Script of Presentation

Script of Presentation
1. A Look at Overall Economic Conditions
a. Real GDP Growth (and components)
Today’s presentation will start off by looking at current economic conditions. The
discussion will then continue to the current monetary strategies being used and its
effects on the economy. After looking at the tools in use today we will put forward our
recommendation on how the tools of monetary policy both traditional and modern,
should be used and the impacts that it will have on the economy going forward. Looking
at overall economic activity, Starting with Real Gdp. Real GDP growth in quarter 3 was
3.0%. The fourteenth straight quarter of growth. GDP has seen moderate growth with
this trend expected to continue.
i. Consumption
Consumption within the United States rises and falls regularly based on seasonal and
annual purchasing motives. With consumption staying on a moderate increasing growth, and
our supply remaining persistent, consumption of production has been on a constant increase
which has resulted our economy to see a slight increase in prices and overall production.
This chart also reflects mutually for Durable and non-durable goods. Their charts stay
consistent.
1. Consumer Sentiment
Consumer sentiment has been on a constant increase for about 9 years now, since the housing
crisis took place. Based on the current trent, we can conquer consumer sentiment will continue
to increase.
b. Net Exports
c. The real GDP measures consumption, government spending, investments, and
exports minus imports. Exports contribute to the measurement of consumption.
This year, our net exports are reaching close to an all time height reaching the
max which took charge in 2015.
d. Government Spending
i. Possible Tax Plan—Fiscal Policy
e. Investment
i. Residential (Housing)
ii. Non-Residential
1. Despite stimulative efforts via monetary policy, business
investment has been very lackluster in recent years. Investment is
being weighed down by a strong dollar, lower energy prices, and
potential market uncertainty. Even with the extremely low interest
rates, investment is just now getting back to pre recession levels
of over $500 billion annually.
2. This poor investment spending is headlined by nondefense capital
goods orders which is a closely watched proxy for predicting
business spending. This value has been falling for three straight
years: declining 1.9% in 2014, 3.1% in 2015, and 2.2% in 2016.
While this is definitely concerning, the value rose to a positive 3%
in first quarter 2017 which could be signalling a potential uptick.
3. Industrial production in the United States rose 0.3 percent in
September. The continued effects of the recent hurricanes
combined to hold down the growth in total production in
September by 1/4 percentage point. However, we believe this is a
transitory issue that will not affect long term production. For the
third quarter as a whole, industrial production fell 1.5 percent at an
annual rate; but excluding the effects of the hurricanes, we believe
the index would have risen at least 1/2 percent. The industrial
production is extremely important to look at because it is often one
of the first signs of potential inflation. When the supply of basic
materials get tight, either for their manufacturers or for the
corporate clients who buy them, the cost of the materials will rise.
Rises in the cost of commodities and materials will begin to get
passed on down the line, ending up with individual consumers
having higher-cost products. For the last few years production has
been stagnant at best, while actually declining in recent years.
4. In addition to production, it is also important to look at capacity
utilization. The capacity utilization rate measures the proportion of
potential economic output that is actually realized. Displayed as a
percentage, capacity utilization levels give insight into the overall
slack that is in the economy at a given point in time. The latest
values show a utilization rate of just 76%, 5% lower than pre
recession levels and over 3% lower than November 2014.
Despite the onset of monetary stimulus leading to historically low
interest rates, the lack of utilization is causing inflation to remain
below target levels. This slack in the economy shows that the lack
of production is likely not due to fiscal policy but due to other
factors.
iii. Inventories
1. Business inventories is a figure that tracks the dollar amount of
inventories held by retailers, wholesalers and manufacturers
across the nation. Business inventories are essentially the amount
of all products available to sell to other businesses or the end
consumer. This figure can be used as a potential indicator to
predict economic growth. If, for example, inventory growth is less
than sales growth, production demand will increase, thus creating
economic growth . The opposite could happen should inventory
accumulation occur, which would cause national production to
slow.
2. The inventory to sales ratio is the number of months it would take
for the business to sell off their current accumulation of products.
This figure has risen almost 10% over the last five years which
shows one of two things: either demand is drying up to the point
where businesses have leftover products, or businesses are
anticipating an economic surge and are trying to be prepared.
2. Labor Market Conditions
a. Unemployment
b. U3, U6, Labor Force Participation Rates (25-54)
c. Wages (and wage growth)
i. (perhaps as an indicator of future inflation)
Unemployment is currently at 4.1% which is under the natural rate. U6 is reported at being
7.9%, the lowest it has been since December 2006. U3 and U6 unemployment are now below
pre-recession levels and as reported by various regions and industries the labor markets are
tightening up. Employers are claiming to have a hard time in finding skilled workers and it has
an impact on their revenues. Tightening labor markets should be putting upward pressure on
wages, however wages have stayed stagnant and have not grown. Labor Force participation
rate is still relatively low but has been trending back up.
3. Explanation of Dual Mandate
a. While unemployment rates have been very positive, it is important to remember
that unemployment is not our only goal. The dual mandate of the fed says that
we must be concerned with both unemployment AND price stability. Traditionally,
low unemployment numbers leads to higher inflation.
4. Inflation
a. However, this is not the case. While employment is almost at full capacity,
inflation has been below the 2% target for nearly a decade. There are two main
measures to look at when calculating inflation: the personal consumption
expenditures index, known as PCE, and the consumer price index. The main
difference between the two measures it that PCE tries to account for substitution
between goods when one good gets more expensive. This is why PCE often
gives a lower inflation rate, which we believe is more realistic. Within PCE there
is a so called headline measure and a core measure, which strips out volatile
sectors such as food and energy. Both indexes result in an inflation rate
consistently below the 2% target rate.
5. Exchange Rate
a. Differentials in inflation
i. U.S. has low inflation when compared with international average. so it
makes our currency higher in value compared to others
b. Differentials in interest rates
c. An interest rate differential is a difference in interest rate between two currencies
in a pair. If one currency has an interest rate of 3 percent and the other has an
interest rate of 1 percent , it has a 2 percent interest rate differential.
i. U.S. also has a low interest rate which means that foreign investment
should be low, which would cause the exchange rate to lower. (but it
isn’t).
ii. The value of the us exchange rate has actually increased. This has
resulted from the Federal funds rate increasing which lowers inflation
which keeps the value of the dollar higher than foreign countries.
1. This has its pros and cons, on one hand a higher exchange rate
would decrease exports while on the other hand would increase
import.
2. Disclaimer (Our current economy relies more on imports than on
exports)
3. The United states interest rate has increased 0.25% within the last
year.
d. http://www.investopedia.com/articles/basics/04/050704.asp
e. Low Interest rates then we could attract
6. Interest Rates
i. Fed Funds Rate
Since about 2009/2010 the federal funds rate has been averaging lower percentages than past
years.This decrease began around the beginning of the Great Recession, about 2007/2008.
However, over recent years the economy has been steadily improving, which has allowed for an
increase in the Federal Funds rate. Looking at today’s rate, one will notice that currently the
Federal Funds Rate is at an upward trend, which also correlates with an increase in interest
rates. However, generally high interest rates and low inflation indicate the economy is doing
well. Currently, the norm does not apply because the economy is experiencing both low interest
rates and low inflation. Despite this, it is important that one understands that the interest rates
are increasing, despite having been below 2% over the past years because when determining
future policy recommendation, not acknowledging the current trends will result in unexpected
results.
7. Monetary Conditions
a. Monetary Base
In addition to the Federal Funds Rates, one must also go over the current monetary conditions
when making important decisions about adjustments in the current federal reserve policies.
Since about 2008m the US economy has been experiencing a sharper increase in the monetary
base, which relates to the recent Great Recession. However, more recently, it looks as though
the yearly increase is not as large as it was in the past. This is also true of the different levels for
2017. Overall, this indicates that there is a larger amount of money supply among consumers
and the central bank. The fact that the increase is not as large as it has been in recent years
indicates the improvement in the economy since the great recession.
b. M2 (and perhaps Divisia Index)
Other than minor adjustments over the years, the overall trend of the M2 Money Supply Curve
has been increasing by a relatively similar rate. This indicates that not only are cash and
checking deposits increasing, but also other forms of money, such as savings deposits, money
market securities, mutual funds, etc. are also increasing. When making our policy decisions, it is
important to note that this is currently increasing at a relatively similar rate because since the M2
money supply has been increasing as the economy increases, it also shows that the economy is
continuing to increase. Looking at the graph, one will notice that there are larger increases in
2001, 2009, and 2012. These large increases in the M2 money supply relate to economic
distress, such as the after effects of 9/11 and the actions taken to counteract the recession.
Because there are not any large increases, it is obvious that there are not any major economic
issues currently going on that would have a major effect on our policy recommendations as a
result of the changes in the M2 Money Supply.
8. Fed’s Balance Sheet
a. Must talk about the unwinding of the balance sheet
b. Yield Curve
The Fed announced its first unwinding will be 10 billion a month then raised to a max of 50
billion a month for a total of 600 billion a year by letting assets mature and not reinvesting the
principal but not selling.Policy Recommendations. What are the options that could be
considered?
c. Change the Fed Funds Rate target (increase, decrease, unchanged)
i. Unchanged. Wait for inflation and production levels to rise.
d. Normalization of the Balance Sheet
i. Either by selling assets or just not rebuying them
Using forward guidance as its main tool when unwinding the balance sheet. Let the MBS and
t-bills mature and slow re-investment as the main way of unwinding the balance sheet. It will be
a slow process but this is the least riskiest. The Fed should pay close attention to how the
unwinding will affect bond and equity markets. Currently, Spreads between 2 year and 10 year
bonds is the narrowest it has been since the recession. Small spreads can sometimes be an
indicator to an inverted yield curve, which can also be an early symptom of a recession.
9. How is our recommendation consistent with the Fed’s Dual Mandate?
I need help with this.
10. Some quick discussion of the expected effects of your policy recommendation.
a. Output (GDP)
b. Labor Market Conditions
c. Inflation
i. When looking at the various economic indicators, we believe the economy
is preparing for additional growth. By allowing this natural growth to occur,
the inflation should rise closer to, or slightly above the 2% levels.

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