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2012 UIC Fed Challenge Presentation

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  • Headwinds to the EconomyAnalysis of European Debt CrisisAnalysis of Fiscal Cliff SituationAlternate Fiscal Scenario AnalysisEconomic Growth SummaryCurrent GDP analysisQ4-2012 and 2103 GDP PredictionMonetary Policy AnalysisSummary and Re-evaluation of Current Policy ToolsSuggestions for New Policy ToolsFinal Monetary Policy Recommendations
  • Headwinds to the EconomyAnalysis of European Debt CrisisAnalysis of Fiscal Cliff SituationAlternate Fiscal Scenario AnalysisEconomic Growth SummaryCurrent GDP analysisQ4-2012 and 2103 GDP PredictionMonetary Policy AnalysisSummary and Re-evaluation of Current Policy ToolsSuggestions for New Policy ToolsFinal Monetary Policy Recommendations
  • Headwinds to the EconomyAnalysis of European Debt CrisisAnalysis of Fiscal Cliff SituationAlternate Fiscal Scenario AnalysisEconomic Growth SummaryCurrent GDP analysisQ4-2012 and 2103 GDP PredictionMonetary Policy AnalysisSummary and Re-evaluation of Current Policy ToolsSuggestions for New Policy ToolsFinal Monetary Policy Recommendations
  • Headwinds to the EconomyAnalysis of European Debt CrisisAnalysis of Fiscal Cliff SituationAlternate Fiscal Scenario AnalysisEconomic Growth SummaryCurrent GDP analysisQ4-2012 and 2103 GDP PredictionMonetary Policy AnalysisSummary and Re-evaluation of Current Policy ToolsSuggestions for New Policy ToolsFinal Monetary Policy Recommendations
  • Transcript

    • 1. The State of theEconomy and the Roleof Monetary PolicyDaniel BotkinMichael CassidyDaniel CraigKyle KorkusKevin Murillo
    • 2. Meeting AgendaHeadwinds to the European Debt CrisisEconomy Fiscal Cliff Situation Alternate Fiscal ScenariosEconomic Growth Current GDP AnalysisSummary Q4-2012 and 2013 GDP PredictionMonetary Policy Summary and Re-evaluation of Current Policy ToolsAnalysis Suggestions for New Policy ToolsFinal MonetaryPolicyRecommendations
    • 3. Headwinds Against RecoveryEuropean Sovereign Debt Crisis – Greece – Italy – Spain – Germany Federal Debt, Percentage of GDP Unemployment Rate, Percent180 30150 25120 20 90 15 60 10 30 5 0 0 2005 2007 2009 2011 2005 2007 2009 2011Source: World Economic Outlook Report Last Updated: 10/9/12, Note: Estimates Start after 2011
    • 4. Headwinds Against RecoveryEconomic Effects: Falling off Fiscal CliffGross Economic Effects:• $560 billion reduction in Nominal GDP• 3.5% projected reduction in Real Gross Domestic Product Tax Effects Spending Effects Expiration of Bush tax cuts - $280 billion $40 billion expiration of emergency Tax Effects Spending Effects unemployment benefits Expiration of payroll tax holiday - $125 $98 billion from Budget Control Act billion (mandated cuts) Affordable Care Act - $18 billion $11 billion: reduction in Medicare paymentsSource: Congressional Budget Office; Michael Ferolli, JP Morgan ChaseLatest updated: (CBO) 8/22/12
    • 5. Government Spending:Multiple Scenarios An alternative 2550 fiscal scenario’s budget will keep most spending Billions of Chained 2005 USD 2500 in place 2450 2400 But a fall off the fiscal cliff will 2350 cut spending drastically 2300 2011-01 2011-07 2012-01 2012-07 2013-01 2013-07Source: US Department of Commerce: Bureau of Economic AnalysisSeasonally Adjusted Annual Rates, Quarterly, Last Updated: 10/26/2012Estimations by the Congressional Budget Office, update 8/22/12
    • 6. Dual-Mandate:Maximum Employment/Price Stability Civilian Unemployment Core CPI, Percent Change from Rate, Percent One Year Ago10 3.0 10-Year 9 2.5 Average 2.0 8 1.5 7 1.0 6 0.5 5 0.0 4 2007-01 2005-01 2006-01 2008-01 2009-01 2010-01 2011-01 2012-01 2005… 2006… 2007… 2008… 2009… 2010… 2011… 2012…Sources: US Department of Labor: Bureau of Labor StatisticsMonthly, Seasonally Adjusted, Last Updated: 11/2 and 11/15 RespectivelyNote: Core CPI is the Consumer Price Index for All Urban Consumers: All Items Less Food & Energy
    • 7. “Do whatever it takes?”The Federal Reserve’s Balance Sheet HasTripled Since 2008 3500000 3000000 2500000 Recession 2000000 Begins 1500000 1000000 500000 0 2003 2007 2002 2004 2005 2006 2008 2009 2010 2011Source: Board of Governors of the Federal Reserve SystemMillions of Dollars, Last Update 11/15/2012
    • 8. Effective Federal Funds RateBetween 0-25 Basis Points Since 2009 5 4 Percent 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012Source: Board of Governors of the Federal Reserve SystemNot Seasonally Adjusted, Monthly Percent, Last Updated 11/13/12
    • 9. What is monetary policy doing:• Keeping interest rate targets between 0-25 basis points.• Mentioning in our statements the length of time the targets are likely warranted until• Purchasing $40 billion worth of agency MBS per month indefinitely• Finishing our maturity extension program, selling short-term treasury bills and buying long-term treasury bonds in an equal amount, for a total of $675 billion between September 2011 and the end of December 2012
    • 10. Meeting AgendaHeadwinds to the European Debt CrisisEconomy Fiscal Cliff Situation Alternate Fiscal ScenariosEconomic Growth Current GDP AnalysisSummary Q4-2012 and 2013 GDP PredictionMonetary Policy Summary and Re-evaluation of Current Policy ToolsAnalysis Suggestions for New Policy ToolsFinal MonetaryPolicyRecommendations
    • 11. Real GDP Growth in 2012: Y=C+I+G+NX Consumption Investment Government Spending Net Exports – Annualized Growth Rate 11000 1.95% 1.25% 2.00%(Billions of Chained 2005 USD) 9000 7000 5000 3000 1000 -1000 2012-01 2012-04 2012-07 Source: US Department of Commerce: Bureau of Economic Analysis Quarterly, Seasonally Adjusted; Last Updated 10/26/2012
    • 12. Consumption Gains in 2012:Retail, Durable Goods, and Auto Sales Increase Retail Sales, % Change from 1 Billions Sales: Durable Goods Millions Year Ago of Units of Units15% Light Weight Vehicle Sales 1250 2110% 1200 19 5% 1150 17 0% 1100 15 -5% 1050 13-10% 1000 11-15% 950 9 2005-01 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2005… 2008… 2006… 2007… 2009… 2010… 2011… 2012…Source: US Department of Commerce, US Census Bureau, US Department of Commerce: Bureau ofEconomic AnalysisSeasonally adjusted, Monthly; Last Updated: Retail Sales-11/14/12, Durable Goods-10/29/12, AutoSales-11/06/12
    • 13. Housing Prices:Standard and Poor’s Case-Shiller Index210.00200.00190.00180.00170.00160.00150.00 Aug-2012140.00 Index 142.7130.00 2009-07 2007-01 2007-07 2008-01 2008-07 2009-01 2010-01 2010-07 2011-01 2011-07 2012-01 2012-07Source: Standard and Poor’s20-City Monthly Index, January 2000=100, Last Updated 10/31/12
    • 14. Consumers More OptimisticThan BusinessesConsumer Confidence Indexed by Thomas Reuters/University of MichiganSmall Business Optimism Indexed by National Federation of Independent Businesses 40% Business Confidence Consumer Confidence 30% Percent Change from a Year Ago 20% 10% 0% -10% -20% -30% -40% 2012-07 2008-01 2008-07 2009-01 2009-07 2010-01 2010-07 2011-01 2011-07Source: University of Michigan/Thomas Reuters, National Federation of Independent Business 2012-01Monthly, Seasonally Adjusted; Last updated - Consumer: 11/9/12 Business: 11/13/12Consumer Confidence Index 100=1966Q1 Business Confidence Index 100=1986
    • 15. Investors are as Wary of FiscalUncertainty Percent Change of Real Gross Domestic Private Investment Percent Change of Real Private Nonresidential Fixed Investment8%6%4%2%0%-2% 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07Source: U.S. Department of Commerce: Bureau of Economic AnalysisQuarterly, Seasonally AdjustedLast Updated: 10/26/2012
    • 16. Production and Manufacturing:2011 Compared to 2012 3% 2% Percent Change, Indust 1% rial Production Index, 3M- 0% Moving Average-1%-2% Percent Change, New-3% Orders, 3M Moving 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07 2012-10 AverageSource: Board of Governors of the Federal Reserve SystemMonthly, Seasonally AdjustedLast Updated: 11/16/2012 Note: New Orders are all Capital Goods Excluding Aircraft
    • 17. Underwhelming Wages and Incomes Average Hourly Wages, 3M Real Disposable Personal Moving Average Incomes 104000.40% Billions of Chained 2005 Dollars 103000.30% 102000.20% 101000.10% 100000.00% 9900 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2011- 2011- 2012- 2012- 01 07 01 07Source: US Department of Labor: Bureau of Labor Statistics; US Department ofCommerce: Bureau of Economic AnalysisSeasonally Adjusted, Monthly; Last Updated: 10/29/12 and 11/2/12
    • 18. Real Net Exports:Falling Euro Area Incomes Will Likely AffectTrade Balance 0.000 Billions of Chained 2005 Dollars -100.000 -200.000 -300.000 -400.000 -500.000 -600.000 -700.000 -800.000 2005-01-01 2006-01-01 2007-01-01 2008-01-01 2009-01-01 2010-01-01 2011-01-01 2012-01-01Source: U.S. Department off Commerce: Bureau of Economic AnalysisSeasonally adjusted, Quarterly, Last Updated: 10/26/2012
    • 19. Dollar/Euro Exchange Rate:Recession in Euro Area Could Lead toDepreciation of Euro 1.5 US Dollars per 1 Euro 1.4 1.3 1.2 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07 2012-10Source: European Central Bank Statistical Data WarehouseDaily, Not Seasonally AdjustedLast Updated: 11/16/2012
    • 20. Predicted Annual GDP Growth:Q4-2012 – Q4-2013 4.00% 3.00% Under current policy: We predict 1.7% annual growth 2.00% 1.00% Should we fall off fiscal cliff: We predict -.5% annual growth 0.00%-1.00% 2011-01 2011-07 2012-01 2012-07 2013-01 2013-07Source: US Department of Commerce: Bureau of Economic AnalysisPrediction by authors
    • 21. Meeting AgendaHeadwinds to the European Debt CrisisEconomy Fiscal Cliff Situation Alternate Fiscal ScenariosEconomic Growth Current GDP AnalysisSummary Q4-2012 and 2013 GDP PredictionMonetary Policy Summary and Re-evaluation of Current Policy ToolsAnalysis Suggestions for New Policy ToolsFinal MonetaryPolicyRecommendations
    • 22. Back To The Main Question• Is short-term unemployment more of a threat to our fulfillment of the dual- mandate than the risks of long-term inflation?• Are we, as policy-makers, past the “do whatever it takes” stage of this recovery?
    • 23. Credit Easier to Obtain:Federal Reserve Board Lending SurveyNet Percentage of Domestic Respondents Tightening Standards on Consumer Loans: – Prime Mortgage Loans – Credit Cards – New and Used Auto Loans80604020 0-20 Note: “Net Percentage of Banks Tightening Standards for New and Used Auto” did not become a series until Q3-2011-40Source: Board of Governors of the Federal Reserve SystemMonthly, Not Seasonally Adjusted; Last Updated: 10/31/12
    • 24. Policy Recommendations:Taylor Rule Negative Regardless of FiscalCliff Resolution 8 6 4 Fiscal Cliff Resolved: - Percent 2 0.562910092 0 -2 -4 -6 2000-01 2002-01 2004-01 2006-01 2008-01 2010-01 2012-01Pre-2012: Inflation Target 2% 2012 and Onward: Inflation Target 3%Output Gap Parameter: .5 Output Gap Parameter: .67Inflation Gap Parameter: .5 Inflation Gap Parameter: .33
    • 25. Personal Consumption/SavingsRate– Real Consumption/Real Income – Real Savings/Real Income96% 7%94% 5%92% 3%90%88% 1% 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 01 01 01 01 01 01 01 01Source: U.S. Department of Commerce: Bureau of Economic AnalysisMonthly, Seasonally Adjusted Annual RateLast Updated: 10/29/2012
    • 26. Housing Market:Showing Signs of Improvement Wells Fargo Housing Market Housing Starts Index 1600 45 Index 100=Perfectly Optimistic 1400Thousands of Units 1200 35 1000 800 25 600 400 15 2007-… 2008-… 2009-… 2010-… 2011-… 2012-… 2011- 2012- 2012- 2012- 2012- 04 10 01 07 10Source: U.S. Department of Commerce: Census Bureau, National Association of HomeBuilders/Wells FargoMonthly, Seasonally Adjusted Annual Rate, Index, Monthly, Seasonally Adjusted Last Updated:10/17/2012
    • 27. Beveridge Curve 4.0 3.5Job Vancacy Rate 3.0 2.5 2.0 1.5 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Unemployment Source: US Department of Labor: Bureau of Labor Statistics Monthly, Seasonally Adjusted
    • 28. Hiring, Turnover, and Quit Rates are Not Back to Pre-Recessionary Levels Hiring Rate-3m 4.0 moving average Turnover Rate - 3m moving 3.0 averagePercent Job Openings Rate -3m moving average 2.0 Quit Rate -3m moving average 1.0 Layoff Rate - 2006… 2010… 2005… 2005… 2006… 2007… 2007… 2008… 2008… 2009… 2009… 2010… 2011… 2011… 2012… 2012… 3month moving averageSource: U.S. Department of Labor: Bureau of Labor StatisticsMonthly, Seasonally AdjustedLast Updated: 11/02/2012
    • 29. Construction Employment:Impact of Housing Crash on Employment 8000 7500 Thousands of Persons 7000 In 4 6500 years, Construction Employment fell 6000 from 7.720 to 5.477 millions of persons 5500 5000 2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01Source: US Department of Labor: Bureau of Labor StatisticsSeasonally Adjusted, MonthlyLast Updated: 11/2/12
    • 30. Forward Guidance •To keep the Federal Funds Rate between 0 to 25 basis points through mid-2015.
    • 31. 7-3 Proposal •Governor Charles Evans’ proposal to tolerate 3 percent inflation in order to target a level of 7 percent unemployment or lower.
    • 32. Monetary Policy Effects:Forward Guidance Has Been Effective inLowering Yields 30-Year Treasury Bond 48 Month Auto Loan AAA Corporate Bond 30 Year Mortgage8.57.56.55.54.53.52.5 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01Source: Board of Governors of the Federal Reserve SystemNot Seasonally Adjusted, MonthlyLatest Update: In order top left to bottom right: 11/15/12, 10/5/12, 11/13/12, 11/13/12
    • 33. Proposal: Qualitative Easing• Sell $40 billion worth of short-term treasury bonds to fund $40 billion dollars a month purchases of agency mortgage- backed securities• Target housing market and long-term interest rates and will not add to the monetary base
    • 34. Meeting AgendaHeadwinds to the European Debt CrisisEconomy Fiscal Cliff Situation Alternate Fiscal ScenariosEconomic Growth Current GDP AnalysisSummary Q4-2012 and 2013 GDP PredictionMonetary Policy Summary and Re-evaluation of Current Policy ToolsAnalysis Suggestions for New Policy ToolsFinal MonetaryPolicyRecommendations
    • 35. Policy Recommendations• New Qualitative Easing: Purchase 40 billion dollars of agency mortgaged backed securities a months funded by the sale of 40 billion dollars worth of short term treasuries.• Keep our Federal Funds rate target at 0-25 basis points until mid-2015.