The 2015 Economic Outlook and the Implications for Monetary Policy
December 1, 2014
William C. Dudley, President and Chief Executive Officer
Remarks at Bernard M. Baruch College, New York City
It is a pleasure to have the opportunity to speak here today. In my remarks, I will focus on the 2015 economic outlook and the implications for monetary policy. In general, I will paint a reasonably positive picture—an economy that is likely to make further progress towards the Federal Open Market Committee’s (FOMC) objectives of maximum sustainable employment in the context of price stability. In fact, if my own forecast is realized, I would expect to favor raising the FOMC’s federal funds rate target sometime in 2015. This would be a welcome development, because it would signify that the economy has healed sufficiently to warrant a somewhat less accommodative monetary policy. As always, what I have to say today reflects my own views and not necessarily those of the FOMC or the Federal Reserve System.
The Growth Outlook Is Improving
Since the official end of the Great Recession more than five years ago, the U.S. economy has grown at a disappointing 2.3 percent annualized rate. Several times over that period, it appeared that growth was breaking out on the upside, but each time such hopes were disappointed. We are again at a similar junction. Over the past few quarters, the pace of economic growth has picked up and the broad consensus is that the U.S. economy will grow at about a 2 1-3 percent annual rate over the next year.1
Will these forecasts once again turn out to be too optimistic? Subject to a few caveats that I discuss later, my view is that the likelihood of another disappointment has lessened. The consensus forecast seems like a reasonable expectation, in part, because several of the “headwinds” restraining U.S. economic activity in recent years have subsided. First, the housing sector is currently in much better balance. The overhang of housing associated with the housing boom has largely been absorbed, and a recovery in housing prices has significantly shrunk the proportion of borrowers that are underwater on their mortgages—that is, those households that have outstanding mortgage balances higher than the value of their homes. Also, measures of distress such as mortgage delinquencies and homes entering the foreclosure process have fallen.
Second, consumers are in better financial shape. Households are carrying less debt, with total household liabilities roughly $500 billion below their cyclical peak in 2008. Moreover, lower interest rates have facilitated significant mortgage debt refinancing, which has lowered the household debt service burdens. Depending on the particular measure used, household debt service burdens relative to income have fallen back to levels last seen in the 1980s and 1990s. In addition, household net worth has recovered sharply, boosted primarily by higher financial asset valuations, but also by some recovery in home prices.
Third, the fiscal restraint that has held back growth in recent years has ended, with the federal budget deficit now at a level consistent with a stable to slowly declining federal debt-to-GDP ratio. In the aggregate, state and local governments have also ended their retrenchment. One important piece of evidence in this regard is the fact that state and local government employment is now rising at between 5,000 and 10,000 per month, after generally contracting during the 2009 to 2012 period.
Now ...
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