Hawks, Doves, Pigs and Pythons: Analyzing the Economic Outlook

Kevin L. Kliesen

Business Economist and Research Officer

WY

The views I will express today are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

The Big Picture

The momentum that developed over the last half of 2022 has carried forward into early 2023.

• There is strength in consumption, labor markets, and nonres construction. And housing is turning around! • Financial stresses have returned to normal. • Solid economic momentum and stubbornly high trend inflation suggest policy isn’t very restrictive at present. • But uncertainty about the economy remains high.

Trend Inflation: Sticky at High Levels

Bad Stuff Happens When Inflation is High!

Growth of Labor Productivity, 1948 to 2023

NOTE: Labor productivity is output per hour in the nonfarm business sector; 2023 is partial (2023:Q1).

SOURCE: Bureau of Labor Statistics and Haver Analytics.

Volcker)

Quoted from William Silber, The Triumph of Persistence, Bloomsbury Press, 2012, p. 53.

“We give government the right to print money because we trust elected officials not to abuse that right, not to debase that currency by inflating. . . Failure to maintain those promises undermines trust in America. And trust is everything.” (Paul

Bullard’s Taylor Rules

Policy Rate and Taylor-Type Rules' Recommendations

Percent Policy Rate (Mid-point of target range) 7

Recommended policy based on a generous Taylor-type rule

Recommended policy based on a less-generous Taylor-type rule

Median projection for 2023 from the June SEP

Not Yet Restrictive . . . Maybe!

Holston-Laubach-Williams Estimate of R* and the Real Fed Funds Target Rate

NOTE: The real fed funds rate is the nominal rate less the 4-quarter percent change in the core PCEPI inflation rate.

SOURCE: FRB New York and Haver Analytics

Few Workers . . . More Retirees

Old-Age Dependency Ratios for the US, China, and Europe: 2000 to 2075

USA China Europe Projection

NOTE: The old-age to working-age demographic ratio is defined as the number of individuals aged 65 and over per 100 people of working age defined as those at ages 20 to 64.

SOURCE: OECD, 2023

Federal Debt: To Infinity and Beyond!

Federal Debt Held By the Public as a Percent of GDP: Actual and CBO Projections

SOURCE: Congressional Budget Office, June 2023

Shock and Awe!

SOURCE: US Treasury, February 16, 2023.

For All Your Economic Data Needs!

Macro Snapshot presents important macroeconomic indicators closely followed by the St. Louis Fed to gauge the current state of the economy and appropriate policy.

https://fred.stlouisfed.org/macro-snapshot

QUESTIONS?

EXTRA SLIDES

“The FOMC has always recognized that in a tightening cycle, if we stop too soon, inflationary pressures will resurge and make it very difficult to contain them again. We therefore always tend to take out the insurance of an additional fed funds increase, fully expecting that it may not be necessary.” (Alan Greenspan)

Quoted from Alan Greenspan, The Age of Turbulence, The Penguin Press, 2007, p. 156.

The Policy Path According to the SEP

SOURCES: FOMC (June 2023) and Haver Analytics

“When the bond market begins to believe that government interest-bearing debt is beyond the ceiling of feasibility, the government's next bond auction “fails” in the sense that the interest rate required by the market on the new bond offering is so high that the government withdraws the offering and turns to money printing as its alternative.” (Charles W. Calomiris)

Quoted from “Fiscal Dominance and the Return of Zero-.

Accounting for Growth: Small Changes Matter Over

Time!

Accounting for Growth of Real GDP: 1982 to 2031 (P)

*NOTE: Calculations exclude recession quarters. In line 5, GDP is the average of gross domest product and gross domestic income.

SOURCE: Author's calculations using actual and projected data from the BEA and BLS.

The Python that Ate the Pig!

The law now commands such extraordinary commitments of limited revenues to mandated programs those that by design operate eternally under rules written by yesterday’s legislators and without any vote by newly elected legislatures—that fiscal democracy is at risk.

(Steuerle, 2010)