Economic Outlook

1. March 20, 2014 Bloomington, Illinois David Oppedahl Senior Business Economist 312-322-6122 david.oppedahl@chi.frb.org Economic Outlook

2. Federal Reserve System

3. Board of Governors of the Federal Reserve System • 1 • ? Janet L. Yellen Chair Vacant Vice Chair • 4 • 3 • 5 • 6 • ? Daniel K. Tarullo Jeremy Stein Sarah Bloom Raskin Vacant Jerome Powell

4. Goals of Monetary Policy • Price stability -- low and stable inflation • Economic growth • Low unemployment • Moderate interest rates

5. The “Great Recession” ended in June 2009 andthe economy grew by 2.5% in 2013

6. Chicago Fed National Activity Indexshows hesitant growth since 2009 (standard deviation from trend growth, 3-month moving average) Above Trend Growth Below Trend Growth

7. In December 2008, the FOMC lowered the Fed Funds rate target to a range up to 0.25% Federal Funds Rate (effective), Yields in percent per annum

8. Credit spreads between Corporate High Yield securitiesand Corporate Aaa securities have been edging lower

9. Quantitative easing was necessary

10. Food price increases smaller than core inflation (less food and energy)

11. Oil prices are still high,yet remain below peaks

12. Real natural gas prices higher but remain low

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

14. Employment fell by over 8.7 million jobsbetween December 2007 and February 2010,but has added over 8 million jobs since then

15. After peaking in October 2009,the unemployment rate has fallen by3.3 percentage points

16. The unemployment rate is forecast to edge lower

17. The path of this recovery has been below past deep recession recovery cycles average annualized growth: 5.4% average annualized growth: 5.3% average annualized growth: 2.4%

18. Growth in real GDP boosted by inventories in 2013

19. Gross Domestic Product is forecast to growabove trend in 2014 and 2015

20. The stock market has improved since March 2009,exceeding previous peak

21. Existing home prices fell hard and are up from their low

22. Housing market tanked and moving up from bottom Housing starts (millions of units, 3-month moving average, SAAR) Home mortgage rate(percent, effective rate for all loans closed)

23. Manufacturing is looking up;orders for capital goods picking up ISM purchasing managers index(net percent reporting increase) Nondefense capital goods ex. aircraft (orders in millions of dollars, 3-month moving average)

24. The dollar’s exchange value peaked in 2002, before falling below earlier range

25. U.S. trade exceeded earlier peaks(billions of dollars, SA)

26. Value of agricultural exports expected to rise in 2014 2014* Exports Imports Surplus (*USDA projection)

27. U.S. Net Farm Income(billion dollars, 2009 $ for inflation adjustment) Real 2014* Nominal *USDA forecast

28. Annual change in farmland values inSeventh Federal Reserve District

29. Year over year changes by quarter in farmlandvalues in the Seventh Federal Reserve District

30. Farmland Value Indexesfor Seventh District States(1981=100) Indiana Wisconsin Illinois Iowa

31. Interest rates charged on new farm loans in the Seventh Federal Reserve District Farm operating Farm real estate

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

33. Balancing Aggregate Demand And Supply • Lower interest rates increase aggregate demand • Relevant rates are long-run real interest rates facing households and businesses • Long-run private-sector real interest rates = expected average short-term nominal rate minus expected average inflation rate plus risk premia (duration, credit, inflation uncertainty) • Two prongs to Fed actions in 2012 • Asset purchases to shrink term premia • Forward guidance to lower expected short-term rates

34. Recent Monetary Policy Actions • Tapering of asset purchases began in December 2013 • Monthly reductions of $10 billion in asset purchases • Step 1: $35 billion MBS and $40 billion Treasuries • Step 2: $30 billion MBS and $35 billion Treasuries • Additional reductions in ongoing purchases, but “asset purchases are not on a preset course”

35. The liabilities on the Fed’s balance sheetinclude a large amount of excess reserves

36. The money supply (M2) is nearly 4 timesbigger than the monetary base

37. The Fed’s expansion of the monetary base has allowed the money supply to continue rising,compared with what took place during the 1930s

38. The FOMC forecasts that the unemployment ratewill approach the natural rate towards the end of 2016 FOMC Central Tendency (December 2013) 2014 6.3 – 6.6 2015 5.8 – 6.1 2016 5.3 – 5.8 Longer run 5.2 – 5.8

39. The FOMC expects GDP to grow somewhat above trend over the next three years FOMC Central Tendency (December 2013) 2014 2.8 – 3.2 2015 3.0 – 3.4 2016 2.5 – 3.2 Longer run 2.2 – 2.4

40. The Federal Funds Rate is anticipated to remainlow over the forecast horizon

41. Summary • The outlook is for the U.S. economy to expand at a • pace somewhat above trend in 2014 • Employment is expected to rise moderately with the • unemployment rate edging lower • Slackness in the economy will lead to a relatively • contained inflation rate • Growth in manufacturing output should continue • Housing has turned the corner, but still has far to go • Agriculture has been healthy, but faces volatility

42. www.chicagofed.org