Regional President Speech

DOMESTIC ECONOMIC CONDITIONS Cathy E. Minehan President and Chief Executive Officer Federal Reserve Bank of Boston Presented to The Global Business Alliance June 16, 2003 - Michigan SRC Index of Current Conditions - Michigarn I=ndex« of Consumer Expectations jJ- . CM J'ftiw I . 0 ~ fv .fLµ)) ~ • W,U. ~ «au. /r,~ ~vtUd ~ Md[f.f: Note: ALL Jsfl'l ~ - /lo-,t, -Pf.f • • of reboun~ YJ(J,,,fL, ~ ~-- ~ J'l). '7 1s 1n expectations component - Dow Jones Industrial Average - S&P 500 I Up 12.4% since 1/2/031 .u-- ~ 'f · ~ q, Ho I CJ- lrr,:.L 2000-2003 ~i, , . I l' l·~j I I ~14)~ Up 9.3% since 1/2/031 Total decline: / i) >40% M ~ cf~ .r. "A-) yv·r J'}(,f(,-). ,, - 13'/o f , I _ 30 . . . I • II II II /:1\,. :1 i,i,i '. i) I) ) , :1 , i ,: 1 ( .lr: 1 1 ·1:(r J: !i - IO-year A spread - IO-year BBB spread - IO-Year Junk spread (right scale) ■ I -family Starts ■ I-family Permits ■ 03:Ql New Home Sales . 1-'?f1fu avg. Ml~ A .lui:;L;!f ~ - Smoothed Growth in Orders for Nondefense Capital Goods 4aw.fl- ~ ~Y- • 1-qtr. Growth Rate - 4-qtr. Growth Rate Recent sales (May) have been boosted by~,in an effort to reduce inventories to desired levels. 1~J1'· Nominal Bro/ a d Dollar Index (right axis) u» Expected Foreign Output ~ro~~hy ~ (Trade-Weighted) \~ /"',_ ~~ ~ l<Llu/ ad- c{ ~ tJtf-y//JoJ - Civilian Unemployment Rate - Personal Savings Rate Uncertainty about how stimulative the tax cut will be Greater than 1.0 % 0.5 % to 0.9 % ... And weakness here will likely offset at Less than 0.5 % least part of the federal stimulus No Structural Sfzltt ~ ~Yo&,r) Deficit Sources: National Conferen e of State Legislatures, ~ts, Bureau of Economic Analysis. Real GDP Forecasts Range of Blue Chip Forecasters Blue Chip Economic Indicators, 6/ 10/03 Real GDP less potential GDP= "Output Gap" (CBO estimate) 2003:Q2 (forecast) Core CPI 2.7% (2001) Estimate of "zero" inflation, given measurement biases ----------------------------------------------------------------------------------------------------------------------------------------------- Summary of Economic Conditions • Pluses tr ,N•fJ,4lh - Sentiment, financial market improvements - Federal spending and tax cut stimulus - Ongoing monetary stimulus - Oil prices settled down (although still high) - Lower exchange rate (helps exports) • Minuses - Real data on spending, employment weak - State and local weakness offs ets federal strength - Monetary policy perhaps not as stimulative as it was - Excess capacity remains, inflation slipping down - Weakening outlook for EU, Asia 17 About Deflation • What is it? - A sustained general decline in the prices of all • ,; '. 1, . . ;.,-?f . (.,V ,I: :, /40 Ii;,, goods and servi ces - 1 I J · l; ;j ~.f ,, ';,. ,}',;. ·.'(~ fi/1 I I ~ 'I ,·•/ /.1".,'1i'/ -,{,{ /J.r, .. : -'<'. - Compare to disinflation: a decrease in the rate 1,/,lt.1; •, /" of inflation of goods and services .· :,\,;·. 1 1 I - Currently, we run a risk of further disinflation '/ - The risk of deflation is smaller and farther off - Of course, the risk increases as we approach zero inflation 18 About Deflation • How. Big a Risk? - Not that likely: most prices still rising • Services prices still rising > 3 % in 2003 - Services are 60% of consumption • Nondurable goods prices still rising at nearly 3% • It's really only durable goods prices that are falling - Because the efficiency with which we manufacture them is high and rising faster than other goods and services - In general, always a mix of price movements, with some rising faster, some rising slower, some falling (-- In the long run the Fed determines the overall rate \. ;.:~. f.ti:1rice increase-,J-w hich probably should be a •~sitive number 19 A\ Nondurable , I; Goods* fu-d,~, ~ rdr~ M, - - -- - -- - -- -- - -- -- -- -- - -- -- -- -- -- - -- -- - -- .: :. ~ -- -, - c;-.- J- - -- -- -- -- -- -- -- -- - Durable Goods Deflation,continued • Why is deflation a problem? - An indication of serious economic weakness J! • That's how the economy would get to deflation • Could include falling asset prices--stocks, houses - Reduces collateral values, possibly limiting loan growth - Makes inflation-adjusted interest rates high • "Zero bound" on nominal interest rates - 1 I . f L f .. . . '. t /·7,. r•(.· '' 1 ·'' .. ~ 1 . 11 . .( 1 r • ! ( . 1 ; / f 1 . 1 , , . ; t , t . '{ i t/ ,:jt,; 11,. ·~1 '.~.-.I) r:' ,;f,, • l I >I{ 1' ,f·, t' /i 1 f ! l ' .t / } ,,; I! " J ' ( • J -fl · l . t't ~·' .. ...£(.-f·,. {.;ot, ," ,, ' . " • 'Phis would-be an ~;rduring.pl"O!Jl_~m; notjust a +,ev,{d/.A~t· trans,l j i • u• o . . ·.n_ , - ,.,,,, ., ,~ / i• ssue / . .. ::.:;,•·' \, \ ' •, · ''·· .s• . ( ri , il / " !.' ' ,t •.·--,• v l v,, J ' f t, ! f, •J / t1•.'l,.ti ,f,.1fil:l f'.4.A·lt -· · v· ,)}, 1 ,1 • { ') " ·•"" t&AL ,,.{H, 'l l!ti, 4 '.·• \. : • . {,r I'/ { · r""'""' ..: / t·. . -·"f .. ~ ,,_ ~- 1, ;·' .1'" I Lf-( .. J, I ' i/ .J! ... J f', ,, .' ,·' I;,. ♦· ' . - 1 21 J '11

Cathy E. Minehan (2003, June 15). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030616_cathy_e_minehan

@misc{wtfs_regional_speeche_20030616_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {2003},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030616_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}