Monetary Policy In Uncertain Times Paula Tkac Senior Vice - PowerPoint PPT Presentation

Monetary Policy In Uncertain Times Paula Tkac Senior Vice President & Associate Research Director The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

The Dual Mandate: BULLSEYE! Unemployment Rate and Inflation 12 1 FRB Dallas Trimmed-mean PCE inflation- year over year percent change 1 Unemployment Rate - monthly, percent 10 1 1 8 1 6 1 FOMC’s judgment of the longer run unemployment rate (4.4%) 0 4 0 FOMC’s Inflation target (2%) 0 2 0 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2 Sources: Bureau of Labor Statistics; Haver Analytics Inflation data through August 2019, Unemployment data through September 2019

Slowing Growth? GDPnow Q4: 1.0% Real GDP Forecast Quarterly percent change, SAAR 4.5 Actual 4.0 Blue Chip projections 3.5 3.0 Optimists 2.5 2.0 Long-run GDP forecast (1.8%) 1.5 1.0 0.5 Pessimist 0.0 2018 2019 2020 Sources: Bureau of Economic Analysis, October 2019 Blue Chip Economic Actual data through 2019:Q2 Indicators ; Haver Analytics. 4

Warning Signs from Manufacturing? Measures of Manufacturing Activity 15 62 Core Capital Goods Orders (nondefense ex.aircraft) y/y percent change (left axis) ISM Manufacturing: PMI Composite Index, sa (right axis) 10 59 5 56 0 53 ISM 50+=expansion -5 50 -10 47 2014 2015 2016 2017 2018 2019 5 Sources: Census Bureau, Institute for Supply Management; Haver Analytics Core goods data through August 2019, ISM data through September 2019

Business Expectations Have Slipped Lower Survey of Business Uncertainty Index = 100 January 2015–December 2018 130 120 Expectations Uncertainty 110 100 90 80 70 2015 2016 2017 2018 2019 The Business Expectations Index reflects firms' expectations about the growth of their own sales, employment, and capital expenditures over the next 12 months. The index can respond to news about the overall economy, changes in business sentiment, policy developments, stock market moves, interest rate changes, and changes in the outlook of firms in the sample. The Business Uncertainty Index reflects firms' uncertainty about the growth of their own sales, employment, and capital expenditures over the next 12 months. respond to the same forces that move the Business Expectations Index. The Business Uncertainty Index captures uncertainty about the outlook for sample firms, while the Business Expectations Index captures the expected direction and magnitude of change. Each index is standardized to have a mean of 100 and a standard deviation of 10 in the period from January 2015 to December 2018. data through September 2019 Source: Federal Reserve Bank of Atlanta/Chicago Booth School of Business/Stanford Survey of Business Uncertainty; 6

While The Consumer Remains Strong Real PCE and Disposable Personal Income year-over-year percent change 8 Volatility due to year-end tax changes 6 4 2 0 Real Disposable Personal Income -2 Real Personal Consumption Expenditures Volatility due to year-end tax changes -4 -6 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 7 Source: Bureau of Economic Analysis; Haver Analytics data through August 2019

And the Labor Market Remains Tight Dec. 2007 Dec. 2009 September 2019 Maximum (outer ring) Minimum (inner ring) Median (middle ring) Sources: BLS, NFIB, Conference Board, Haver Analytics; staff calculations data through September 2019 8

Yet Wage Growth Remains Moderate 9

Policy as a Source of Uncertainty 10

The Impact on Firms’ Outlook: Sales Revenue Based on Firm-Level Responses in the July, August, and September 2019 Survey of Business Uncertainty What impact, if any, have recent tariff hikes and trade policy tensions had on your firm's sales revenue? Number of respondents : 385 Number of respondents : 416 11 Source: Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and University of Chicago Booth School of Business.

The Impact on Firms’ Outlook: Hiring Based on Firm-Level Responses in the July, August, and September 2019 Survey of Business Uncertainty What impact, if any, have recent tariff hikes and trade policy tensions had on your firm's number of employees? Number of respondents : 418 Number of respondents : 416 12 Source: Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and University of Chicago Booth School of Business.

Is Uncertainty Affecting CapEx? 13

Estimated Impact of Tariff Hikes and Trade Policy Tensions Based on Firm-Level Responses in the July, August, and September 2019 Survey of Business Uncertainty (1) Percentage (2) Impact on 2019:H1 (3) Number Impact on Capital Capital Spending of Survey Expenditures ($ billions) Responses Private Sector - 2.7 [0.7] - 39.6 [10.0] 373 Manufacturing - 6.2 [1.8] -16.3 [4.7] 94 Construction - 18.3 [6.2] -5.7 [1.9] 29 Notes: Column (1) reports the capital-stock weighted mean of firm-level responses to SBU questions about whether tariff hikes and trade policy tensions caused the firm to alter its capital expenditures in the first half of 2019 and, if so, by what percentage amount. To obtain the private sector dollar value in column 2, we multiply the column 1 figure by of the 2019:Q2 value of nominal private nonresidential fixed investment in the U.S. Bureau of Economic Activity’s National Income and Product Accounts and then by ½ because the data are reported in seasonally adjusted annualized rates. For manufacturing & construction, we multiply by the corresponding nominal value for the manufacturing (construction) sector in 2018, scaled up by an adjustment factor of 1.0091. We compute the adjustment factor using the percentage growth of private sector investment expenditures from 2018:Q4 to 2019:Q2. Column 3 reports the number of survey responses used to calculate column 1. Standard errors reported in brackets. Source: BEA; Authors’ calculations using data from the Survey of Business Uncertainty conducted by the Federal Reserve Bank of Atlanta, Stanford University, and the University of Chicago Booth School of Business. 14

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What’s an FOMC Member To Do? FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 4.0 3.5 3.0 Projected Range of Longer Run Fed Funds Rate 2.5 2.0 1.5 1.0 0.5 0.0 2019 2020 2021 2022 2019 2020 2021 2022 2023 16 Source: Federal Reserve Board