The Fed and the Economic Outlook Mark L. J. Wright Research Director Federal Reserve Bank of Minneapolis March 28, 2018
Disclaimer The views expressed are my own and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. minneapolisfed.org
Today s Talk Overview of the Federal Reserve System and of the Federal Reserve Bank of Minneapolis Discuss the national economy and the thinking behind recent monetary policy decisions Compare national economy to: State economies of Minnesota and Wisconsin Twin Cities metro economy
The Federal Reserve System
The Federal Reserve System Central bank of the U.S. Established by Act of Congress in 1913 Two previous U.S. central banks: First Bank of the United States (1791-1811) Promoted by Alexander Hamilton, the first Secretary of the Treasury Second Bank of the United States (1816-1836) Ended when President Andrew Jackson vetoed reauthorization of the bank
Responsibilities of the Federal Reserve System Supervise and regulate banks Mainly large bank holding companies JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup Provide financial services Manage ( clear ) financial payments Help banks meet short-term demands for cash Lender of Last Resort Set monetary policy
Structure of the Federal Reserve System Monetary policy 12 District banks carry out operating duties of Federal Reserve BOG Chair, Jerome Powell
The Federal Reserve Banks
Minneapolis Fed s Ninth District The Minneapolis Fed s job is to: Supervise banks & offer financial services in this district Monitor developments in this regional economy Represent the interests of the 9 th district when monetary policy is set in Washington D.C. 8 times per year
The Federal Open Market Committee (12 Voting Members) Board of Governors 7 Governors = 7 votes 4 seats currently unfilled FOMC = 7 + 1 + 4 Currently: 3 + 1 + 4 District bank presidents = 5 votes NY Fed permanent vote 4 rotating votes among remaining 11 District banks Minneapolis Fed President Neel Kashkari not voting 2018
The Federal Open Market Committee
Monetary Policy: The Dual Mandate In 1977, Congress directed the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to set monetary policy in order to promote the goals of: maximum employment stable prices Known as the dual mandate
Maximum Employment
National Unemployment Rate percent 19 17 15 13 11 9 7 5 Unemployment rate (U-3)* Under-employment rate (U-6)* *Dashed lines indicate 2006-2007 average. 3 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
19 Unemployment Rate percent * * * 12 17 15 13 11 9 7 5 3 *Dashed lines indicate 2006-2007 average. 11 10 9 8 7 6 5 4 3 Source: Bureau of Labor Statistics
12 11 10 9 8 7 6 5 4 3 National and Regional Unemployment Rates percent U-3 U-6 18 16 14 12 10 8 6 Source: Bureau of Labor Statistics
Local Unemployment Rates U-3 only, percent 9 8 7 6 5 4 3 Rochester Twin Cities 2 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
Employment-population and Labor Force Participation Ratios percent 68 E/P* LFP* 66 64 62 60 58 *Dashed lines indicate 2006-2007 average. 56 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
Employment-population and Labor Force Participation Ratios 25-54, percent 84 E/P LFP 82 80 78 76 *Dashed lines indicate 2006-2007 average. 74 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
72 Employment-population and Labor Force Participation Ratios percent E/P 75 LFP 70 68 66 64 62 60 58 56 73 71 69 67 65 63 61 59 Source: Bureau of Labor Statistics
Stable Prices
PCE Inflation 12-month percent change 4.0 Headline Target Core 3.0 2.0 1.0 0.0-1.0 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Economic Analysis
Annualized Monthly Changes in Core PCE 4 3 2 % 1 0-1 -2 Source: Bureau of Economic Analysis.
Consumer Price Index 4-quarter percent change 6 US Minneapolis-St Paul Milwaukee-Racine 5 4 3 2 1 0-1 -2 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
Survey-based Inflation Expectations percent 3.5 UMich, next 5 to 10 years* SPF, 10 years PCE 3.0 2.5 2.0 1.5 2006 2008 2010 2012 2014 2016 2018 *3-month moving average. Source: Survey of Consumers, University of Michigan; Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia
Market-based Inflation Expectations weekly averages, percent 3.5 5yr/5yr Swaps 2yr/3yr Swaps 3.0 2.5 2.0 18 th percentile 30 th percentile 1.5 1.0 2004 2007 2010 2013 2016 Source: Bloomberg
Labor Costs 12-month or 4-quarter percent change 6.0 Compensation Per Hour Average Hourly Earnings Employment Cost Index 5.0 4.0 3.0 2.0 1.0 0.0 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
Average Weekly Earnings 12-month percent change, 3-month moving average 10 US MN WI 5 0-5 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
Average Weekly Earnings 12-month percent change, 3-month moving average 25 20 15 10 5 0-5 -10 Rochester Twin Cities -15 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Labor Statistics
Take-Aways National economy continues to get stronger Are we at maximum employment? Prices are stable and are expected to remain so Wages and compensation growth remain modest Comparatively speaking, MN and Twin Cities metro: Are doing better than national economy Wages growth remains strong, but has slowed down recently
Thank you! Questions? Twitter: @MarkLJWright @MinneapolisFed