A Perspective on Monetary Policy David Oppedahl March 23, 2017 - - PowerPoint PPT Presentation

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A Perspective on Monetary Policy David Oppedahl March 23, 2017 - - PowerPoint PPT Presentation

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A Perspective on Monetary Policy David Oppedahl March 23, 2017 Senior Business Economist Bloomington, IL 312-322-6122 david.oppedahl@chi.frb.org The path of this recovery has been below past deep recession recovery cycles Business cycle

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SLIDE 1

A Perspective on Monetary Policy

March 23, 2017 Bloomington, IL

David Oppedahl Senior Business Economist 312-322-6122 david.oppedahl@chi.frb.org

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SLIDE 2

The path of this recovery has been below past deep recession recovery cycles

average annualized growth: 2.4% average annualized growth: 5.3% average annualized growth: 5.4%

95 100 105 110 115 120 125 130 135 140 95 100 105 110 115 120 125 130 135 140

  • 8
  • 6
  • 4
  • 2

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Business cycle recovery path

index - business cycle trough = 100

1981-82 2008-09 1974-75 quarters before trough quarters after trough

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SLIDE 3

Confidence rising as uncertainty persists

Consumer Confidence (Conf. Board)

50 100 150 1 9 9 9 ' 1 ' 3 ' 5 ' 7 ' 9 ' 1 1 ' 1 3 ' 1 5 ' 1 7 50 100 150 200 250 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17

Economic Policy Uncertainty Index

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SLIDE 4

Record stock markets

50 100 150 200 250 300 350 400

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Real S&P 500 stock index

Index: 1990 = 100

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SLIDE 5

Federal Reserve System

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SLIDE 6

How does the Fed affect agriculture?

  • Interest rates
  • Price level (inflation)
  • National income (GDP)
  • Exchange rates (indirectly)
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SLIDE 7

What is the Federal Reserve System?

  • Twelve District Banks
  • Board of Governors
  • Federal Open Market Committee (FOMC)
  • Functions of the Fed

– Monetary policy – Regulator of financial institutions – Provides banking services for U.S. government – Electronic funds transfer & financial services – Protect credit rights of consumers

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SLIDE 8

3 4 5 1 6 7 2

Board of Governors of the Federal Reserve System

1

Janet et L. Yel ellen en Ch Chair St anley ey Fisc scher er Vice ce Ch Chair Daniel K. Tarullo Jer erom e e Pow el ell Vac acan ant

? ?

Vac acan ant

?

La Lael Brainard

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SLIDE 9

8 7 2 12 11 10 9 6 5 4 3 1

Presidents of the Federal Reserve Banks

Jef effrey ey M. Lacker er Fift h Dist rict - Richm hm ond nd Robe

  • bert S. Kapl

plan Eleve vent nt h h Di Dist rict - Dallas Eric S. Rosen sengren en First Dist rict - Bos

  • st on
  • n

Pat ri rick T. Hark rker Third Dist rict - Philadelphia I nt er erim Presi esiden ent Sixt h Dist rict - At l t lant a t a Cha harles L. Eva vans ns Seve vent nt h h Di Dist rict - Ch Chica cago Jam es es B. Bullard Eight h Dist rict - St . Lo Louis Neel eel Kash shkari Nint h Dist rict - Minneapolis W illiam C. Dudley Sec econd Dist st rict - New ew York John C. W illiam s Tw elft h Dist rict - San Franci cisco co Est st her er Geo eorge Tent nt h h Di Dist rict - Kansa sas s Cit y Loret et t a J. Mest est er er Four urt h h Di Dist rict - Clev evel eland

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SLIDE 10
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SLIDE 11

Goals of Monetary Policy

  • Price stability -- low and stable inflation
  • Low unemployment
  • Economic growth
  • Moderate interest rates
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SLIDE 12

Chicago Fed National Activity Index shows hesitant growth since 2009

  • 5
  • 4
  • 3
  • 2
  • 1

1 2

1999 '01 '03 '05 '07 '09 '11 '13 '15 '17

Above Trend Grow th Below Trend Grow th

(standard deviation from trend growth, 3-month moving average)

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SLIDE 13

Chicago Fed National Financial Conditions Index

  • 2
  • 1

1 2 3 2001 '03 '05 '07 '09 '11 '13 '15 '17

Tighter Conditions Looser Conditions

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SLIDE 14

Quantitative easing was necessary

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Assets of the Federal Reserve

Billions of dollars

Term Auction Credit

Securities Held Outright

Central Bank Swaps Maiden Lane II & III Commercial Paper Facility

2007 2008 2009

Term Asset-Backed Securities Loan Facility AIG Support Maiden Lane

2010 2011 2012 2013 2014 2015

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SLIDE 15

Recent Monetary Policy Actions

  • Tapering of asset purchases began in December 2013
  • No additional asset purchases after November 2014,

while continuing to reinvest assets as they mature

  • In December of 2015 & 2016 and March 2017, raised

the range of the Fed Funds Rate by 0.25% points

  • The FOMC will monitor economic conditions to tailor

future actions to meet objectives of maximum employment and 2% inflation

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SLIDE 16

In March 2017, the FOMC raised the Fed Funds rate target to a range from 0.75% to 1.00%

1 2 3 4 5 6 7 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17

Federal Funds Rate (effective), Yields in percent per annum

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SLIDE 17

Contributions to real GDP growth

  • f 1.9% in the 4th quarter of 2016
  • Consumption

2.0%

  • Residential Investment 0.4%
  • Business Investment

0.2%

  • Inventories

0.9%

  • Government

0.1%

  • Net Exports
  • 1.7%
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SLIDE 18

The FOMC consensus outlook has output rising at about its trend over the next few years

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 6

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Real gross domestic product

percent change from a year earlier FOMC

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SLIDE 19

Food price changes now well below core inflation (less food and energy)

(Consumer Price Index, percent change from year ago)

  • 2

2 4 6 8 1991 1996 2001 2006 2011 2016 CPI Less Food and Energy CPI for Food

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SLIDE 20

Real Cash Crop Prices

($/bushel, adjusted by CPI-U for January 2010)

10 20 30 40 1976 1981 1986 1991 1996 2001 2006 2011 2016 Corn Soybeans

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SLIDE 21

Real USDA Livestock Prices

($/hundredweight, adjusted by CPI-U for January 2010)

50 100 150 200 250 1976 1981 1986 1991 1996 2001 2006 2011 2016 Hogs Cattle

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SLIDE 22

Oil prices plummeted and lower gas prices boosted consumer saving/spending

(2010 $/barrel)

50 100 150

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

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SLIDE 23

Natural gas prices have moderated

Real Natural Gas Price

{2010 $/mmbtu}

5 10 15 1997 2002 2007 2012 2017

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SLIDE 24

Even including the volatile food and energy components, inflation remains contained

  • 2
  • 1

1 2 3 4 5 6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Personal consumption expenditure - chain price index

percent change from a year earlier FOMC

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SLIDE 25

Employment fell by over 8.7 million jobs between December 2007 and February 2010, and finally recovered all the lost jobs in May 2014

  • 8
  • 6
  • 4
  • 2

2 4 6

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Total employment

percent

Monthly change (saar) Percent change from a year earlier

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SLIDE 26

Alternative measures of unemployment

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SLIDE 27

Still high including discouraged workers and part-time employment for economic reasons

2 4 6 8 10 12 14 16 18

1994 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Unemploymentrate

percent

U-3 U-6 U-5 U-4

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SLIDE 28

The share of those unemployed more than 6 months remains significantly high

5 10 15 20 25 30 35 40 45 50

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Unemployed for 27 weeks or more

percent

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SLIDE 29

The FOMC forecasts that the unemployment rate will be under the natural rate through 2019

3 4 5 6 7 8 9 10 11

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Unemployment rate

percent FOMC

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SLIDE 30

Wages and benefit cost increases remain low

1 2 3 4 5 6 7 8

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Employment cost index

percent change from year ago

benefit costs wages and salaries

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SLIDE 31

Stronger productivity after the recession, but weak results recently

  • 1

1 2 3 4 5

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Productivty

percent change (20-qtr rate)

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SLIDE 32

Poor business investment explains much of the lower productivity levels

  • 30
  • 20
  • 10

10 20

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Real private nonresidential fixed investment

percent

Quarterly change (saar) Percent change from a year earlier

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SLIDE 33

Manufacturing is growing again;

  • rders for capital goods moving up

Nondefense capital goods ex. aircraft

(orders in millions of dollars, 3-month moving average) 45 50 55 60 65 70 75 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 30 35 40 45 50 55 60 65 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17

ISM purchasing managers index

(net percent reporting increase)

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SLIDE 34

Industrial production is forecast to improve, yet remain below its historic rate of growth

  • 25
  • 20
  • 15
  • 10
  • 5

5 10

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Total industrial production

percent

Quarterly change (saar) Percent change from a year earlier Q4-2016 Blue Chip IP Forecast Actual Forecast 2016 2017 2018

  • 0.1

2.3 2.3

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SLIDE 35

Vehicle sales are anticipated to edge lower

10 11 12 13 14 15 16 17 18

1980 '85 '90 '95 '00 '05 '10 '15

Vehicle sales

millions of units

Blue Chip Light-Vehicle Sales Forecast Actual Forecast 2016 2017 2018 17.5 17.4 17.3

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SLIDE 36

Housing market tanked, moving up slowly

Housing starts

(millions of units, 3-month moving average, SAAR) 0.5 1.0 1.5 2.0 2.5 1999 '01 '03 '05 '07 '09 '11 '13 '15 '17 3 4 5 6 7 8 9 1 9 9 9 ' 1 ' 3 ' 5 ' 7 ' 9 ' 1 1 ' 1 3 ' 1 5 ' 1 7

Home mortgage rate

(percent, effective rate for all loans closed)

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SLIDE 37

House Price Indexes

(expanded data from the Federal Housing Finance Agency)

50 100 150 200 250 1991 1994 1997 2000 2003 2006 2009 2012 2015

Illinois U.S.

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SLIDE 38

The burden of mortgages has been receding

30 40 50 60 70 80 90 100

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Mortgage debt as a percentage of disposable income

percent

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SLIDE 39

Although improving, delinquencies on mortgages remain elevated

1 2 3 4 5 6 7 8 9 10

1980 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16

Delinquencies on Mortgages

percent of loans 90 or more days past due or in foreclosure

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SLIDE 40

Lending standards for mortgages have been easing recently

  • 20

20 40 60 80

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Senior Loan Officer Opinion Survey

net percentage of domestic respondents tightening mortgage loan standards

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SLIDE 41

The dollar’s exchange value peaked in 2002, before falling below earlier range and rallying

(Real Broad Trade-Weighted Exchange Value of the US$)

{March 1973=100}

80 90 100 110 120 1991 1996 2001 2006 2011 2016

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SLIDE 42

U.S. exports and imports decreased in 2016

0.0 0.5 1.0 1.5 2.0 2.5 3.0 1992 1995 1998 2001 2004 2007 2010 2013 2016 trillion $

Exports Imports

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SLIDE 43

Value of agricultural exports expected to slide in 2016 and rebound in 2017

20 40 60 80 100 120 140 160 FY1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 billion $

Exports Imports

Surplus

(*USDA projection)

2017*

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SLIDE 44

Survey results for January 2017

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SLIDE 45

Annual change in farmland values in Seventh Federal Reserve District

  • 30
  • 20
  • 10

10 20 30 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Percent

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SLIDE 46

Index of Seventh District farmland values

(1981=100) 100 200 300 400 500 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Nominal Inflation Adjusted

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SLIDE 47

Supporting factors for farmland values?

  • 1. Long-term stream of farm income
  • 2. Productivity and yield trends
  • 3. Mix of investors has broadened

(more diversifiers; recreational buyers returning)

  • 4. Off-farm income growth is important
  • 5. Government payments are lower and insurance

programs provide less protection

  • 6. Relatively low interest rates for agriculture
  • 7. Limited availability of farmland
  • 8. Opportunism
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SLIDE 48

Index of Seventh District Cash Rents Nominal vs. Inflation Adjusted (1981=100)

50 100 150 200 250 300 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Inflation Adjusted Nominal

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SLIDE 49

7th District Earnings to Price Ratio (left axis, 1981=1.0)

  • vs. Real Return on 10 Year Treasury Bonds

0.6 0.8 1.0 1.2 1.4

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

  • 2

2 4 6 8 10

E/P Ratio 10 year bond rate

Percent

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SLIDE 50

Real farm sector assets and equity still at levels above prior peak

500 1,000 1,500 2,000 2,500 3,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

billion 2009$

Debt Equity Assets

2017*

*USDA forecast

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SLIDE 51
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SLIDE 52

Index of agricultural loan demand for the Seventh Federal Reserve District (excluding real estate)

40 60 80 100 120 140 160 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

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SLIDE 53

Index of agricultural loan repayment rates for the Seventh Federal Reserve District

20 40 60 80 100 120 140 160 1980 1985 1990 1995 2000 2005 2010 2015

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SLIDE 54

Farm loan volume with “major” or “severe” repayment problems in Seventh Federal Reserve District

(fourth quarter of year) 2 4 6 8 10 1998 2001 2004 2007 2010 2013 2016 percent

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SLIDE 55

Real Net Farm Income

50 100 150

1 9 4 9 1 9 5 4 1 9 5 9 1 9 6 4 1 9 6 9 1 9 7 4 1 9 7 9 1 9 8 4 1 9 8 9 1 9 9 4 1 9 9 9 2 4 2 9 2 1 4

Billion 2009$

7G U.S.

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SLIDE 56
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SLIDE 57

Interest Expenses as Share of Agricultural Value of Production (% of total)

0% 5% 10% 15% 20% 1949 1959 1969 1979 1989 1999 2009

7G U.S.

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SLIDE 58

Interest rates charged on new farm loans in the Seventh Federal Reserve District

5 10 15 20 1975 1980 1985 1990 1995 2000 2005 2010 2015 percent

Farm operating Farm real estate

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SLIDE 59

The Federal Funds Rate is forecast to move up

1 2 3 4 5 6 7 8 9

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Target Federal Funds Rate

percent FOMC

slide-60
SLIDE 60

The Federal Funds Rate is anticipated to reach the neutral rate by the end of 2019

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SLIDE 61
  • The outlook is for the U.S. economy to expand at a

pace around trend through 2019

Summary

  • Employment growth is expected to slow with the

unemployment rate edging lower

  • Shrinking slack in the economy will help the inflation

rate gradually rise toward 2%

  • Growth in manufacturing sector should continue
  • Housing turned the corner, but still has far to go
  • Net exports remain a wild card given world conditions
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SLIDE 62
  • U.S. economic growth boosting demand at restaurants

and for animal products

Impacts on Agriculture

  • Subpar world economic growth and stronger value of the dollar

holding back U.S. agricultural exports

  • Plentiful grain and oilseed supplies pushing down prices and

feed costs for animal agriculture, but livestock prices down too

  • Some give on input costs but rising interest rates (still low)
  • Lower levels of farm income; farmland values adjusting
  • Strong past decade for agriculture tempers downturn
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SLIDE 63

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