As they deliberate monetary policy decisions, the members of the Federal Open Market Committee spend a lot of time looking at past data to help them look forward, said Paula Tkac, vice president and senior economist of the Federal Reserve Bank of Atlanta.
However, it’s not easy.
“Where are we going?” Tkac asked the Economic Roundtable of Jacksonville on Tuesday.
“In some sense, nobody has any idea,” she said at the meeting held at the Jacksonville Branch of the Atlanta Fed.
The Federal Open Market Committee, or FOMC, consists of the seven governors of the Federal Reserve Board and the 12 regional presidents of the Federal Reserve Banks. Only five of the 12 regional presidents are voting members of the FOMC at any one time.
With its monetary policy actions such as quantitative easing – in which the committee instructed the Fed to buy up assets from financial institutions – the FOMC is able to exert control over U.S. interest rates. So even though it is difficult, the committee has to try and get a handle on where the economy is headed.
“We do at some point have to come up with a forecast,” Tkac said, so she looked at some of the data the FOMC is using to determine its policy.
The U.S. gross domestic product, the broadest measure of overall economic activity has moved up and down since the recession ended, she said.
That’s in contrast to the normal “V-shaped” graph in which the trend points down as the country heads into recession and up as the recovery takes hold.
“We really haven’t seen what we expected,” Tkac said.
“It’s not the return to growth we know we’re capable of, certainly not what the FOMC is comfortable with,” she said.
GDP did grow by 3.6 percent in the second half of 2013 but for the most part, growth has been around 2 percent during the recovery, she said.
Growth in the first quarter this year looks like it may be below 1.75 percent, but that might be a temporary dip.
“We don’t know how much of this was weather-related,” Tkac said.
At its December meeting, FOMC members forecast growth of 2.8 percent to 3.2 percent this year and 3 percent to 3.4 percent in 2015, she said.
“It looks like it’s going in the right direction,” she said.
Several factors make a case for stronger growth, including the housing market recovery.
“We waited a long time to see the housing price bottom find itself and get a bit of a snapback,” Tkac said.
Other factors pointing to stronger growth include a better global economic outlook and reduction in tax and fiscal policy uncertainty. Growth also may be spurred by a need for businesses to make capital investments, as their fixed assets are aging, Tkac said.
The FOMC sees inflation remaining under control.
“FOMC members think we’re going back to 2 percent but it’s going to take time to get there,” perhaps not until 2016, Tkac said. The committee considers 2 percent to be a normal inflation rate, she said.
The labor market has been particularly difficult to assess. One issue economists have been wrestling with is the labor force participation rate.
When people become discouraged and stop actively looking for work, they are considered to be not in the labor force,
even though they want to be working.
Tkac said the number of people in the U.S. who want a job but are considered not in the labor force grew by almost a million, or 20 percent, from September 2007 through December 2013.
Another issue is the surveys the government uses to measure the labor market. The survey of households, which is used to measure the unemployment rate, and the survey of business payrolls, which measures job growth, both have high margins of errors. That makes it difficult to assess a sudden change in the monthly data.
“You don’t want to put any undue weight on one month’s announcement or two months’ announcements,” Tkac said.
One unusual trend in the current recovery is the increase in temporary workers, which has reached a higher level than
before the recession started, she said. Normally, an increase in temps signals an increase in permanent jobs, but that hasn’t happened.
“What we’re doing in Atlanta is re-looking at that,” Tkac said.
Despite the difficulty, the FOMC is forecasting a continued decline in unemployment. FOMC members project the U.S. unemployment rate to be between 6.3 percent and 6.6 percent this year and 5.8 percent and 6.1 percent in 2015, Tkac said.
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