What to Expect from FOMC

What to Expect from the FOMC part of GIC’s Virtual Summer Series

featuring Bill Dunkelberg, Ph.D. Chief Economist National Federation of Independent Business

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Submit a Question: To submit a question for Q&A, please email your question to alichtenstein@interdependence.org

ACTUAL PRICE INCREASES SEASONALLY ADJUSTED RAISED (NET)

80

FIRST MONTH IN EACH QUARTER

40 20

-40

'1 2 15

'0 6 '0 9

'0 0 '0 3

94 97

88 91

-20

82 85

0

76 79

Percent of Firms

60

MAY JUNE

2

GDP AND EMPLOYMENT GDP(left)

EMPLOYMENT (right)

PAYROLL

17000

148000

16000

146000 144000

15000

142000

14000

140000 138000

13000

136000

12000

134000 132000

11000

14

'1 3

'1 2

'1 1

'1 0

'0 9

'0 8

'0 7

'0 6

130000

'0 5

'0 4

'0 3

'0 2

HAVER ANALYTICS

'0 1

'0 0

10000

3

PERCENT OF OWNERS INCREASING OR REDUCING EMPLOYMENT INCREASED

30

REDUCED

FIRST MONTH IN EACH QUARTER + MAY JUNE

20 15 10 5

'1 2

'0 9

'0 6

'0 3

97 '0 0

91 94

85 88

0

79 82

Percent of Firms

25

4

ACTUAL CAPITAL OUTLAYS %SPEND + LEASE

75

MAY JUNE

65 60 55 50 45

FIRST MONTH IN EACH QUARTER

2 '1

9 '0

6 '0

3 '0

0 '0

97

40

94

Percent of Firms

70

5

QUARTERLY CHANGE IN REAL GDP QUARTERLY 4 3

1 0 -1 -2

2 '1

9 '0

6 '0

3 '0

0 '0

94 97

82 85

88 91

SEASONALLY ADJUSTED

-3

76 79

Percent

2

6

7

MORTGAGES

TREASURY SECURITIES

8

EXCESS RESERVES

9

10

REGULAR BORROWING ACTIVITY (AT LEAST ONCE A QUARTER)

QUARTERLY 50 45 40 35 30

97 '0 0 '0 3 '0 6 '0 9 '1 2

94

91

88

85

82

79

25

76

Percent of Firms

55

11

SINGLE MOST IMPORTANT PROBLEM FACING OWNERS INFLATION

CREDIT

45 35 30

FIRST MONTH IN EACH QUARTER + MAY JUNE

25 20 15

CREDIT: NO PROBLEM

10 5

12

9 '0

6 '0

3 '0

0 '0

97

94

91

88

85

82

79

0

76

Percent of Firms

40

12

AVERAGE RATE PAID ON SHORT TERM LOANS RATE PAID

1 YR TREASURY

25

QUARTERLY + JUNE

15 10 5

14

1 '1

8 '0

5 '0

2 '0

99

96

93

90

87

84

0

81

Percent

20

13

ALL CREDIT NEEDS NOT SATISFIED MAY JUNE

15 10 5

14

'11

'08

'05

'02

99

96

0

93

Percent of Firms

NEEDS NOT MET

14

LOAN DEMANDS WEAKEN WITH WEAK EXPECTATIONS FOR GROWTH PERCENT OF ALL FIRMS NOT WANTING A LOAN RECESSION STARTS

50

45 40

14

11

'0 8

'0 5

'0 2

99

96

35

93

Percent of Firms

55

15

OUTLOOK FOR BUSINESS EXPANSION (PCT “NOW IS A GOOD TIME”)

QUARTERLY

MAY JUNE

“NO” for 25 QUARTERS

25 20 15 10 5

(SEASONALLY ADJUSTED)

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

85

82

79

0

76

Percent of Firms

30

16

BAD TIME TO EXPAND DUE TO THE POLITICAL CLIMATE QUARTERLY

MAY JUNE

35 30 25 20 15 10 5

(SEASONALLY ADJUSTED)

'1 3

'1 0

'0 4

'0 7

% OF THOSE SAYING “BAD TIME”

0

'0 1

Percent of Firms

40

17

2008-2014

'1 2

'0 9

'0 6

NET % POLICIES ARE GOOD

'0 3

50 40 30 20 10 0 -10 -20 -30 -40 -50

'0 0

Percent of Consumers

RATING OF GOVERNMENT POLICY

Source: University of Michigan 18

EXACTLY HOW HELPFUL IS TRANSPARENCY AND FORWARD GUIDANCE?

“So the language that we used in the statement is considerable period. So I, you know, this is the kind of term it's hard to define. But, you know, probably means something on the order of around six months, that type of thing.”

19

“But, if inflation were slightly above 2 percent even as unemployment remained far above levels consistent with maximum employment, then the unemployment consideration would dominate because we would be further from the unemployment objective than we are from the inflation objective.” NY NABE May, 2014 EXACTLY HOW HELPFUL IS TRANSPARENCY AND FORWARD GUIDANCE?

20

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 '0 0 '0 2 '0 4 '0 6 '0 8 10 12 14

TRILLIONS OF DOLLARS

CONSUMER NET WORTH NET WORTH

80 BELIEVABLE???

60 HOUSING

DOT COM

40

20

0

21

CONSUMER NET WORTH RELATIVE TO GDP 5

4.5

BUBBLE

BUBBLE??

BUBBLE

4 3.5 RECESSION

3 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 '0 0 '0 2 '0 4 '0 6 '0 8 10 12 14

RATIO OF WEALTH TO GDP

NET WORTH

22

UNEMPLOYMENT RATE U3 RATE 11 10

GOAL??

8 7 6 5 4

'1 2

'0 9

'0 6

'0 3

'0 0

97

94

91

88

85

82

79

3

76

Percent

9

(SEASONALLY ADJUSTED) 23

24

25

FACTORS TO CONSIDER • • • • • •

UNEMPLOYMENT & ECONOMY BOARD APPOINTED BY ONE PRESIDENT THE FED IS TRYING TO CREATE INFLATION ?

MAJOR GOAL IS UNEMPLOYMENT IF ALL YOUHAVE IS A HAMMER……

OFFICIAL END OF QE3 DOES NOT MEAN FED WILL NOT EXPAND ITS PORTFOLIO • “ACCOMODATION” = BUYING BONDS • FED BUYING MORE THAN NEW ISSUES 26

FED POLICY? • KEEP RATES LOW EVEN THOUGH IT IS NOT STIMULATING REAL INVESTMENT: PV DENOMINATOR • KEEP RATES LOW EVEN THOUGH THERE IS LITTLE EVIDENCE THIS HELPS UNEMPLOYMENT • INFLATE ASSET PRICES TO RAISE SPENDING • GENERATE PROFITS FOR LARGE FINANCIAL INSTITUTIONS WHO NEED CAPITAL • DEPRIVE SAVERS OF TRILLIONS IN INCOME • HELP TRADERS MAKE MONEY BY INSURING FUTURE PRICES • INCREASE REGULATORY SUPERVISION • DECLARE VICTORY WHEN UNEMPLOYMENT FINALLY FALLS FAR ENOUGH • IGNORE EFFECTS ON FOREIGN MARKETS • ENCOURAGE MIS-ALLOCATIONS OF CAPITAL • RAISING THE “INFLATION TAX” ON ALL TO MAYBE EMPLOY A FEW MORE PEOPLE? 27

FED POLICY? • WHAT IS “NORMALIZATION”?

• HOW FAST WILL WE “NORMALIZE”?

• ANY IMPACT OF RISING RATES ON THE VALUE OF THE FED’S PORTFOLIO? • FED “EARNINGS”?

• WHEN WILL THE FED LET MARKETS SET RATES AND NOT THE FED? NEVER? FED USES “MODELS” TO DETERMINE “NORMAL”

28

Submit a Question: To submit a question for Q&A, please email your question to alichtenstein@interdependence.org

Join GIC for our next Virtual Summer Series event: Nineteen Quarters and Counting. How Long will the Expansion Last?

Michael Drury August 27, 2014 12 - 1 p.m. Eastern Register at http://bit.ly/GIC-Events