Economic Outlook: Monetary Policy
September 1, 2017
Paula Tkac, Ph.D., vice president and senior economist on the financial markets team of the Federal Reserve Bank of Atlanta provided an update from the Atlanta office at the 2017 Southeastern Accounting Show, which included a candid view of the differences in opinion that exist and the struggles and challenges the Bank goes through as it tries to understand the economy around us.
The goal for monetary policy has two mandates – price stability and maximum employment.
"When I look at the economy, one of the first things I go to is the amount of economic activity and growth in the nation's economy, the GDP," said Tkac.
In an effort to make sense of a world that is constantly changing, the Georgia Federal Reserve utilizes GDP Now, which is a current-cast of the existing economic activity that is going on in the present quarter. It shows the evolution of the forecast over the course of the quarter and allows economists to keep their finger on the pulse of what's going on.
“The Georgia Fed likes to get ahead of it a little bit to try and understand what is happening on the ground,” said Tkac. “They do it with statistical models and talking to business professionals.”
Are we there yet? Many factors go into determining the health of growth and factors affecting the maximum employment mandate. Factors adversely affecting employment include wage growth not being as high as anticipated and marginally attached individuals looking for work, meaning they are not actively in job market and look for work on occasion.
More positive factors focus around the prime age workforce, which is workers age 25-54 and how many of those individuals are actively engaging in the workforce. That percentage was declining through the recession and continued to decline until 2014. Since 2015-2016, the percentage is increasing with fewer in school and coming back into the workforce. Labor market has turned and more people are coming back in to participate.
“The composition of the whole national labor force is in flux; we try to control for that,” said Tkac. “Wage growth is at 3.5 percent and becoming more robust, which is a good sign and shows that the economy is doing well, but still not up to where it was before the recession.”
Are we there yet? Internal staff forecast shows the nation is on about a two percent growth rate.
Policy makers need to make decisions in the moment; they don't have the luxury of waiting for years to obtain copious amounts of information. They weigh the risks versus the reality; what if we're wrong? Think about it like risk management – if I'm wrong, what is the worst possible thing that could happen? Policy makers make a personal judgement as to which risk is greater and they have a range of opinions affecting decisions regarding where the economy is going.
The consumer remains strong overall, representing two thirds of the economy. The Fed is paying more attention to the fabric under the consumer to really understand the growth pattern.
Business fixed investment is another factor while examining price stability. Not a lot of firms are willing to expand, along with tax policy and other regulation uncertainty.
Financial markets look at the big picture and the data coming in to predict what the Fed is going to do.
“Understanding how the world views how and what it is we do, is a key feature of how we spend our time,” concluded Tkac.