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
  • 2012 UIC Fed Challenge Presentation

    1. 1. The State of theEconomy and the Roleof Monetary PolicyDaniel BotkinMichael CassidyDaniel CraigKyle KorkusKevin Murillo
    2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 30. Forward Guidance •To keep the Federal Funds Rate between 0 to 25 basis points through mid-2015.
    31. 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. 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. 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. 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. 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.

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