Recommended
Recommended
More Related Content
What's hot
What's hot (15)
Similar to 2012 UIC Fed Challenge Presentation
Similar to 2012 UIC Fed Challenge Presentation (20)
Recently uploaded
Recently uploaded (20)
2012 UIC Fed Challenge Presentation
- 1. The State of the Economy and the Role of Monetary Policy Daniel Botkin Michael Cassidy Daniel Craig Kyle Korkus Kevin Murillo
- 2. Meeting Agenda Headwinds to the European Debt Crisis Economy Fiscal Cliff Situation Alternate Fiscal Scenarios Economic Growth Current GDP Analysis Summary Q4-2012 and 2013 GDP Prediction Monetary Policy Summary and Re-evaluation of Current Policy Tools Analysis Suggestions for New Policy Tools Final Monetary Policy Recommendations
- 3. Headwinds Against Recovery European Sovereign Debt Crisis – Greece – Italy – Spain – Germany Federal Debt, Percentage of GDP Unemployment Rate, Percent 180 30 150 25 120 20 90 15 60 10 30 5 0 0 2005 2007 2009 2011 2005 2007 2009 2011 Source: World Economic Outlook Report Last Updated: 10/9/12, Note: Estimates Start after 2011
- 4. Headwinds Against Recovery Economic Effects: Falling off Fiscal Cliff Gross 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 payments Source: Congressional Budget Office; Michael Ferolli, JP Morgan Chase Latest 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 2013-07 Source: US Department of Commerce: Bureau of Economic Analysis Seasonally Adjusted Annual Rates, Quarterly, Last Updated: 10/26/2012 Estimations 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 Ago 10 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 Statistics Monthly, Seasonally Adjusted, Last Updated: 11/2 and 11/15 Respectively Note: 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 Has Tripled Since 2008 3500000 3000000 2500000 Recession 2000000 Begins 1500000 1000000 500000 0 2003 2007 2002 2004 2005 2006 2008 2009 2010 2011 Source: Board of Governors of the Federal Reserve System Millions of Dollars, Last Update 11/15/2012
- 8. Effective Federal Funds Rate Between 0-25 Basis Points Since 2009 5 4 Percent 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: Board of Governors of the Federal Reserve System Not 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 Agenda Headwinds to the European Debt Crisis Economy Fiscal Cliff Situation Alternate Fiscal Scenarios Economic Growth Current GDP Analysis Summary Q4-2012 and 2013 GDP Prediction Monetary Policy Summary and Re-evaluation of Current Policy Tools Analysis Suggestions for New Policy Tools Final Monetary Policy Recommendations
- 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 Units 15% Light Weight Vehicle Sales 1250 21 10% 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 of Economic Analysis Seasonally adjusted, Monthly; Last Updated: Retail Sales-11/14/12, Durable Goods-10/29/12, Auto Sales-11/06/12
- 13. Housing Prices: Standard and Poor’s Case-Shiller Index 210.00 200.00 190.00 180.00 170.00 160.00 150.00 Aug-2012 140.00 Index 142.7 130.00 2009-07 2007-01 2007-07 2008-01 2008-07 2009-01 2010-01 2010-07 2011-01 2011-07 2012-01 2012-07 Source: Standard and Poor’s 20-City Monthly Index, January 2000=100, Last Updated 10/31/12
- 14. Consumers More Optimistic Than Businesses Consumer Confidence Indexed by Thomas Reuters/University of Michigan Small 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 2011-07 Source: University of Michigan/Thomas Reuters, National Federation of Independent Business 2012-01 Monthly, Seasonally Adjusted; Last updated - Consumer: 11/9/12 Business: 11/13/12 Consumer Confidence Index 100=1966Q1 Business Confidence Index 100=1986
- 15. Investors are as Wary of Fiscal Uncertainty Percent Change of Real Gross Domestic Private Investment Percent Change of Real Private Nonresidential Fixed Investment 8% 6% 4% 2% 0% -2% 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07 Source: U.S. Department of Commerce: Bureau of Economic Analysis Quarterly, Seasonally Adjusted Last 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 Average Source: Board of Governors of the Federal Reserve System Monthly, Seasonally Adjusted Last 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 10400 0.40% Billions of Chained 2005 Dollars 10300 0.30% 10200 0.20% 10100 0.10% 10000 0.00% 9900 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2011- 2011- 2012- 2012- 01 07 01 07 Source: US Department of Labor: Bureau of Labor Statistics; US Department of Commerce: Bureau of Economic Analysis Seasonally Adjusted, Monthly; Last Updated: 10/29/12 and 11/2/12
- 18. Real Net Exports: Falling Euro Area Incomes Will Likely Affect Trade 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 2012-01-01 Source: U.S. Department off Commerce: Bureau of Economic Analysis Seasonally adjusted, Quarterly, Last Updated: 10/26/2012
- 19. Dollar/Euro Exchange Rate: Recession in Euro Area Could Lead to Depreciation 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 2012-10 Source: European Central Bank Statistical Data Warehouse Daily, Not Seasonally Adjusted Last 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 2013-07 Source: US Department of Commerce: Bureau of Economic Analysis Prediction by authors
- 21. Meeting Agenda Headwinds to the European Debt Crisis Economy Fiscal Cliff Situation Alternate Fiscal Scenarios Economic Growth Current GDP Analysis Summary Q4-2012 and 2013 GDP Prediction Monetary Policy Summary and Re-evaluation of Current Policy Tools Analysis Suggestions for New Policy Tools Final Monetary Policy Recommendations
- 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 Survey Net Percentage of Domestic Respondents Tightening Standards on Consumer Loans: – Prime Mortgage Loans – Credit Cards – New and Used Auto Loans 80 60 40 20 0 -20 Note: “Net Percentage of Banks Tightening Standards for New and Used Auto” did not become a series until Q3-2011 -40 Source: Board of Governors of the Federal Reserve System Monthly, Not Seasonally Adjusted; Last Updated: 10/31/12
- 24. Policy Recommendations: Taylor Rule Negative Regardless of Fiscal Cliff 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 2012-01 Pre-2012: Inflation Target 2% 2012 and Onward: Inflation Target 3% Output Gap Parameter: .5 Output Gap Parameter: .67 Inflation Gap Parameter: .5 Inflation Gap Parameter: .33
- 25. Personal Consumption/Savings Rate – Real Consumption/Real Income – Real Savings/Real Income 96% 7% 94% 5% 92% 3% 90% 88% 1% 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 01 01 01 01 01 01 01 01 Source: U.S. Department of Commerce: Bureau of Economic Analysis Monthly, Seasonally Adjusted Annual Rate Last Updated: 10/29/2012
- 26. Housing Market: Showing Signs of Improvement Wells Fargo Housing Market Housing Starts Index 1600 45 Index 100=Perfectly Optimistic 1400 Thousands 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 10 Source: U.S. Department of Commerce: Census Bureau, National Association of Home Builders/Wells Fargo Monthly, Seasonally Adjusted Annual Rate, Index, Monthly, Seasonally Adjusted Last Updated: 10/17/2012
- 27. Beveridge Curve 4.0 3.5 Job 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 average Percent 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 average Source: U.S. Department of Labor: Bureau of Labor Statistics Monthly, Seasonally Adjusted Last 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 2012-01 Source: US Department of Labor: Bureau of Labor Statistics Seasonally Adjusted, Monthly Last 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 in Lowering Yields 30-Year Treasury Bond 48 Month Auto Loan AAA Corporate Bond 30 Year Mortgage 8.5 7.5 6.5 5.5 4.5 3.5 2.5 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 Source: Board of Governors of the Federal Reserve System Not Seasonally Adjusted, Monthly Latest 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 Agenda Headwinds to the European Debt Crisis Economy Fiscal Cliff Situation Alternate Fiscal Scenarios Economic Growth Current GDP Analysis Summary Q4-2012 and 2013 GDP Prediction Monetary Policy Summary and Re-evaluation of Current Policy Tools Analysis Suggestions for New Policy Tools Final Monetary Policy Recommendations
- 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.
Editor's Notes
- 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