FEDERAL RESERVE BANK

OF PHILADELPHIA

Economic Update

The Entrepreneurship InstituteAnnual Presidents’ Forum of Philadelphia

June 6, 2012

Luke A. Tilley

Today’s Agenda

• National Economy

• Regional Economy

• International

• Monetary Policy

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0FOMC Forecast - Real GDP Growth

Perc

ent

(%)

Real GDPq/q

Real GDPy/y

Source: Bureau of Economic Analysis Federal Reserve Board, FOMC Minutes , April 2012

LongRun

Real Personal Consumption Expenditure Growth

'09

'09

'09

'09

'10

'10

'10

'10

'11

'11

'11

'11

'12

'12

'12

'12

'13

'13

-2

-1

0

1

2

3

4Q

/Q A

nnualize

d C

hange (

%)

Source: Federal Reserve Bank of Philadelphia, Survey of Professional ForecastersLast Point Plotted: Historical 2012:Q1, Forecast 2013: Q2

Personal Consumption & Retail Sales

'00 '02 '04 '06 '08 '10 '12-15

-10

-5

0

5

10

15

Year-

over-

Year

Change (

%) Retail Sales

Personal Consumption“The Consumer”

Source: Census Bureau, Bureau of Economic AnalysisLast Point Plotted: April 2012

Fixed Investment Growth Forecast

'09 '09 '09 '09 '10 '10 '10 '10 '11 '11 '11 '11 '12 '12 '12 '12 '13 '13-25

-15

-5

5

15

Q/Q

Annualize

d C

hange (

%)

Source: Federal Reserve Bank of Philadelphia, Survey of Professional ForecastersLast Point Plotted: Historical 2012:Q1, Forecast 2013: Q2

'00 '00 '01 '01 '02 '02 '03 '04 '04 '05 '05 '06 '07 '07 '08 '08 '09 '09 '10 '11 '11 '1240

45

50

55

60

65

70

75

Billions

($)

Source: Census Bureau & Haver Analytics (NAICS)Last Point Plotted: March 2012

Shipments

New Orders

Manufacturers’ New Orders & ShipmentsNondefense Capital Goods

Consumer and C&I Loans

'88 '91 '94 '97 '00 '03 '06 '09 '120.0

0.5

1.0

1.5

2.0

($tr

illions)

Source: Haver Analytics with Break adjusted % Changes reported by FRBLast Point Plotted: April 2012

C & I Loans

Consumer Loans

'07

'07

'08

'08

'09

'09

'10

'10

'11

'11

'12

'12

'13

'13

'14

'14

-800

-600

-400

-200

0

200

400

2

3

4

5

6

7

8

9

10FOMC Forecast – Labor Market

Avera

ge M

onth

ly C

hange (

thous.

)Perce

nt (%

)

Unemployment Rate (%)

Nonfarm Payrolls

LongRun

Source: Bureau of Labor StatisticsFederal Reserve Board, FOMC Minutes , April 2012

Monthly Private Employment Growth – U.S.

-50

0

50

100

150

200

250

300277

254

147

8782

2010Source: Bureau of Labor Statistics

Last Point Plotted: May 2012

2011

-2

0

2

4

6Perc

ent

(%)

Core PCE

PCEPrice Index

Source: Bureau of Economic Analysis Federal Reserve Board, FOMC Minutes , April 2012

LongRun

FOMC Forecast – Inflation

SPF: Inflation Expectations

'88 '89 '91 '93 '95 '96 '98 '00 '02 '03 '05 '07 '09 '10 '12-2

0

2

4

6

8

Perc

ent

(%)

Source: BLS, Philadelphia Fed Survey of Professional ForecastersLast Point Plotted: BLS - 2012:Q1; SPF’s 10 yr. CPI Forecast - 2012-2021

10-yr CPI Inflation Expectation

Y/Y CPI Inflation

Summary of the FOMCNear-Term Forecasts

• GDP – Expected growth rate of 2.1% - 3.0% in 2012,

2.4% - 3.8% in 2013, and 2.9% - 4.3% in 2014

• Unemployment Rate - Expected rate of 7.8% - 8.2% in

2012, 7.0% - 8.1% in 2013, and 6.3% - 7.7% in 2014

• Inflation - Expected to remain contained 1.8% - 2.3% in

2012, 1.5% - 2.1% in 2013, and 1.5% - 2.2% in 2014

Today’s Agenda

• National Economy

• Regional Economy

• Monetary Policy

Three month Annualized Growth – April 2012Philadelphia Fed Current Economic Activity Indexes

> 4%3% to 4%2% to 3%0.5% to 2%-0.5% to 0.5%-2% to -0.5%-3% to -2%<-3%

Predictions of change in Philadelphia Fed Current Economic Activity Indexes over next 6 months – April 2012

Philadelphia Fed Leading Economic Activity Indexes

> 4%3% to 4%2% to 3%0.5% to 2%-0.5% to 0.5%-2% to -0.5%-3% to -2%<-3%

'00 '02 '04 '06 '08 '10 '12-60

-40

-20

0

20

40

60

80

Diff

usi

on Index

Third District Manufacturing – General Activity Index

Source: Business Outlook Survey – Philadelphia FedLast Point Plotted: May 2012

6 Month Ex-pected

May ‘12= 15.0

Current Activ-ity

May ‘12 = -5.8

National & Regional Unemployment

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '03 '04 '05 '06 '07 '08 '09 '10 '110

2

4

6

8

10

Source: Bureau of Labor StatisticsLast Point Plotted: U.S. – April 2012 ; PA – March 2012

U.S. 8.2%

PA 7.5%

constr/mining

manufacturing

trans/trade/utils

information

finance

business/prof

health & edu

hospitality

other svcs

gov't

-20

0

20

40

3.0 4.2

12.1

-10.0

8.3 6.7

45.8

19.1

8.1

-17.3

Y/Y

Job G

row

th (

thousa

nds)

Source: BLS

Year-over-Year Job Growth by SectorPA, NJ, DE – April 2012

Total Jobs = 86.9Total Private Jobs = 104.7

Pennsylvania Housing Starts

'89 '93 '96 '00 '04 '08 '120

10

20

30

40

50

60

Hou

sing

Sta

rts (

thou

sand

s)

Source: Bank of Tokyo Mitsubishi UFJ – Housing StartsLast Point Plotted: 2012: Q1

'92 '96 '00 '04 '08 '12-10

-5

0

5

10

15

20

Y/Y

Chan

ge in

FH

FA H

ome

Pric

e In

dex

(%)

Source: Federal Housing Finance AgencyLast Point Plotted: PA - 2012: Q1; Phila Metro Division – 2012:Q2

Pennsylvania

Regional Home Prices

Philadelphia Metro

Division

Mortgage Delinquencies – 90+ and in ForeclosureApril 2008

Source: LPS Applied Analytics

Mortgage Delinquencies – 90+ and in ForeclosureApril 2012

Source: LPS Applied Analytics

Today’s Agenda

• National Economy

• Regional Economy

• International

• Monetary Policy

Euro Area GDP Share and Growth

Germany; 28.2

France; 20.9Italy; 16.6

Spain; 11.1

Netherlands; 6.5

Greece; 2.3All Others;

14.5 (%) q/q

Euro Area 17 0.07

Germany 2.06

France 0.18

Italy -3.21

Spain -1.28

Netherlands -0.63

Real GDP Growth 2012Q1

Share of Euro Area GDP 2011Q1

Source: EuroStat

'06 '07 '08 '09 '10 '11 '1235

40

45

50

55

60

65

Index

China Manufacturing Index

Source: China Federation of Logistics & PurchasingLast Point Plotted: May 2012

'05 '06 '07 '08 '09 '10 '11 '12 ￥ 6.00

￥ 6.50

￥ 7.00

￥ 7.50

￥ 8.00

￥ 8.50

Exchange Rate Regimes Chinese Yuan (¥/$)

Source: Federal Reserve BoardLast Point Plotted: June 1, 2012

Floating-Peg Rate

Soft-PeggedRate

Floating-Peg Rate

RecentDepreciation

Today’s Agenda

• National Economy

• Regional Economy

• International

• Monetary Policy

Fed Transparency: A Long Process

1994 – First announcement of policy decision (policy changes only)2000 – Regular post meeting statements, regardless of policy2002 – Post meeting statements include voting information2004 – FOMC minutes released after three weeks (from six)2007 – Economic projections of FOMC participants released2009 – Economic projections include long-run tendencies2011 – Chairman starts giving quarterly press conferences2012 – Statement of long run goals and strategy

Start releasing assessments of appropriate policy

FOMC Statement of Longer-Run Goals and Policy Strategy

Source: FOMC Statement of January 25, 2012

• The FOMC is committed to statutory mandate to promote• Maximum employment, stable prices, moderate long-term interest rates

• Longer run inflation is mainly influenced by monetary policy, so a nominal target is appropriate• Sets an inflation target of 2 percent in annual change of PCE price index

• Maximum employment determined by non-monetary factors, so a nominal target is not appropriate• Determined by labor force dynamics, fiscal policies, and more

• Inflation and employment goals are generally complementary• When they are not, the FOMC takes a balanced approach

5045

0

1

2

3

4

5

6Federal Funds Effective Rates & Limits

Source: U.S. Treasury Department, Haver AnalyticsLast Point Plotted: Week Ending April 25th, 2012

Fed Funds Ef-fective Rate

Fed Funds Rate

Upper & Lower

Limits

FOMC Projections of Appropriate Policy

2012 2013 2014 2015 20160

1

2

3

4

5

6

7

8

3 3

5

4

2

3 3

7

4

January 2012

April 2012

Num

ber

of

Part

icip

ants

Source: FOMC Statements of Jan 2012 and April 2012FIG. 2 Overview of FOMC Participants’ Assessments of Appropriate Monetary Policy

Appropriate Timing of Policy Firming:Year of first increase in federal funds rate

Percent

FOMC Projections of Appropriate PolicyAppropriate Pace of Policy Firming:

Year-end federal funds rate

2012

2012

2012

2013

2013

2013

2014

2014

2014

Longer Run

Longer Run

Longer Run

0

1

2

3

4

5

6

Source: FOMC Statement of April 25, 2012FIG. 2 Overview of FOMC Participants’ Assessments of Appropriate Monetary Policy

QuestionsLuke A. Tilley, Ph.D.Regional Economic Advisorluke.tilley@phil.frb.org

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FEDERAL RESERVE BANK

OF PHILADELPHIA

The Federal Reserve’s Toolsfor Monetary Tightening

• Higher interest on Bank Reserves

• Reverse Repurchase Agreements

• Term Deposits

• Redemption and sales of long term assets: Treasuries,

Agency Debt, MBS

constr/mining

manufacturing

trade/trans/utilities

information

finance

business/prof

health & edu

hospitality

other svcs

gov't

-20

-10

0

10

20

7.1 6.17.8

-1.5

3.50.9

16.914.2

0.4

-16.8

Y/Y

Job G

row

th (

thousa

nds)

Total Jobs = 45.7Total Private Jobs = 63.0

Source: BLS

Year-over-Year Job Growth by SectorPennsylvania – April 2012

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97-2

0

2

4

6

8SPF: Long Term Inflation Expectations

Pe

rce

nt

(%)

10-yr CPI Inflation Expectation

y/y CPI Infla-tion

Source: BLS, Philadelphia Fed Survey of Professional ForecastersLast Point Plotted: 2012: Q2

1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/120.0

1.0

2.0

3.0Bond Market Implied Inflation Expectations

Pe

rce

nt

(%)

Source: Haver Analytics Using Treasury Constant Maturity YieldsLast Point Plotted: April 2012

10 Year Im-plied Inflation

Rate

'00

'00

'01

'02

'03

'03

'04

'05

'06

'06

'07

'08

'09

'09

'10

'11

'12

'12

0

1

2

3

4

5

6

7

8

9Perc

ent

(%)

Source: Federal Reserve Board, Moody’s, FRB PhiladelphiaLast Point Plotted: 2012:Q1 (historical), 2013:Q2 (forecast)

Survey of Professional Forecasters: Treasury yields move up

AAA Corp

10 year T-note

3 month T-bill

BAA Corp

Source: National Association of REALTORS, Census BureauLast Point Plotted: Home Sales 2011:Q4, Housing Starts 2012:Q1

'80'81'83'85'87'88'90'92'94'95'97'99'01'02'04'06'08'09'110.00

0.50

1.00

1.50

2.00

2.50

3.00

0.0

2.0

4.0

6.0

8.0

Millio

ns

Millio

ns

U.S. Home Sales and Starts

Housing Starts(left)

Existing Home Sales (right)

US Dollar versus Major Currencies

1 11 21 31 41 51 61 71 81 91 101

111

121

131

141

60

70

80

90

100

110

120

Source: Federal Reserve Board Last Point Plotted: March 2012

Mar

ch 1

973=

100

'07 '08 '10 '12 0

25

50

75

100

125

150Crude Oil Prices

WTI

$/b

arr

el

Source: Haver AnalyticsLast Point Plotted: Week of May 11, 2012

Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 123750

4000

4250

4500

Separa-tions

Hires /

Job Openings Labor Turnover SurveyTh

ousa

nds

Source: BLS/Haver Analytics Last Point Plotted: March 2012

Weekly Initial Unemployment Insurance Claims

'00 '00 '01 '01 '02 '02 '03 '03 '04 '05 '05 '06 '06 '07 '07 '08 '09 '09 '10 '10 '11 '11200

350

500

650

800

370

Num

ber

of

Cla

ims

(thousa

nds)

Source: Department of Labor, BLSLast Point Plotted: Week of May 19, 2012

Initial weekly claims

4 week moving aver-age

Total Unemployed & Long Term Unemployed

'00 '00 '01 '01 '02 '02 '03 '04 '04 '05 '05 '06 '07 '07 '08 '08 '09 '09 '10 '11 '11 '120

4

8

12

16

Num

ber

of

Unem

plo

yed P

eople

(m

illions)

17%Apr. ‘07

Source: BLS, Department of LaborLast Point Plotted: April 2012

Unemployed 0-26 wks

Long-term Unemployed (over 27

wks)

41%Apr. ‘12

'99

'05

'11

'17

'23

'29

'35

'41

'47

'53

'59

'65

'71

'77

'83

'89

'95

'01

'07

0

500

1,000

1,500

2,000

2,500

3,000

Tota

ls (

$ B

ill)

Treasuries Short-Term

Federal Reserve Balance Sheet: Selected Assets

Source: Federal Reserve BoardLast Point Plotted: April 2012

Liquidity Swaps

GSE Securities

Treasuries Long-Term

LiquidityPrograms

GSE MBS

'07

'07

'07

'07

'08

'08

'08

'08

'09

'09

'09

'09

'10

'10

'10

'10

'11

'11

'11

'11

'12

0

500

1,000

1,500

2,000

2,500

3,000

Tota

ls ($

Bill

) Federal Reserve Balance Sheet: Selected Liabilities

Currency in Circulation

Source: Federal Reserve BoardLast Point Plotted: April 2012

Treasury Balance and Other Liabilities

Bank Reserves

Monetary Policy NormalizationExpected Sequence of Key Elements

1. Cease reinvesting some or all payments of principal on the securities

holdings in the SOMA

2. Modify forward guidance on the path of the federal funds rate and

initiate temporary reserve-draining operations

3. Begin raising target for the federal funds rate, and make adjustments

to interest on excess reserves and excess reserve levels

4. Commence sales of agency securities from the SOMA,

communicated to public, and at a steady and gradual pace

5. Eliminate the SOMA’s holdings of agency securities over a period of

three to five years

Source: Minutes of the FOMC June 21-22, 2011