What are They Waiting For? Laurence H. Meyer Senior Managing Director
Global Interdependence Center’s Central Banking Series Federal Reserve Bank of St. Louis September 25, 2015 www.twitter.com/macroadvisers
www.macroadvisers.com
The forecasts provided herein are based upon sources believed by Macroeconomic Advisers, LLC, to be reliable and are developed from models that are generally accepted as methods for producing economic forecasts. Macroeconomic Advisers, LLC, cannot guarantee the accuracy or completeness of the information upon which this Report and such forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.
Why Not September? • “Recent global and financial developments… are likely to put further downward pressure on inflation in the near term.” -FOMC Statement, September 17, 2015
• “In light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Committee judged it appropriate to wait for…some further improvement in the labor market…” -Chair Yellen, Press Conference, September 17, 2015
•“These developments… have not led… to a significant change in the Committee’s outlook for the U.S. economy.” -Chair Yellen, Press Conference, September 17, 2015 *Bolding added by MPI Source: Federal Reserve.
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Macro Outlook The Broad Contours of the Forecast Growth of Real GDP September Projections June Projections MA
2015
2016
2017
2018
2.1 1.9 2.3
2.3 2.5 2.5
2.2 2.3 2.2
2.0 N.A. N.A.
5.0 5.3 5.1
4.8 5.1 4.8
4.8 5.0 4.7
4.8 N.A. N.A.
1.4 1.3 1.4
1.7 1.8 1.7
1.9 2.0 1.8
2.0 N.A. N.A.
Unemployment Rate September Projections June Projections MA Core PCE Inflation September Projections June Projections MA
Note: For FOMC projections, values correspond to the medians of FOMC participants' projections. Values are Q4/Q4 rates (growth and inflation) and Q4 averages (unemployment rate). Source: MPI/Macroeconomic Advisers, Federal Reserve.
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Basic Contours of Forecast Unchanged FOMC’s Revision to Q4/Q4 Real GDP Growth
0.3
pp
FOMC’s Revision to Q4/Q4 Core PCE Inflation
0.2
pp
0.2 0.1 0.1 0.0
0.0
-0.1 -0.1 -0.2 -0.3
-0.2 2015
2016
2017
2015
2016
2017
Source: MPI/MA, Federal Reserve.
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Gap Between Actual and Potential Growth Gap Between Actual and Potential GDP Growth 1.4
Forecasts for the Growth of Potential GDP
Percentage Points
2015
2016
LongerRun
MA
1.5
1.4
2.0
Board Staff
1.5
1.5
?
FOMC Participants
?
?
2.0
1.2 1 0.8 0.6 0.4 0.2 0 2014
2015
2016
2017
Source: MPI/MA, BEA.
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Financial Conditions Deteriorate 5.0 Percent different from June Forecast
60
4.5
55
Revision to Nominal TradeWeighted Dollar
4.0
Basis Point difference from June Forecast
Revision to BAA Spread Over Ten-Year Treasury
50 45
3.5
40
3.0
35
2.5
30
2.0
25 20
1.5
15
1.0
10
0.5
5
0.0
0 15:Q3
15:Q4
16:Q1
16:Q2
16:Q3
16:Q4
15:Q3
15:Q4
16:Q1
16:Q2
16:Q3
16:Q4
S&P 500 2300
Index
last forecast
H F
2200 2100
current forecast
2000 1900 1800 Source: MPI/MA.
September, 2015
2014
2015
2016
2017
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Global Forces as Downside Risks 3.5 Percent
Index, 13:Q4 = 100
120
Trade-Weighted Rest-of-World Growth
current forecast
H F
115
last forecast
110
3.0
105 100
2.5
95
Nominal Trade-Weighted Dollar
90
2.0
July 8, 2014 forecast
85 80
1.5 2012
130 120
2013
2014
2015
2016
2017
2018
0.6
$ per barrel
H
F July 8, 2014 forecast
last forecast
70 60 50 40
current forecast 2012
2013
2014
2013
2014
2015
2016
2017
pp H F
0.0 -0.3 -0.6
Brent Crude Oil Price
2011
2012
0.3
110 100 90 80
2011
2015
2016
2017
-0.9
Net Exports contribution to growth
-1.2 -1.5 -1.8 -2.1
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Source: MPI/MA.
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A Setback to Firming Core Inflation Core PCE in Hand at Next Two Meetings 6-mo
September
1.66
Core PCE Set to Rebound This Fall
12-mo
2.0
1.24
1.8
October
1.66
1.31
December
1.50
1.37
Percent, annual rate H F 6-month
1.6 1.4 1.2 1.0
12-month
0.8 0.6
Source: MPI/MA, BEA.
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The Phillips Curve and Inflation Dynamics Phillips Curve Projection/Decomposition of Core PCE Inflation Percentage points Pull from inflation 2.0 expectations 2.5
H F
inertia 1.5 1.0 0.5 slack
0.0 -0.5 -1.0
shock
oil
Q3
dollar Q4 Q1
2014
Q2
Q3
Q4
Q1
2015
Q2
Q3
Q4
2016
Source: MPI/MA.
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What Does Full Employment Mean? Phillips Curve: đ?œ‹ = −đ?›ż đ?‘ˆ3 − đ?‘ˆ3∗ + đ?œ‹ đ?‘’ + đ?›žđ?œ‹đ?‘Ąâˆ’1 + đ?‘†đ?‘† Loss Function: â„’ = đ?›ź(đ?‘ˆ6 − đ?‘ˆ6∗ )2 + đ?›˝(đ?œ‹ − đ?œ‹ ∗ )2
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Not Enough Improvement Yet! Unemployment Rate and NFP Growth 625 Thousands
Percent
H F
500
10
8
375
Unemployment Rate (right axis)
Nonfarm Payrolls avg. monthly change (left axis)
6
250
4
125
2
0
0 2012
2013
2014
2015
2016
2017
Source: MPI/MA, BLS.
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Why Not September? “While the unemployment rate is close to most FOMC participants‟ estimates of the longer-run normal level, the participation rate is still below estimates of its underlying trend, involuntary part-time employment remains elevated, and wage growth remains subdued.” -Chair Yellen‟s Press Conference, September 17, 2015
*Bolding added by MPI Source: Federal Reserve.
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What‟s Yellen Waiting For? Part-time Employment for Economic Reasons Gap relative to „94-‟07 average
10.0
3.0
Gap relative to „94-‟07 average U6
8.0
2.5
6.0
2.0
4.0
1.5 1.0
U3
2.0
0.5
0.0
0.0
-2.0
-0.5
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
-4.0 1994
-1.0
1994
3.5
Gap Between U3 and U6 Continues to Narrow
Source: MPI/MA, BLS.
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What‟s Yellen Waiting For? Cyclical Rebound in Participation Rate to Slow Decline in the Unemployment Rate 67
Percent
Wage Growth Expected to Pickup 5.0
H F
67
4.5
66
4.0
66
3.5
65
3.0
65
2.5
64
1.5
Employment Cost Index
2017
2016
2015
2014
2013
2012
2011
0.0 2010
62 2009
0.5 2008
63 2007
1.0
2006
63
2005
H F
2.0
Labor Force Participation Rate
64
Percent
Source: MPI/MA.
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FOMC Still Sees 2015 As Most Likely Liftoff The dots indicate that 13 of 17 participants still expect a rate hike this year. 2.00 1.75 1.50 Median dots consistent with one 25-basis-point hike this 1.00 year (most likely December) 1.25
0.75 0.50 0.25 0.00
-0.25 2014.5
2015
2015.5
Sources: MPI/Macroeconomic Advisers, Federal Reserve.
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Liftoff Probabilities At Which FOMC Meeting Is Liftoff Most Likely? 60
Percent MPI
50
Market*
40 30 Market*
20
MPI
10 0 October
December
*Implied by fed funds futures quotes from September 21, 2015. Sources: MPI/Macroeconomic Advisers, Bloomberg
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Liftoff Probabilities What’s the Probability of a Rate Hike by Each Meeting? 70
Percent MPI Market*
60 50 40 30 Market*
20
MPI
10 0 October
December
*Implied by fed funds futures quotes from September 8, 2015. Sources: MPI/Macroeconomic Advisers, Bloomberg
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After Liftoff: Pace of Rate Hikes Three Views on Pace
Percent
5 4 3
2
MPI
1 OIS
0 -1 2014
2015 2015
2016
20162017
2018
2017 Longer 2019Run
Source: MPI/Macroeconomic Advisers, Bloomberg, and Federal Reserve. Note: For each year in question, a dot represents an FOMC participant's view on the appropriate year-end value of the funds rate—dark dots denote the median view. OIS forward rates are for the one-month rate at the end of the year in question. The MPI path is our expected year-end value.
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End Game: Undershoot the NAIRU? Overshooting the (Core) Inflation Target?
Undershooting the NAIRU 5.0
Percent H F
4.0
1.0
Percent, 4th/4th
H F
0.5
3.0
0.0
2.0
-0.5
1.0
-1.0
0.0
-1.0
-1.5
-2.0 1994 1997 2000 2003 2006 2009 2012 2015
-2.0 1994 1997 2000 2003 2006 2009 2012 2015
“A lot of people that are currently long term unemployed, they’ve been out of work for a very long time. This is obviously very bad for them, but it’s also very bad for the economy as a whole. Allowing the economy to run a little hot would make it more likely that inflation would actually move up towards the 2 percent objective. And two, it would pull some of these long term unemployed back into the workforce.” - President Dudley, October 6, 2014 *Bolding added by MPI Source: MPI/Macroeconomic Advisers, BLS, Federal Reserve
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How Does the FOMC Respond? FOMC Raises Funds Rate Above the LR Equilibrium Rate 4.0
Percent H F
2.0 0.0 Funds Rate Gap
-2.0 -4.0 -6.0 -8.0 -10.0 -12.0 1994
Yellen (2012) Rule Gap 1997
2000
2003
2006
2009
2012
2015
*The actual or prescribed fed funds rate (or its forecast) minus the estimate of the long-run fed funds rate (r* + 2%) at that time. Source: MPI/Macroeconomic Advisers, Federal Reserve
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The Buffer and the Inflation Objective
Frequency of Hitting the Zero Lower Bound Size of the Buffer
2½
3½
4½
Frequency
20%
9%
5%
These probabilities are derived from Williams (2009). Williams used data from 1968-2002.
Source: Williams (2009), MPI/MA.
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Combinations of r* and Buffer
Frequency of Hitting the ZLB
2½
2
4½
5
1½
2
3½
9
1½
3
4½
5
½
2
2½
20
½
3
3½
9
½
4
4½
5
These probabilities are derived from Williams (2009). Williams used data from 1968-2002.
Source: Williams (2009), MPI/MA.
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Statement of Strategy of Monetary Policy In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer run goal and deviations of employment from its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking account of the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate - FOMC “Statement on Longer-run Goals and Monetary Policy Strategy,” adopted effective as of Jan 24, 2012, and amended effective as of January 27, 2015
Source: Federal Reserve. Bolding added by MPI.
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