Exploring Current Economic

Conditions and the Implications

for Monetary Policy
Eric S. Rosengren
President & CEO
Federal Reserve Bank of Boston

October 26, 2018

1Berkshire
Economic Outlook Luncheon
Dalton, Massachusetts
bostonfed.org
Recent Monetary Policy Actions

▶ FOMC raised federal funds rate by 25 basis

points at September meeting
▶ Third increase this year
▶ Range of 2 to 2.25 percent exceeds inflation target
of 2 percent
▶ Move reflects strong economic performance
over past 2 quarters
▶ Monetary policy remains mildly accommodative,
and fiscal policy is quite accommodative

2
Outlook – Continued Robust Growth

▶ Private-sector forecasts expect second half

growth of approximately 3 percent
▶ Most FOMC participants have similar outlook
▶ With unemployment at 3.7 and strong growth:
▶ Blue Chip forecast expects unemployment to fall
to 3.5 percent by the end of next year
▶ Below FOMC participants’ estimates of the long-
run unemployment rate

3
Clear Risks to the Forecast

▶ Both the U.S. and China recently increased

tariffs – potential headwind over time
▶ Some emerging market economies are
experiencing stress – Turkey, Argentina
▶ Europe still facing challenges – Brexit,
exposure to emerging markets

4
How Should Policy Respond to Strong
Base Forecast But Rising Risks?

▶ Closely monitoring
▶ My view of most likely outcome – a labor
market that continues to tighten risking
economic imbalances
▶ Gradual monetary tightening balances risk to
avoid a more forceful response
▶ Assuming risks do not materialize – gradually
raise rates until monetary policy is mildly
restrictive

5
Figure 1: Initial Claims for Unemployment Insurance
January 25, 1967 - October 13, 2018

Thousands
700

600

500

400

300

200

100

0
28-Jan-67 29-Jul-78 27-Jan-90 28-Jul-01 26-Jan-13
Recession

Note: Four-week moving average

Source: U.S. Department of Labor, NBER, Haver Analytics
6
Figure 2: Job Leavers: The Quits Rate
January 2003 - August 2018

Percent
2.6

2.2

1.8

1.4

1.0
Jan-2003 Jan-2006 Jan-2009 Jan-2012 Jan-2015 Jan-2018

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
7
Figure 3: Job Openings Rate
January 2003 - August 2018

Percent
5

1
Jan-2003 Jan-2006 Jan-2009 Jan-2012 Jan-2015 Jan-2018
Recession

Note: The job openings rate is the number of job openings on the last business day of the month as a
percent of total employment plus job openings. Pictured above is the three-month moving average.
Source: BLS, NBER, Haver Analytics
8
Figure 4: Unemployment Rate: Actual and Forecast
Actual, 2003:Q1 - 2018:Q3 and Forecast, 2018:Q4 - 2019:Q4

Percent
12

10

2
Actual
Blue Chip Consensus Forecast
0
2003:Q1 2006:Q1 2009:Q1 2012:Q1 2015:Q1 2018:Q1
Recession

Source: BLS, Blue Chip Economic Indicators, NBER, Haver Analytics

9
Figure 5: Average Hourly Earnings of Production
and Nonsupervisory Private-Industry Employees
January 2003 - September 2018

Percent Change from Year Earlier

5
Total
Goods-Producing Industries
4 Service-Providing Industries

0
Jan-2003 Jan-2006 Jan-2009 Jan-2012 Jan-2015 Jan-2018
Recession

Source: BLS, NBER, Haver Analytics

10
Figure 6: Inflation Rate: Change in Personal
Consumption Expenditures (PCE) Price Indices
Actual, 2003:Q1 - 2018:Q2 and Forecast, 2018:Q4 & 2019:Q4

Percent Change from Year Earlier

5
Total PCE
4
Core PCE

-1
Forecasts are represented by diamonds.
-2
2003:Q1 2006:Q1 2009:Q1 2012:Q1 2015:Q1 2018:Q1
Recession

Note: Core PCE excludes food and energy.

Source: BEA; Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters; NBER; Haver Analytics
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Figure 7: Inflation Rate: Change in Personal
Consumption Expenditures (PCE) Price Indices for
Goods and Services
2003:Q1 - 2018:Q2
Percent Change from Year Earlier
6

PCE - Goods
4 PCE - Services

-2

-4

-6
2003:Q1 2006:Q1 2009:Q1 2012:Q1 2015:Q1 2018:Q1
Recession

Source: BEA, NBER, Haver Analytics

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Inflation for Goods and Services

▶ Services PCE inflation is above 2 percent

▶ Goods PCE inflation below 2 percent but rising
▶ Tariffs pose a potential risk
▶ Tariffs may make it easier (provide “cover”) to
raise prices, including for the cost of labor
▶ Many New England businesses report less
resistance to price increases
▶ Greater price flexibility, posing upside risk to
measured inflation

13
Figure 8: Real GDP Growth: Actual and Forecast
Actual, 2003:Q1 - 2018:Q2 and Forecast, 2018:3 - 2019:Q4

Quarterly Percent Change at Annual Rate

10
Actual
Blue Chip Consensus Forecast

-5

-10
2003:Q1 2006:Q1 2009:Q1 2012:Q1 2015:Q1 2018:Q1
Recession

Source: BEA, Blue Chip Economic Indicators, NBER, Haver Analytics

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Figure 9: Real Consumption Growth: Actual and
Forecast
Actual, 2003:Q1 - 2018:Q2 and Forecast, 2018:Q3 - 2019:Q4

Quarterly Percent Change at Annual Rate

8
Actual
6 Blue Chip Consensus Forecast

-2

-4
2003:Q1 2006:Q1 2009:Q1 2012:Q1 2015:Q1 2018:Q1
Recession

Source: BEA, Blue Chip Economic Indicators, NBER, Haver Analytics

15
Figure 10: Exports of Goods and Services as a
Share of GDP
2003:Q1 - 2018:Q2

Percent
16

14

12

10

6
2003:Q1 2006:Q1 2009:Q1 2012:Q1 2015:Q1 2018:Q1
Recession

Source: BEA, NBER, Haver Analytics

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Exports are Important and Uncertain

▶ Sizable share of GDP

▶ Highly uncertain if tariffs persist or increase
▶ Trade disruptions could cause countries to source
goods from new countries
▶ Disruptions to supply chains
▷ May cause firms to source from more costly – but
potentially more reliable – suppliers
▷ Adjustment will take time – implies an upward bias
to the inflation forecast

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Figure 11: Trade-Weighted Value of the U.S. Dollar
January 2013 - September 2018

Index, January 1997=100

140

120

100

80
Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018

Source: Federal Reserve Board, Haver Analytics

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Figure 12: Spot Exchange Rates
January 2, 2015 - October 19, 2018

Index, January 2, 2015=1

5
Argentina (Pesos/US$)
Devaluation
Turkey (Lira/US$)
4

0
02-Jan-2015 01-Jan-2016 30-Dec-2016 29-Dec-2017
Weekly

Note: Spot Exchange Middle Rate, NY Close

Source: WSJ, Haver Analytics
19
Figure 13: Brent Crude Oil Price
January 2013 - September 2018

Dollars Per Barrel

120

90

60

30

0
Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018

Source: Energy Information Administration, Haver Analytics

20
Figure 14: Emerging Markets Stock Price Index:
The Shanghai Composite Index
January 2013 - September 2018

Index, January 2013 = 1

2.5

2.0

1.5

1.0

0.5

0.0
Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Jan-2018

Source: Bloomberg Finance L.P.

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Figure 15: Median Federal Funds Rate Forecast
from the Summary of Economic Projections
Year-end, 2018 - 2021

Percent
4

1
Central Tendency
Median Federal Funds Rate Projection
0
Year-end 2018 Year-end 2019 Year-end 2020 Year-end 2021

Note: The central tendency excludes the three highest and three lowest observations.
Source: FOMC, Summary of Economic Projections (SEP), September 26, 2018
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Concluding Observations

▶ Median forecast of FOMC participants is that

the federal funds rate will rise to 3.4 percent
▶ Moves seem likely to occur only gradually
▶ My own view is consistent with SEP forecasts:
▶ Move interest rates gradually from a mildly
accommodative stance to a mildly restrictive
stance
▶ Of course, if risks become more germane, a
different path may be warranted

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