The Chairperson of the Federal Reserve, Janet Yellen, (Published 6.15.2015) publishes a semiannual monetary policy report to the public. The key statistics provided in the Federal Reserve’s semiannual report indicate the United States Economy is strong and growing at the same rate as the past twenty years, the key focus for improvement is unemployment.
Federal Open Market Committee (FOMC) is committed to maximum employment, stable prices, and moderate long-term interest rates. Monetary Policy has a direct influence over the economy’s rate of inflation. A goal of 2% interest rate while maintaining maximum employment (Yellen, 2015).
The GDP Gross Domestic Product has had nominal change and maintained an average similar to the rates recorded for the past 20 years. Slight GDP 2 ½% increase (economic activity rose moderately in the second quarter) (Yellen, 2015). Factors, such as, the steep drop in crude oil prices, down ¼% in May, have put downward pressure on inflation (Yellen, 2015). The current rate of U.S consumer price inflation is below the goal of 2% annually. The estimated current normal rate of inflation is estimated to be 5.0% to 5.2%, current Congressional Budget Office’s estimate of natural inflation is 5.4% (Yellen, 2015).
Capital and Liquidity at banks has remained strong. The FOMC has agreed to a high degree of accommodation to preserve market liquidity, maximum employment, and price stability. It will keep federal funds rates low, 0 to ¼% (Yellen, 2015). The Federal Reserve wants to maintain low interest rates in the market and allow access to financing for households and businesses to keep the economy growing. Even small increases in federal funds rates can cause consumers and investors to be more conservative and significantly reduce economic activity.
There have been increases and declines in various areas of Business but the net has been growth. The United States banks are growing in Capital and Assets, as well as writing more loans. Business investment fell by 2% (the number of drilling rigs fell resulting in a ½% subtracted from the first quarter GDP (Yellen, 2015). Business outlays for structures outside the energy sector declined in the first quarter. Spending on equipment and intellectual property increased modestly at 3 ½% (Yellen, 2015).
Financing remained solid. Commercial and industrial loans expanded at a solid pace. Mortgage Backed Securities (MBS), an important determinant of mortgage interest rates, have increased 20 basis points in 2015.The treasuries market has remained stable though decreased willingness to provide balance sheets by securities dealers has created turbulence. Expansion in bank credit led to expansion in loan growth. Capital and liquidity standards at the largest banks have remained at historic highs.
Internationally, the United States Economy is still out performing other countries. Policy Easing worldwide declined, especially the Euro, relative to the U.S. The value of the U.S. dollar has risen but it has lowered import prices and put downward pressure on consumer price inflation (Yellen, 2015).
Price Index for Personal Consumption Expenditures (PCE) only increased ¼% so inflation is below the 2% (Yellen, 20150. Household debt growth has remained modest. This indicates that debt and expenses are inflation growing with the growth of the overall market and GDP. Growth on both ends; expense and income, are similar and sustainable. The average amount on car loans and student debt has increased, and for some mortgages are still difficult to obtain though the number written has increased.
Despite increase in auto and student loan debt, the ratio of Outstanding Debt to Disposable Personal Income has remained at historically low levels. Household net worth continues to increase (Yellen, 2015). Household net worth has risen considerably since the recession to more than six times disposable personal income. Consumer confidence remains high and household expectations are at the highest since before the recession. Resident investment is consistent at moderate gains. Single-family home construction has remained slow but 30 year mortgage rates have remained historically low. Increases in housing prices have balanced by increases in income (Yellen, 2015).
Reducing unemployment to reach maximum employment is the goal and the economy has added 210,000 jobs to the payroll every month in the first half of 2015 (Yellen, 2015). Unemployment decline ¼% to 5.3% and most analyst project it will be below 5% by the end of 2017 (Yellen, 2015). The number of people working part-time that want to work full-time have decreased. Researches for the Federal Reserve state that, “Slack in the Labor Market has more to do with utilization of resources than the unemployment rate (Yellen, 2015).” This might be true but one key object of the FOMC is maximum employment and everyone who wants full-time employment and is qualified should be able to find a job.
The cost of employer provided-benefits rose 2 ¼% up from 2% but overall the employment cost index has had nominal change (Yellen, 2015). The average output per hour for the business sector has risen at an annual rate of 1 ¼% this is a continued slow growth since 2007 (Yellen, 2015). Inflation rates on Treasury Inflation Protected Securities (TIPS) and Treasury Securities declined noticeably. Analysts noted a 2 ¾% decline in annual industrial production (Yellen, 2015). In 2015, Exports fell and imports grew. Current account deficit widened to 2.6% of nominal GDP but near its narrowest since 1990’s.Consumer spending increased at an average annual rate of 2 ¾% (Yellen, 2015).
Internally, The FED is concerned with the level of short-term interest rates in their reserves and the size and composition of its balance sheet. The purchases of large assets have created significant short-term debt liability. The FED has a 25-point target range goal for federal funds (Yellen, 2015). The Fed is testing operations, controls, and analysis on its ability to influence, efficiently and effectively, the macroeconomics of the markets.
Key Factors that affect the economy; oil prices, business investment, consumer spending. Most analysts judge normalization as appropriate monetary policy, including raising federal funds rates. Most predict Fed funds at end of March 2015 0.63% at the end of 2016 and 2017 1.63% and 2.88% (Yellen, 2015). The greatest uncertainties of future projects are around inflation and unemployment. Market short of full employment but GDP growth is expected to remain around 20-year average.