast for unemployment in the longer run
▶ Employees are becoming more comfortable
switching jobs
▶ The duration of unemployment has normalized
▶ If economy grows much faster than potential,
employers will likely encounter increasing
difficulty finding labor with the skills they need
to grow
11
Figure 7: Real GDP Growth
2016:Q3 - 2017:Q4
4
Quarterly Percent Change at Annual Rate
Actual
Blue Chip Consensus Forecast
3
2
1
0
2016:Q3
2016:Q4
2017:Q1
2017:Q2
2017:Q3
Source: BEA; Blue Chip Economic Indicators, February 10, 2017; Haver Analytics
2017:Q4
12
Figure 8: Growth in Real Personal Consumption
Expenditures (PCE)
2016:Q3 - 2017:Q4
4
Quarterly Percent Change at Annual Rate
Actual
Blue Chip Consensus Forecast
3
2
1
0
2016:Q3
2016:Q4
2017:Q1
2017:Q2
2017:Q3
Source: BEA; Blue Chip Economic Indicators, February 10, 2017; Haver Analytics
2017:Q4
13
Figure 9: Real Exports of Goods and Services
2005:Q1 - 2016:Q4
15
Percent Change from Year Earlier
10
5
0
-5
-10
-15
2005:Q1
2008:Q1
2011:Q1
2014:Q1
Recession
Source: BEA, NBER, Haver Analytics
14
Figure 10: Forecasts for Real GDP Growth
2017:Q4 and 2018:Q4
3
Percent Change from Year Earlier
Blue Chip Consensus
SEP Median
2
1
0
2017:Q4
2018:Q4
Source: Blue Chip Economic Indicators, February 10, 2017; FOMC, Summary of Economic Projections (SEP),
December 14, 2016; Haver Analytics
15
Figure 11: Median Federal Funds Rate Forecast
from the Summary of Economic Projections
Year-end, 2016 - 2019
4
Percent
SEP Median Federal Funds Rate Forecast
3
2
1
0
Year-end 2016
Year-end 2017
Year-end 2018
Year-end 2019
Source: FOMC, Summary of Economic Projections (SEP), December 14, 2016
16
Economy Continues to Improve
▶ Most forecasters expect above-potential growth
and gradual tightening in labor markets
▶ Such a path would justify a continued, gradual
removal of monetary policy accommodation
▶ In my view, removing accommodation at least as
quickly as suggested by the median SEP, and
possibly even a bit more rapidly than that
forecast
▶ Both international conditions and the likely path
of fiscal policy remain quite uncertain, and these
could materially impact the forecast, and
appropriate policy
17