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www.bostonfed.org The Economic Outlook and Monetary Policymaking Eric S. Rosengren President & CEO Federal Reserve Bank of Boston Lake Champlain Regional Chamber of Commerce Burlington, Vermont October 2, 2013 EMBARGOED UNTIL WEDNESDAY, OCTOBER 2, 2013 AT 12:40 P.M. OR UPON DELIVERY Recent FOMC Decision Much public discussion over Fed’s September FOMC decision and lead-up messaging I strongly support the decision to continue purchases of Treasury and Mortgage-Backed Securities Disappointing incoming economic data Possibility of disruptions in the nation’s fiscal policies Long-term market rates had already risen more than desirable to support recovery Improvement needs to be in the data, not just the forecast 2 Policy Should be Data Dependent Policy that is data dependent cannot always be “signaled” clearly in advance Utilize all available information FOMC is a committee – different interpretations and weighting of data FOMC discussion can influence views Reliance on data may mean at times less signaling before FOMC meetings about small changes in the purchase program 3 Developing Data-Driven Monetary Policy Policy is not determined by Wall Street expectations – rather, policies need to be consistent with achieving key goals (employment, prices) Had the fiscal issues not been problematic, and incoming data on real GDP and employment stronger, it may well have been appropriate to take some action in September 4 Communicating Data-Driven Monetary Policy Certainly there are difficulties inherent in communicating a data-contingent policy Some inherent policy uncertainty when policy is dependent on actual incoming data (which may or may not follow forecasts) 5 Figure 1 Civilian Unemployment Rate January 2008 - August 2013 Percent 1 12 10 1 8 1 6 0 4 0 2 0 0 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Recession Source: BLS, NBER / Haver Analytics 6 Figure 2 Civilian Labor Force Participation Rate* January 2008 - August 2013 Percent 1 68 1 66 1 64 0 62 0 0 60 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Recession *The percent of the population 16 years of age and over that is either working or actively searching for work Source: BLS, NBER / Haver Analytics 7 Figure 3 Payroll Employment Growth January 2008 - August 2013 Thousands of Jobs, Three-Month Moving Average 400 400 200 200 0 0 -200 -200 -400 -400 -600 -600 -800 -800 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Recession Source: BLS, NBER / Haver Analytics 8 Figure 4 Growth in Real Residential Investment and Real Consumer Durable Goods 2012:Q3 - 2013:Q2 Percent Change at Annual Rate 20 Residential Investment Consumer Durable Goods 15 10 5 0 2012:Q3 Source: BEA / Haver Analytics 2012:Q4 2013:Q1 2013:Q2 9 Figure 5 Growth in Real GDP and Selected Components First Half of 2013 Percent Change at Annual Rate 16 12 8 4 0 -4 GDP Consumer Spending Source: BEA / Haver Analytics Business Investment Residential Investment Government Spending Exports Imports 10 Figure 6 Contribution of Real Government Spending to Percent Change in Real GDP During Recovery Percentage Points at Annual Rate 2 Historical Average of Previous Recoveries (1947 - Present) 1 0 Current Recovery -1 -2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Quarters from Trough of Recession Source: BEA, NBER / Haver Analytics 11 Figure 7 Employment Growth During Current and Previous Recoveries Index, Official Trough = 100 112 Historical Average of Previous Recoveries (1947 - Present) 108 104 Current Recovery 100 96 0 6 12 18 24 30 36 42 48 Months from Trough of Recession Source: BLS, NBER / Haver Analytics 12 Figure 8 Growth in Real Consumer Spending and Real Government Spending 2012:H1 - 2013:H2 Percent Change at Annual Rate 4 2 0 -2 -4 Consumer Spending Federal Government Spending State and Local Government Spending -6 2012:H1 Source: BEA / Haver Analytics 2012:H2 2013:H1 13 Figure 9 Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents June 2013 and September 2013 Percent 4.0 Change in Real GDP 2013 Percent 4.0 Change in Real GDP 2014 3.5 3.5 3.5 3.0 3.0 3.0 2.5 2.6 2.3 2.0 3.1 2.9 2.5 2.3 2.0 1.5 2.0 1.5 June 2013 September 2013 Note: High, Low and Midpoint of Central Tendency June 2013 September 2013 Note: High, Low and Midpoint of Central Tendency Note: Central tendency excludes the three highest and three lowest projections for each variable in each year. Source: FOMC, Summary of Economic Projections 14 Figure 10 Inflation Rate: Change in Total and Core Personal Consumption Expenditure (PCE) Price Indexes January 2007 - August 2013 Percent Change from Year Earlier 5 1 4 1 PCE 3 Target (2%) 2 1 0 Core PCE (Excluding Food and Energy) 0 1 0 -1 0 -2 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Recession Source: BEA, NBER / Haver Analytics 15 Figure 11 Inflation Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents September 2013 Percent PCE Inflation Fourth Quarter to Fourth Quarter Percent 2.50 2.50 2.00 2.00 1.50 1.50 1.00 1.00 0.50 0.50 Core PCE Inflation Fourth Quarter to Fourth Quarter Midpoint of Central Tendency 0.00 Midpoint of Central Tendency 0.00 2013 2014 2015 2016 2013 2014 2015 2016 Note: Central tendency excludes the three highest and three lowest projections for each variable in each year. Source: FOMC, Summary of Economic Projections 16 Risks Risks to the outlook remain on the downside Fiscal issues and fiscal austerity are still headwinds to recovery Concern over problems once again emerging in parts of Europe Higher market interest rates could slow down the strongest sectors of economy 17 Implications for Monetary Policy If the economy evolves as anticipated, policy should, in my view, include only a very slow removal of accommodation over the next several years, and that should only occur when the data ratify our forecast for an improvement in real GDP and employment If data indicate stronger or weaker growth than anticipated, monetary policy should adjust 18 Conclusion Monetary policy is not following a predetermined path We likely need to see the fiscal headwinds subside, and consumers become more confident If the economy is not improving as expected, in my view, we should not reduce accommodation 19