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EMBARGOED UNTIL WEDNESDAY, FEBRUARY 15 AT 1:10 P.M.; OR UPON DELIVERY 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