23
www.macroadvisers.com www.twitter.com/macroadvisers 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. Laurence H. Meyer Senior Managing Director Global Interdependence Center’s Central Banking Series Federal Reserve Bank of St. Louis September 25, 2015 What are They Waiting For?

Meyer lhm 2015 0925 sl

Embed Size (px)

DESCRIPTION

 

Citation preview

Page 1: Meyer lhm 2015 0925 sl

www.macroadvisers.com www.twitter.com/macroadvisers 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.

Laurence H. Meyer

Senior Managing Director

Global Interdependence Center’s Central Banking Series

Federal Reserve Bank of St. Louis

September 25, 2015

What are They Waiting For?

Page 2: Meyer lhm 2015 0925 sl

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

September, 2015 1 ©2015 Macroeconomic Advisers, LLC

*Bolding added by MPI

Source: Federal Reserve.

Page 3: Meyer lhm 2015 0925 sl

2015 2016 2017 2018

Growth of Real GDP

September Projections 2.1 2.3 2.2 2.0

June Projections 1.9 2.5 2.3 N.A.

MA 2.3 2.5 2.2 N.A.

Unemployment Rate

September Projections 5.0 4.8 4.8 4.8

June Projections 5.3 5.1 5.0 N.A.

MA 5.1 4.8 4.7 N.A.

Core PCE Inflation

September Projections 1.4 1.7 1.9 2.0

June Projections 1.3 1.8 2.0 N.A.

MA 1.4 1.7 1.8 N.A.

September, 2015 ©2015 Macroeconomic Advisers, LLC 2

Macro Outlook

The Broad Contours of the Forecast

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.

Page 4: Meyer lhm 2015 0925 sl

Basic Contours of Forecast Unchanged

September, 2015 3 ©2015 Macroeconomic Advisers, LLC

FOMC’s Revision to Q4/Q4 Real GDP Growth

Source: MPI/MA, Federal Reserve.

FOMC’s Revision to Q4/Q4 Core PCE Inflation

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

2015 2016 2017

pp pp

-0.2

-0.1

0.0

0.1

0.2

2015 2016 2017

pp pp

Page 5: Meyer lhm 2015 0925 sl

Gap Between Actual and Potential Growth

September, 2015 4 ©2015 Macroeconomic Advisers, LLC

Source: MPI/MA, BEA.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2014 2015 2016 2017

Percentage Points

Gap Between Actual and Potential GDP

Growth

2015 2016

Longer-

Run

MA 1.5 1.4 2.0

Board Staff 1.5 1.5 ?

FOMC

Participants ? ? 2.0

Forecasts for the Growth of Potential GDP

Page 6: Meyer lhm 2015 0925 sl

Financial Conditions Deteriorate

September, 2015 5 ©2015 Macroeconomic Advisers, LLC

1800

1900

2000

2100

2200

2300

2014 2015 2016 2017

Index

H F

S&P 500

current

forecast

last

forecast

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4

Percent different from June Forecast

Revision to Nominal Trade-

Weighted Dollar

0

5

10

15

20

25

30

35

40

45

50

55

60

15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4

Revision to BAA Spread

Over Ten-Year Treasury

Basis Point difference from June Forecast

Source: MPI/MA.

Page 7: Meyer lhm 2015 0925 sl

80

85

90

95

100

105

110

115

120

2011 2012 2013 2014 2015 2016 2017

Index, 13:Q4 = 100

Nominal

Trade-Weighted Dollar

H F

80

85

90

95

100

105

110

115

120

2011 2012 2013 2014 2015 2016 2017

Index, 13:Q4 = 100

Nominal

Trade-Weighted Dollar

40

50

60

70

80

90

100

110

120

130

2011 2012 2013 2014 2015 2016 2017

$ per barrel

Brent Crude Oil Price

H F

Global Forces as Downside Risks

September, 2015 6 ©2015 Macroeconomic Advisers, LLC

1.5

2.0

2.5

3.0

3.5

2012 2013 2014 2015 2016 2017 2018

Percent

Trade-Weighted Rest-of-World Growth

current

forecast

last

forecast

July 8, 2014

forecast

-2.1

-1.8

-1.5

-1.2

-0.9

-0.6

-0.3

0.0

0.3

0.6

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Net Exports

contribution to growth

pp

H F

current

forecast

July 8, 2014

forecast

last

forecast

40

50

60

70

80

90

100

110

120

130

2011 2012 2013 2014 2015 2016 2017

$ per barrel

Brent Crude Oil Price

H F

Source: MPI/MA.

Page 8: Meyer lhm 2015 0925 sl

Source: MPI/MA, BEA.

A Setback to Firming Core Inflation

Core PCE in Hand at Next Two Meetings

September, 2015 7 ©2015 Macroeconomic Advisers, LLC

Core PCE Set to Rebound This Fall

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0 Percent, annual rate

6-month

12-month

H F 6-mo 12-mo

September 1.66 1.24

October 1.66 1.31

December 1.50 1.37

Page 9: Meyer lhm 2015 0925 sl

The Phillips Curve and Inflation Dynamics

September, 2015 8 ©2015 Macroeconomic Advisers, LLC

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Percentage points H F

Phillips Curve Projection/Decomposition of Core PCE Inflation

inertia

Pull from

inflation

expectations

shock

dollar

Source: MPI/MA.

slack

oil

2014 2015 2016

Page 10: Meyer lhm 2015 0925 sl

Phillips Curve:

𝜋 = −𝛿 𝑈3− 𝑈3∗ + 𝜋𝑒 + 𝛾𝜋𝑡−1 + 𝑆𝑆

Loss Function:

ℒ = 𝛼(𝑈6 − 𝑈6∗)2 + 𝛽(𝜋 − 𝜋∗)2

What Does Full Employment Mean?

September, 2015 9 ©2015 Macroeconomic Advisers, LLC

Page 11: Meyer lhm 2015 0925 sl

Not Enough Improvement Yet!

September, 2015 10 ©2015 Macroeconomic Advisers, LLC

Source: MPI/MA, BLS.

0

2

4

6

8

10

0

125

250

375

500

625

2012 2013 2014 2015 2016 2017

Thousands

Unemployment Rate

(right axis) Nonfarm Payrolls

avg. monthly change

(left axis)

Percent H F

Unemployment Rate and NFP Growth

Page 12: Meyer lhm 2015 0925 sl

Why Not September?

September, 2015 11 ©2015 Macroeconomic Advisers, LLC

“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.

Page 13: Meyer lhm 2015 0925 sl

What‟s Yellen Waiting For?

September, 2015 12 ©2015 Macroeconomic Advisers, LLC

Source: MPI/MA, BLS.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Gap relative to „94-‟07 average

Part-time Employment for Economic

Reasons

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Gap relative to „94-‟07 average

U3

U6

Gap Between U3 and U6 Continues to

Narrow

Page 14: Meyer lhm 2015 0925 sl

What‟s Yellen Waiting For?

September, 2015 13 ©2015 Macroeconomic Advisers, LLC

Source: MPI/MA.

62

63

63

64

64

65

65

66

66

67

67

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Percent

Labor Force

Participation Rate

H F

Cyclical Rebound in Participation Rate to

Slow Decline in the Unemployment Rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0 Percent

Employment

Cost Index

H F

Wage Growth Expected to Pickup

Page 15: Meyer lhm 2015 0925 sl

FOMC Still Sees 2015 As Most Likely Liftoff

September, 2015 14 ©2015 Macroeconomic Advisers, LLC

Sources: MPI/Macroeconomic Advisers, Federal Reserve.

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2014.5 2015 2015.5

Median dots consistent with

one 25-basis-point hike this

year (most likely December)

The dots indicate that 13 of 17 participants still expect a rate hike this year.

Page 16: Meyer lhm 2015 0925 sl

Liftoff Probabilities

September, 2015 15 ©2015 Macroeconomic Advisers, LLC

Percent

*Implied by fed funds futures quotes from September 21, 2015.

Sources: MPI/Macroeconomic Advisers, Bloomberg

At Which FOMC Meeting Is Liftoff Most Likely?

0

10

20

30

40

50

60

October December

MPI

Market*

Market*

MPI

Page 17: Meyer lhm 2015 0925 sl

Liftoff Probabilities

September, 2015 16 ©2015 Macroeconomic Advisers, LLC

Percent

*Implied by fed funds futures quotes from September 8, 2015.

Sources: MPI/Macroeconomic Advisers, Bloomberg

What’s the Probability of a Rate Hike by Each Meeting?

0

10

20

30

40

50

60

70

October December

MPI

Market*

Market*

MPI

Page 18: Meyer lhm 2015 0925 sl

After Liftoff: Pace of Rate Hikes

September, 2015 17 ©2015 Macroeconomic Advisers, LLC

Three Views on Pace

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.

2015 2016 2017

Percent

OIS

MPI

-1

0

1

2

3

4

5

2014 2015 2016 2017 2018 2019Longer Run

Page 19: Meyer lhm 2015 0925 sl

*Bolding added by MPI

Source: MPI/Macroeconomic Advisers, BLS, Federal Reserve

End Game: Undershoot the NAIRU?

September, 2015 18 ©2015 Macroeconomic Advisers, LLC

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1994 1997 2000 2003 2006 2009 2012 2015

Percent, 4th/4th

H F

Overshooting the (Core)

Inflation Target?

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1994 1997 2000 2003 2006 2009 2012 2015

Undershooting the NAIRU

Percent

H F

“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

Page 20: Meyer lhm 2015 0925 sl

Source: MPI/Macroeconomic Advisers, Federal Reserve

How Does the FOMC Respond?

September, 2015 19 ©2015 Macroeconomic Advisers, LLC

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

1994 1997 2000 2003 2006 2009 2012 2015

Percent

*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.

H F

Yellen (2012) Rule Gap

Funds Rate Gap

FOMC Raises Funds Rate Above the LR Equilibrium Rate

Page 21: Meyer lhm 2015 0925 sl

The Buffer and the Inflation Objective

September, 2015 20 ©2015 Macroeconomic Advisers, LLC

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.

Page 22: Meyer lhm 2015 0925 sl

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.

Combinations of r* and

September, 2015 21 ©2015 Macroeconomic Advisers, LLC

Source: Williams (2009), MPI/MA.

Page 23: Meyer lhm 2015 0925 sl

Source: Federal Reserve. Bolding added by MPI.

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

September, 2015 22 ©2015 Macroeconomic Advisers, LLC