Monetary policy today
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This document outlines Ryan W. Herzog's presentation on monetary policy and the macroeconomy. The presentation covers economic growth and indicators from 1980-2013, quantitative easing programs, their effects on financial markets and inflation, the banking sector response to low interest rates including high reserves, and implications for future monetary policy. It provides charts and discusses issues like interest rate risk and the relationship between money supply and inflation.
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Monetary policy today
- 1. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy and the Macroeconomy Ryan W. Herzog, Ph.D. Assistant Professor of Economics May 26, 2013
- 2. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy 1 Economic Overview 2 Monetary Policy and Financial Markets 3 Banking Sector 4 Future Course of Monetary Policy 5 Spokane and Surrounding Areas
- 3. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy Monetary policy (i.e. changing short-term and long-term interest rates) has been the primary mechanism for economic stimulus over the last five years.
- 4. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy Monetary policy (i.e. changing short-term and long-term interest rates) has been the primary mechanism for economic stimulus over the last five years. Increased uncertainty surrounding fiscal policy has put more of the burden on monetary policy.
- 5. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy Monetary policy (i.e. changing short-term and long-term interest rates) has been the primary mechanism for economic stimulus over the last five years. Increased uncertainty surrounding fiscal policy has put more of the burden on monetary policy. There is only so much monetary policy can do before creating perverse incentives:
- 6. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy Monetary policy (i.e. changing short-term and long-term interest rates) has been the primary mechanism for economic stimulus over the last five years. Increased uncertainty surrounding fiscal policy has put more of the burden on monetary policy. There is only so much monetary policy can do before creating perverse incentives: (i) Stock bubble
- 7. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy Monetary policy (i.e. changing short-term and long-term interest rates) has been the primary mechanism for economic stimulus over the last five years. Increased uncertainty surrounding fiscal policy has put more of the burden on monetary policy. There is only so much monetary policy can do before creating perverse incentives: (i) Stock bubble (ii) Increased inflation
- 8. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy Monetary policy (i.e. changing short-term and long-term interest rates) has been the primary mechanism for economic stimulus over the last five years. Increased uncertainty surrounding fiscal policy has put more of the burden on monetary policy. There is only so much monetary policy can do before creating perverse incentives: (i) Stock bubble (ii) Increased inflation (iii) Increased inequality
- 9. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Economic Growth from 1980 through 2013Q1
- 10. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy RGDP and Potential, 1980 through 2013Q1
- 11. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Unemployment Rate, 1980 through 2013Q1
- 12. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Long-term unemployed, 1980 through 2013Q1
- 13. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Change in employment, 1980 through 2013Q1
- 14. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Changes in inflation, 1990 through 2013Q1
- 15. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Nonfarm Productivity and Real Compensation, 1990 through 2013Q1
- 16. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Quantitative Easing I November 25th 2008, Fed announced they will purchase $600 billion in agency debt and mortgage backed securities (QE1). March 19th 2009, Fed announced they are extending the program by purchasing an additional $800 billion in securities.
- 17. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Quantitative Easing II November 3rd 2010, Fed announced a new purchase program of $600 billion ($75 billion per month) (QE2).
- 18. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Operation Twist In September of 2011 the Federal Reserve announced Operation Twist. They purchased $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years. The goal is to extend the average maturity of the Fed’s own portfolio without increasing the overall amount of money in circulation.
- 19. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Quantitative Easing III September 13, 2012, Fed announced a new $40 billion a month, open ended, bond purchasing program of agency mortgage backed securities. They also announced to continue extreme low rates until at least mid-2015.
- 20. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Short-term interest Rates, 1990-2013
- 21. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Long-term interest Rates, 1990-2013
- 22. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Federal Reserve Bank Credit, 1990-2013
- 23. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest Rate Risk With low long-term interest rates, financial institutions have shifted portfolios into more liquid assets.
- 24. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest Rate Risk With low long-term interest rates, financial institutions have shifted portfolios into more liquid assets. The Fed is assuming a large amount of interest rate risk, an increase in interest rates will cause long-term debt to experience larger losses.
- 25. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest Rate Risk With low long-term interest rates, financial institutions have shifted portfolios into more liquid assets. The Fed is assuming a large amount of interest rate risk, an increase in interest rates will cause long-term debt to experience larger losses. Given the concerns over future possible losses will the Fed be quick to raise interest rates (under projections of future inflation)?
- 26. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Average government maturities holdings, 1990-2013
- 27. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Average MBS maturities holdings, 1990-2013
- 29. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Housing Starts and Case/Shiller Housing Price Index, 1990 through 2013Q1
- 30. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy on Stock and Bond Markets Are we seeing an stock bubble due to the low interest rate environment?
- 31. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy on Stock and Bond Markets Are we seeing an stock bubble due to the low interest rate environment? Are investors increasing their risk appetite?
- 32. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Policy on Stock and Bond Markets Are we seeing an stock bubble due to the low interest rate environment? Are investors increasing their risk appetite? Are corporations issuing more high yield debt?
- 33. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Stock Indicators, 1990-2013
- 34. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy P/E Ratio 1990-2013
- 35. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Term Premium, 1990-2013
- 36. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Risk Premium, 1990-2013
- 37. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy US Bond Issuance, 1996-2012 (SIFMA)
- 38. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest on Required and Excess Reserves Starting October 1st, 2008 the Federal Reserve elected to pay interest on reserves.
- 39. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest on Required and Excess Reserves Starting October 1st, 2008 the Federal Reserve elected to pay interest on reserves. Banks long argued that forcing banks into holding reserves acted like a tax.
- 40. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest on Required and Excess Reserves Starting October 1st, 2008 the Federal Reserve elected to pay interest on reserves. Banks long argued that forcing banks into holding reserves acted like a tax. They also claimed they would hold sufficient reserves to meet customer demands.
- 41. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest on Required and Excess Reserves Starting October 1st, 2008 the Federal Reserve elected to pay interest on reserves. Banks long argued that forcing banks into holding reserves acted like a tax. They also claimed they would hold sufficient reserves to meet customer demands. Today the Federal Reserve is paying 0.25% on all reserve holdings.
- 42. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Interest on Required and Excess Reserves Starting October 1st, 2008 the Federal Reserve elected to pay interest on reserves. Banks long argued that forcing banks into holding reserves acted like a tax. They also claimed they would hold sufficient reserves to meet customer demands. Today the Federal Reserve is paying 0.25% on all reserve holdings. This has resulted in large amounts of excess reserves.
- 43. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Change in Monetary Aggregates, 1990-2013
- 44. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Monetary Base, 1990-2013
- 45. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Reserves, 1990-2013
- 46. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy The link between money and inflation Does a radical increase in the monetary base or money supply create higher inflation?
- 47. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy The link between money and inflation Does a radical increase in the monetary base or money supply create higher inflation? Perhaps.
- 48. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy The link between money and inflation Does a radical increase in the monetary base or money supply create higher inflation? Perhaps. Despite food price shocks and high oil prices inflation rates have remained low.
- 49. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy The link between money and inflation Does a radical increase in the monetary base or money supply create higher inflation? Perhaps. Despite food price shocks and high oil prices inflation rates have remained low. Inflation has probably remained lower then the Fed would like.
- 53. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Banking Activity Lending Capital/leverage rates Liquidity
- 54. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Banking Activity Lending Capital/leverage rates Liquidity Net Loans and Leases
- 55. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Lending, 1990-2013
- 56. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Liquidity, 1998-2012
- 57. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Short-term investments, 1998-2012
- 58. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Net loans and leases, 1998-2012
- 59. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Investment securities, 1998-2012
- 60. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Capital “Well Capitalized.” Total RBC Ratio equal to or greater than 10%, and Tier 1 RBC Ratio equal to or greater than 6 percent.
- 61. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Capital “Well Capitalized.” Total RBC Ratio equal to or greater than 10%, and Tier 1 RBC Ratio equal to or greater than 6 percent. “Adequately Capitalized.” Total RBC Ratio equal to or greater than 8%, and Tier 1 RBC Ratio equal to or greater than 4%.
- 62. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Capital “Well Capitalized.” Total RBC Ratio equal to or greater than 10%, and Tier 1 RBC Ratio equal to or greater than 6 percent. “Adequately Capitalized.” Total RBC Ratio equal to or greater than 8%, and Tier 1 RBC Ratio equal to or greater than 4%. “Undercapitalized.” Neither Well Capitalized nor Adequately Capitalized.
- 63. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Capital “Well Capitalized.” Total RBC Ratio equal to or greater than 10%, and Tier 1 RBC Ratio equal to or greater than 6 percent. “Adequately Capitalized.” Total RBC Ratio equal to or greater than 8%, and Tier 1 RBC Ratio equal to or greater than 4%. “Undercapitalized.” Neither Well Capitalized nor Adequately Capitalized. Under Doff-Frank each bank is required to have a total RBC ratio of 8% and a tier 1 RBC ratio of 4%.
- 64. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Bank Capital “Well Capitalized.” Total RBC Ratio equal to or greater than 10%, and Tier 1 RBC Ratio equal to or greater than 6 percent. “Adequately Capitalized.” Total RBC Ratio equal to or greater than 8%, and Tier 1 RBC Ratio equal to or greater than 4%. “Undercapitalized.” Neither Well Capitalized nor Adequately Capitalized. Under Doff-Frank each bank is required to have a total RBC ratio of 8% and a tier 1 RBC ratio of 4%. Under Basel III tier 1 RBC ratio increases to 4.5% in 2014 and eventually 6% by 2016 (with a 4.5% common equity tier 1 capital ratio).
- 65. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Basel III, capital requirements
- 66. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Tier 1 RBC, 1998-2012
- 67. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Total RBC, 1998-2012
- 68. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Return on Average Equity, 1990-2013
- 69. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Return on Average Assets, 1990-2013
- 70. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Tier 1 RLeverage Ratio, 1998-2012
- 71. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Future Course of Monetary Policy Future growth rates
- 72. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Future Course of Monetary Policy Future growth rates Expected inflation
- 73. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Federal Reserve key projections
- 74. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Federal Reserve interest rate projections
- 75. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Zillow Home Price Index
- 76. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Foreclosure Rates (Pacific NW) Foreclosure Rates (First Lien) City Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Spokane 3.9 3.6 2.9 2.75 2.7 3.3 3.2 3.2 3.1 2.9 2.4 Seattle/Tac. 4.9 4.5 3.5 3.2 3.4 4.2 4.1 4 3.7 3.1 2.8 Portland/Van. 5.1 5 4.8 4.4 4.5 4.5 4.1 4.7 3.7 3.5 3.4 Yakima 5.2 4.9 4.3 3.9 4 4.4 4.3 4.3 4.2 3.8 3.5 Olympia 4.5 4.1 3.2 2.9 2.9 3.6 3.6 3.5 3.3 2.8 2.4 Wenatchee 3.1 2.9 2.2 2.2 2.4 2.7 2.6 2.7 2.3 2 1.8 Tri Cities 2.7 2.75 2.1 1.9 1.8 4.2 2.1 2.2 2.2 2 1.9 Coeur d’Alene 4.5 4.5 4.4 4.2 4.1 3.9 3.8 4 3.8 3.8 3.5 Lewiston, ID 3.6 3.4 3 2.7 2.6 2.6 2.6 2.9 2.75 2.1 2.2 Serious Delinquency Rates (First Lien) City Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Spokane 8.2 8 7.6 7.4 7 6.5 6.4 6.3 6.2 6.1 6.1 Seattle/Tac. 9.7 9.6 9.4 9.1 8.7 8.4 8.4 8.2 8 7.9 7.7 Portland/Van. 7.9 8 7.8 7.6 7.7 7.4 7.3 7.4 6.9 7.1 7.3 Yakima 9.5 9.1 9.1 8.7 8.2 7.9 7.5 7.5 7.6 7.7 7.5 Olympia 9.6 9.2 8.7 8.5 7.9 7.3 7.1 7.1 6.9 6.8 6.6 Wenatchee 6.1 5.9 5.9 5.9 5.6 5.4 5.1 5.3 5 4.9 4.8 Tri Cities 5.2 5 4.9 4.8 4.4 4.2 4.1 4.3 4.5 4.7 4.9 Coeur d’Alene 7 7 6.8 6.5 6.7 6.5 6.5 6.6 6.3 6.9 7.1 Lewiston, ID 6.2 5.9 5.9 5.9 5.3 4.8 4.7 4.9 5 4.7 5.3 *Source www.foreclosure-response.org (Center for Housing Policy)
- 78. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Employment by Major Industry, Spokane
- 79. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Personal Income (per capita), 1990-2012
- 80. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Leading Index - Pacific NW, 1990-2013
- 81. Monetary Policy Ryan W. Herzog Outline Economy Financial Markets Banking Sector Future Local Economy Local Company Stock Prices Company 1-Year %∆ 5-Year %∆ Company 1-Year %∆ 5-Year %∆ Russell 2000 10.11% 20.34% S&P 500 10.79% 11.97% Key Tronic 0.96% 216.27% Sterling Fin. 6.3% Northwest Bancorp 14% -57.78% Itron -6.78% -52.76% CdA Mines -31.18% -59.77% WTB Fin. 12.43% 10.5% Hecla Mining -8.4% -51.32% Clearwater Paper 31.82% 316.09% Potlach 44.51% Avista 4.59% 36.72% Coldwater Creek -12.13% -17.81% Intermnt Bank 17.39% (YTD) Red Lion -6.47% -9.85% *Prices as of 2/27/2013