Fed Economist Speaks at CFA Day Luncheon

Federal Reserve Bank of St. Louis Economist and Vice President Richard Anderson spoke to the Certified Financial Analysts (CFA) Society of Louisville at the CFA Day luncheon on June 14. CFA Day is an annual, nationwide celebration of the profession. The specific day of the celebration is different city-by-city—June 14 was Louisville’s day.

The luncheon began with Anderson’s survey of the state of the national economy, followed by a focus on Kentucky’s economic outlook. It also included a panel discussion on the state’s municipal bond market.

Anderson noted that, although real output grew very slowly in the first quarter, aggregate demand for goods and services grew strongly. The first quarter’s data should not be interpreted as signaling an economic slowdown, he said. He noted that forecasters expect second quarter real growth at approximately a 3 percent rate. Most forecasters and futures data in financial markets seem to indicate that the Federal Open Market Committee will maintain its federal funds rate target at its current level for the balance of the year. The greatest risk to forecasted growth is a rebound of inflation. Currently, abstracting from higher energy costs, underlying core inflation in most goods and services continues to slow.

Summarizing details, Anderson noted that:

• Consumer spending remains solid, despite weakness in housing.
• Business capital spending on equipment and software is strengthening, but remains below many analysts’ expectations given strong aggregate demand and relatively low financing costs.
• Residential housing remains a question mark. Although lower than one year ago, housing starts increased modestly during the past three months (through April), and new home sales jumped sharply in April. Despite this favorable news, many forecasters regard the new home market as overbuilt, with significant excess supply of finished unsold new homes.
• Labor market conditions improved by more than expected in May, as nonfarm payroll employment rose by 157,000. Year-to-date, monthly payroll gains have averaged about 132,000.
• Inflation remains the greatest risk to the economic outlook. Policymakers regard as unacceptable the cost to the economy of distortions that arise when inflation is greater than approximately 1-1/2 to 2 percent. “Headline” inflation pressures moderated in April following relatively large gains in February and March. Year-to-date, the CPI has increased at an alarming 4-3/4 percent annual rate, while the deflator for personal consumption expenditures (PCE chain-weight price index) has increased at a 4 percent rate. Yet, over the same period in 2006, the increases were 4-1/2 percent and 4-1/4 percent, respectively. Excluding food and energy, so-called core inflation increased in April at a modest 2 percent pace. This rate is expected to decrease further over the year—prices have increased at a 1.9 percent and 1.8 percent annual rate over the past three- and six-months, respectively.