Exploring Economic Conditions and the Implications for Monetary Policy
October 11, 2019
- Takeaway: The economy faces elevated risks, including trade disruptions and geopolitical concerns. But overall, the economy is close to where many policymakers expected it would be, with the U.S. at full employment and inflation trending toward the Fed’s target.
Excerpt: “Overall, then, the economy has evolved about as expected, despite the unanticipated increase in tariffs and the slower growth of exports and business fixed investment. Moreover, recent monetary policy easing is likely to provide some stimulus over the next several quarters. … In sum, the U.S. economy is now very close to meeting the Fed’s Congressional mandate of full employment and stable prices (which we define as 2 percent inflation).”
- Takeaway: Strong consumer spending – bolstered by plentiful jobs, growth in personal income, and increases in household wealth – has fueled the U.S. economic expansion. The key question is, will consumption continue to offset other challenges?
Excerpt: “Sustaining growth at potential depends on the U.S. consumer continuing to offset the weakness we are seeing in exports and business fixed investment. … While U.S. consumers have been resilient to date, continued resilience is not guaranteed. So it is important to consider whether the economy can continue on its quite favorable path – with growth around potential, tight labor markets, and inflation near the Fed’s target of 2 percent.”
- Despite risks to growth, policymakers can afford to be patient and evaluate incoming data before further cutting interest rates. Right now, more cuts don’t appear needed, as many forecasters expect growth close to potential – and policy is already accommodative.
Excerpt: “My forecast for the economy does not envision additional easing being necessary. However, should risks materialize and economic growth slow materially, to below the potential rate, I would be prepared to support aggressive easing… To me, it seems appropriate to continue to closely monitor incoming data to determine if the forecast of growth around potential is likely to be achieved, or if the risks I have outlined are indeed materializing.”
- Takeaway: Regarding financial indicators, many see the decline in 10-year Treasury bond yields as a sign of an impending slowdown, but an alternative explanation is that low foreign long-term rates are leading to lower U.S. rates. Other financial indicators run counter to worries about a slowdown, including robust stock prices and the restrained spread between corporate and Treasury bond yields.
Excerpt: “Very low (and in some cases negative) foreign long-term rates are playing a role in pushing down U.S. long rates, as foreign investors move money from low-rate economies into the (relatively) high-rate U.S. markets, pushing down U.S. yields. … Other financial indicators do not portend a significant slowdown.”
- Takeaway: There are risks to “easing too much,” or lowering interest rates too aggressively. One risk involves unintended consequences of chasing higher returns or “reaching-for-yield.”
Excerpt: “While the risks to the global and U.S. economies remain, there are also risks to easing too aggressively, as I’ve highlighted in previous speeches. Ever-lower interest rates could encourage reaching-for-yield behavior at exactly the wrong stage of the economic cycle. This remains an important consideration factoring into my views on the elements policymakers must weigh and balance at this complex time for our economy.”