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EMBARGOED UNTIL FRIDAY, APRIL 13, 2018 AT 8:10 A.M.; OR UPON DELIVERY The U.S. Economy: An Optimistic Outlook, But With Some Important Risks Eric S. Rosengren President & CEO Federal Reserve Bank of Boston April 13, 2018 Greater Boston Chamber of Commerce Economic Outlook Breakfast 2018 Boston, Massachusetts bostonfed.org Recent Data ▶ Mildly disappointing employment report ▶ 103,000 jobs created in March ▶ However, 202,000 jobs per month (average) over quarter ▶ Average hourly earnings continues upward trend ▶ Unemployment rate at 4.1 percent ▶ Tight labor markets – common concern of New England businesses 2 March Forecast of FOMC for 2018 ▶ Quite positive median forecast ▶ Strong real GDP – 2.7 percent ▶ Inflation – 1.9 percent ▶ Unemployment – 3.8 percent ▶ Conditioned on two additional increases this year ▶ My own forecast – a bit more inflation and a bit lower unemployment ▶ So, somewhat more tightening may be needed 3 Some Important Risks to Forecast ▶ Forecasts not outcomes – assumptions about hard-to-predict variables matter ▶ Will international trade be better or worse this year? ▶ Will oil prices tighten further? ▶ Will other central banks begin tightening their monetary policy? ▶ Many model assumptions are about political outcomes not underlying economic relationships ▶ Today, will focus not only on the positive forecast, but also on risks to the forecast 4 Figure 1: Core PCE Inflation Rate: Actual and Forecast from the Summary of Economic Projections Actual, 2015:Q1 - 2017:Q4 and Forecast, 2018:Q4 - 2020:Q4 3 Percent Change from Year Earlier Actual SEP Median 2 1 0 2015:Q1 2017:Q1 2019:Q1 Note: SEP median projected values are for the percent change in the Core PCE Index from the previous fourth quarter to the fourth quarter of the year specified. The Core PCE Index excludes food and energy. Source: FOMC, Summary of Economic Projections (SEP), March 21, 2018; BEA; Haver Analytics 5 Figure 2: Unemployment Rate: Actual and Forecast from the Summary of Economic Projections Actual, 2015:Q1 - 2018:Q1 and Forecast, 2018:Q4 - 2020:Q4 6 Percent Actual SEP Median 5 4 SEP Median Longer-Run Unemployment Rate 3 2015:Q1 2017:Q1 2019:Q1 Note: SEP median projected values are for the unemployment rate in the fourth quarter of the year specified. Source: FOMC, Summary of Economic Projections (SEP), March 21, 2018; BLS; Haver Analytics 6 Figure 3: Federal Funds Rate: Actual and Forecast from the Summary of Economic Projections Actual, 2015:Q1 - 2018:Q1 and Forecast, 2018:Q4 - 2020:Q4 4 Percent Actual SEP Median 3 2 1 0 2015:Q1 2017:Q1 2019:Q1 Note: SEP median projected values are for the federal funds rate in the fourth quarter of the year specified. Source: FOMC, Summary of Economic Projections (SEP), March 21, 2018; BEA; Haver Analytics 7 A Positive Forecast ▶ Some of the underlying strength in this positive outlook comes from fiscal stimulus and still relatively accommodative monetary policy ▶ My own forecast is even a bit more positive – which is why somewhat more tightening, in my view, may be appropriate this year ▶ Despite the positive outlook, it is important to consider the risks around this forecast ▶ In my view, two short-run risks ▶ Role of international trade ▶ Potential for boom-bust 8 Figure 4: Exports of Goods and Services as a Share of GDP 2015:Q1 - 2017:Q4 16 Percent 14 12 10 8 2015:Q1 Source: BEA, Haver Analytics 2016:Q1 2017:Q1 9 Figure 5: Percent Change in Import Price Indices January 2015 - March 2018 6 Percent Change from Year Earlier All Imports 3 All Imports Excluding Fuel 0 -3 -6 -9 -12 Jan-2015 Source: BLS, Haver Analytics Jan-2016 Jan-2017 Jan-2018 10 Figure 6: Unemployment Rate minus CBO Natural Rate of Unemployment 1970:Q1 - 2018:Q1 6 Percentage Points 3 0 -3 1970:Q1 1977:Q3 1985:Q1 1992:Q3 2000:Q1 2007:Q3 2015:Q1 Recession Source: BLS, CBO, NBER, Haver Analytics 11 Figure 7: Corporate Bond Spreads over 10-Year U.S. Treasury Yield 1995:Q1 - 2018:Q1 20 Percentage Points High-Yield Corporate Master II Moody's Seasoned Baa 15 10 5 0 1995:Q1 2002:Q3 2010:Q1 2017:Q3 Recession Note: Dashed lines are averages over the period. Source: ICE/BofA Merrill Lynch, Moody’s, Haver Analytics 12 Risks Short-Run ▶ Not expecting these risks, only identifying them ▶ Important to watch incoming data to see if they indicate that these risk scenarios are becoming more likely Long-Run ▶ Longer-run policy risks: potentially inadequate buffers: ▶ Fiscal buffers ▶ Monetary buffers 13 Figure 8: Gross Federal Debt as a Percentage of GDP Actual, 1990 - 2017, Projection, 2018 - 2028 120 Percent 100 80 60 40 20 0 1990 1995 2000 2005 2010 2015 2020 2025 Note: CBO projections for the U.S. (2018 - 2028) were released on April 9, 2018 and include the recent tax changes and increases in the federal budget. Source: OMB, CBO, Haver Analytics 14 Figure 9: Federal Funds Rate 1970:Q1 - 2018:Q1 18 Percent 15 12 9 6 3 0 1970:Q1 1977:Q3 1985:Q1 1992:Q3 2000:Q1 2007:Q3 2015:Q1 Recession Source: Federal Reserve Board, NBER, Haver Analytics 15 Concluding Observations ▶ March FOMC / SEP – positive outlook for the economy ▶ Short-run risks that could be problematic – but I am not expecting to occur ▶ More serious trade concerns ▶ Boom-bust economy ▶ Longer-run risks – do we have sufficient policy buffers? ▶ Current fiscal stimulus may leave less room to react to negative shocks ▶ Monetary policy buffer will be limited if rates remain low 16
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