Weekly Economic Update: February 5 - February 9, 2018

February 05, 2018

CHART OF THE WEEK

Break in Policy Ushers in Economic Resurgence

Economic Rebounds After Election

With the election of a Republican majority in Congress and the Trump presidency, a striking change in the U.S. economy’s trajectory occurred. The election outcome gave rise to relief from the Obama Administration’s growth-constraining policies. Improved expectations raised forward-looking indicators and led to improvement in broad measures of real economic activity, such as business investment, employment, and industrial.

LAST WEEK

Category (percentage change from same month last year)	Dec	Nov	Oct
Overall PCE Deflator	1.70%	1.77%	1.59%
Core PCE Deflator (excludes food and energy)	1.52%	1.49%	1.45%

Noteworthy: The Fed’s main inflation rate metric decreased from 1.77% in November to 1.70% in December. However, the “core” measure, which excludes volatile food and energy prices, increased to 1.52% from 1.49% last month.

Federal Reserve FOMC Meeting Statement (December 2017)

Note: The fed funds rate is the rate banks charge each other for overnight loans when they do not hold large excess reserves at the Fed. The Fed would make small interventions in the fed funds market to influence that rate. However, in 2008, the administratively determined interest on excess reserves (IOER) supplanted a market-determined fed funds rate as the Fed’s key policy rate. This is because the Fed’s emergency lending and quantitative easing programs created a vastly greater amount of excess reserves. The Fed pays IOER on the funds banks deposit with the Fed rather than lend to consumers or businesses. A higher IOER rate portends a tighter monetary policy because it encourages banks to hold reserves rather than to make more loans.

A much-reduced level of trading still occurs in the fed funds market as government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac), which are ineligible to earn IOER, lend their idle cash to banks at the fed funds rate. Banks then deposit the cash with the Fed to earn a higher IOER rate. To prop up the fed funds rate as the Fed raises the IOER rate, the Fed withdraws cash from the market by temporarily selling some of its securities for cash at its overnight reverse repurchase (ON-RRP) rate, which sets a floor for the fed funds rate. The continued existence of the fed funds market and the ON-RRP facility should not distract from the fact that the Fed now uses IOER as the key rate to conduct monetary policy.

Category	Before FOMC meeting	After FOMC meeting
Interest on excess reserves (IOER)—upper bound	1.50%	1.50%
Federal funds rate target (average of IOER and ON-RRP rates)	1.37%	1.37%
Overnight reverse repurchase (ON-RRP) rate—lower bound	1.25%	1.25%

Federal Funds Rate Target Range

Noteworthy: The Fed decided to hold its key policy rate, the IOER rate, steady at 1.50% last Wednesday. Please see JEC’s FOMC Review for more details.

Productivity and Costs (Q4-2017, seasonally adjusted at annualized growth rates, preliminary estimate)

Increasing productivity growth is essential for living standards to improve. Before 2008 nonfarm business labor productivity growth averaged 2.4%; from 2008 to date, it has averaged only 1.2%.

Category	Preliminary estimate
Nonfarm Business Labor Productivity	-0.1%

Employment Situation (January 2018)

Category	January	December	November
Nonfarm payroll jobs (thousands)	200	160	216
Headline unemployment rate (U-3)	4.1%	4.1%	4.1%
“True” unemployment rate (U-6)	8.2%	8.1%	8.0%

Employment Situation

Noteworthy: The reported that 200,000 jobs created in January exceeded expectations. Average hourly earnings of all private-sector employees increased 2.9% from 12 months ago, its highest rate of increase since the last recession (2008-09). Furthermore, the reported pay data does not include the payment of irregular bonuses, such as those frequently mentioned in connection to the Tax Cuts and Jobs Act.