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Smla 2011

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Smla 2011

  1. 1. Monetary Policy and What’s to Come Ryan Herzog, Ph.D. Assistant Professor of Economics Gonzaga University 9/28/2011 Prepared for SMLA
  2. 2. The National Economy
  3. 3. National Output
  4. 4. Housing Starts
  5. 5. National Unemployment
  6. 6. Unemployment
  7. 7. Manufacturing and the Labor Force
  8. 8. Structural Concerns
  9. 9. Jobs <ul><li>The recession has simply magnified and sped up job losses in the manufacturing sectors. </li></ul><ul><ul><li>The construction industry provided alternative employment. </li></ul></ul><ul><li>We need to focus on retraining 7-8 million workers. </li></ul><ul><li>Extending unemployment compensation does not address the structural problems in the manufacturing industry. </li></ul><ul><ul><li>Workers are searching for jobs that do not exist or will not exist in the near future. </li></ul></ul>
  10. 10. Washington State <ul><li>Very similar problems to the rest of the nation </li></ul><ul><ul><li>Unemployment rate 9.1% </li></ul></ul><ul><ul><li>Manufacturing and construction workers </li></ul></ul>
  11. 11. State Unemployment
  12. 12. State Unemployment
  13. 13. Spokane Unemployment
  14. 14. Washington and Spokane Income
  15. 15. Foreclosure Rates
  16. 16. Washington State Housing Foreclosure Rates (First Lien) March 2011 December 2010 September 2010 June 2010 March 2010 Spokane 3.2 3.2 3.1 2.9 2.4 Seattle/Tacoma 4.1 4.0 3.7 3.1 2.8 Portland/Vancouver 4.1 4.7 3.7 3.5 3.4 Yakima 4.3 4.3 4.2 3.8 3.5 Olympia 3.6 3.5 3.3 2.8 2.4 Wenatchee 2.6 2.7 2.3 2.0 1.8 Tri Cities 2.1 2.2 2.2 2.0 1.9 Coeur d'Alene 3.8 4.0 3.8 3.8 3.5 Lewiston, ID 2.6 2.9 2.5 2.1 2.2 90+ Days - Delinquency Rates (First Lien) March 2011 December 2010 September 2010 June 2010 March 2010 Spokane 3.2 3.1 3.2 3.5 3.7 Seattle/Tacoma 4.3 4.3 4.3 4.8 5.0 Portland/Vancouver 3.2 3.4 3.2 3.6 3.8 Yakima 3.2 3.3 3.8 3.9 4.0 Olympia 3.5 3.6 3.7 4.0 4.3 Wenatchee 2.6 2.6 2.8 2.9 3.1 Tri Cities 2.0 2.1 2.3 2.7 3.0 Coeur d'Alene 2.7 2.5 2.6 3.0 3.6 Lewiston, ID 2.1 2.0 2.5 2.6 3.1 *Source www.foreclosure-response.org (Center for Housing Policy)
  17. 17. Washington Housing
  18. 18. Monetary Policy <ul><li>Dual Mandate: </li></ul><ul><ul><li>The Congress established two key objectives for monetary policy--maximum employment and stable prices </li></ul></ul><ul><li>Will continue expansionary policies until inflation shows signs of increasing. </li></ul><ul><li>The hope is for increased home buying (and refinancing) and retail sales </li></ul>
  19. 19. Investment
  20. 20. Retail Sales
  21. 21. Inflation Rates
  22. 22. Long-Term Interest Rates <ul><li>Continue to surprise (under 2%) </li></ul><ul><li>Quantitative Easing I - March 2009 </li></ul><ul><ul><li>Buy $1.2 trillion in MBS and agency debt </li></ul></ul><ul><li>Quantitative Easing II – November 2010 </li></ul><ul><ul><li>Buy $600 billion </li></ul></ul><ul><li>Operation Twist – September 2011 </li></ul><ul><ul><li>Sell $400 billion of short term debt to buy long term debt. </li></ul></ul>
  23. 23. Short and Long-term Interest Rates
  24. 24. Federal Reserve Balance Sheet <ul><li>Fed holdings have increased </li></ul><ul><li>During the last FOMC meeting they announced a shift from short-term to long-term securities </li></ul><ul><li>Also agreed to reinvest principal received from its holdings of agency debt and agency MBS in agency MBS rather than continuing to reinvest in longer-term Treasury securities </li></ul>
  25. 25. Federal Reserve Balance Sheet
  26. 26. Interest Rate Targeting
  27. 27. Where do we go from here? <ul><li>The Fed is running out of tools </li></ul><ul><li>They left the door open for a QE3: </li></ul><ul><ul><ul><ul><li>Two members said that current conditions and the outlook could justify stronger policy action, but they supported undertaking the maturity extension program at this meeting as it did not rule out additional steps at future meetings. </li></ul></ul></ul></ul><ul><li>A gradual increase in inflationary expectations </li></ul><ul><ul><li>Increase consumer spending </li></ul></ul><ul><ul><li>Comes at a large cost in higher nominal rates (large interest rate risks) </li></ul></ul>
  28. 28. Risks <ul><li>Holding long-term debt exposed the Federal Reserve to large amounts of interest rate risk </li></ul><ul><li>Inflation? </li></ul><ul><ul><li>Food and energy prices have stabilized following the summer peaks. </li></ul></ul>
  29. 29. Inflationary Concerns

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