1. A History of Monetary Policy: Federal Open
Market Committee meeting, June 2009
Antonio Alonso Gonz´alez, Congyi Lui
Boston University
29 April 2016

2. Outline
Financial and economic outlook
Evolution of the Balance Sheet
The Supervisory Capital Assessment Program
The Large Scale Asset Purchases
Liquidity facilities discussion
Exit strategy
Forward Guidance
Inflation and Output Gap
Policy options considered and the final decision
Major Speeches during the FOMC meeting period
Comparative perspectives
Retrospective information

3. Financial outlook of the American Economy
Much higher issue of corporate debt. The spreads of corporate
debt of Treasuries were reduced by 176 and 405 basis points
for the investment-grade and high-yield debt, respectively.
Increase in the price of the stocks. The Standard and Poors
rose a 5 percent, driven by the better prospects of banks.
Decrease of the value of the dollar a 5 percent. Cause:
investors moving from safe US assets to riskier assets abroad.

4. Financial outlook of the American Economy
Key feature: yields on treasures are going up since the last
FOMC meeting...

5. Financial outlook of the American Economy

6. Economic outlook
The FED expected positive economic growth for the next
months
The FED forecasted 1.1 percent growth of the real GDP for
the second half of the year.
Job losses remained important, although not as many job
losses than in previous months. Unemployment was expected
to peak at 10 percent at the end of the year.
Inflation was expected to be 1.4 percent for the whole 2009,
0.7 percent more than the previous forecast.
Great program of public spending: big deficit financed by
issuing debt.

7. Size and composition of the Balance Sheet

8. The Supervisory Capital Assessment Program (Stress test)
During the first half of 2009, great uncertainty about the
solvency of the main banks.
The FED and the Treasury conducted a test to know the
capital needs of the banks in the case of a worsen of the
macroeconomic conditions
Calculated capital needs had to be covered. If the banks could
not raise the capital, Treasury would help them.
Results were better than expected, the test helped to restore
the confidence in the banking system.

9. The Supervisory Capital Assessment Program

10. The Large Scale Asset Purchases Program
So far, the LSAP had a major impact in the MBS and Agency
markets.
The impact of the LSAP in the Treasuries market was smaller,
because the relative size of the program compared to the
market was small. Also, great debt issuance during the period.
At the time, it was already known that most of the effect of
the LSAP was produced by market reaction to the
announcements.
the FOMC rejected the proposals to reallocate the size of the
programs within them. They rejected also changing the
strategy of a constant pace of purchases. Finally, they
rejected the purchase of securitizations of hybrid ARMs
recommended by the staff.

11. The Large Scale Asset Purchases Program: Evolution and
predicted path

12. Liquidity facilities discussion
The FOMC discussed whether to renew or not some liquidity
facilities.
The FOMC decided to renew until February the Commercial
Paper Funding Facility (CPFF), the Primary Dealer Credit
Facility (PDCF), the AMLF and the TSLF. In addition, the
FOMC extended the swap lines between the FED and other
Central Banks.
They decided to let expire the Money Market Investor
Funding Facility (MMIFF). They also decided to suspend
some TSLF auctions.
Even if most programs were renewed, the access to the
programs became more difficult.
The FOMC backed all the proposals by the staff. Even if the
use of liquidity facilities had dropped considerably in the
previous months, they judged useful to have the programs
operative in case of an emergency.

13. Exit Strategy: how to unwind the measures they put in place
The size of the Balance Sheet made a challenge to unwind the
expansionary monetary policy.
To unwind the policies several tools were considered, from the
demand side and from the supply side.
From the supply side
From the demand side

14. From the Demand side

15. From the Supply side

16. In the discussion, they rejected the option of issuing FED bills
because they considered this action as politically unfeasible.
In the Monetary Policy Report of July to the Congress, the
Chairman said that the FED had several tools available,
including the reverse repurchase agreements, sales of long
term assets and the ability to pay interests on balances held at
the FED by depository institutions
They did not include this discussion in the Statement because
they did not want to confuse the market about their
intentions.
The discussion about the exit strategy was rather informal
and the FOMC members did not vote on it.

17. Forward Guidance
MR. Bullard pointed naming a specific date for when we might
make future interest rate moves might go the wrong direction
Never drawing the line in the sand

18. Inflation and Output gap
The committee expected overall PCE (personal consumption
expenditure) inflation to slow from 1.4 percent this year to 1.1
percent in 2010
The projected deceleration in core inflation reflects the
substantial drag induced by economic slack

19. Inflation and Output Gap
Mr. Kiley employed several possible explanations for the
discrepancy In the Greenbook:
GDP data, as currently published, may understate the
contraction in real activity
labor force participation may currently be boosted to an
unusual degree by the Extended Unemployment Compensation
program
have underestimated the size of shifts in the NAIRU (non-
accelerating inflation rate of unemployment) or other elements
of potential

20. Inflation and Output Gap
Various models can be utilized to estimate potential GDP
Two risks to the inflation outlook
expectations could shift down or ramp up
the links between resource utilization and inflation
Sources of distorting shocks

21. Policy options considered and final decision
Three policy alternatives: A,B and C
Alternative A: Increase the purchase of Treasuries to 750
billion by the end of the year
Alternative B: Size of LSAP Program remains unchanged
Alternative C: The LSAP Program will tapper off gradually by
the end of the year.
Alternative B was chosen. A wait-and-see policy.

22. Major Speeches during June FOMC Meeting Period:
Kevin Warsh, Governor, at the Institute of International
Bankers Annual Meeting, New York, New York, June 16, 2009
Governor Elizabeth A. Duke, at the Women in Housing and
Finance Annual Meeting, Washington, D.C., June 15, 2009

23. Major Speeches during June FOMC Meeting Period:
The governor, Kevin Warsh, made a speech titled “Defining
Deviancy”
This definition has expanded to describe actions that deviant
from acceptable standards
It is time to say no to the stability strategy when we face the
deviancy of economy

24. Major Speeches during June FOMC Meeting Period:
Stability is a fine goal, but it is not a final one
Sorely maintaining stability cannot bring US economy back to
the ideal development track
if the policies for fiscal, regulatory, and trade all treat stability
as the ultimate objective, then we might find ourselves with
lower growth and diminished economic potential

25. Major Speeches during June FOMC Meeting Period:
The Federal Reserve should not compromise another kind of
stability–price stability–to help achieve other government
policy objectives
Productivity is still the key of growth
In terms of long-term, we should not lose confidence in the
inherent innovation, creativity, dynamism in the U.S.
economy, and the inherent good sense of our citizens

26. Major Speeches during June FOMC Meeting Period:
“Containing the Crisis and Promoting Economic Recovery” by
Elizabeth A. Duke
Credit easing focuses on the mix of loans and securities that
the central bank holds as assets on its balance sheet as a
means to reduce credit spreads and improve the functioning of
private credit markets

27. Major Speeches during June FOMC Meeting Period:
Targeted actions aimed at specific systemically important
institutions
Liquidity programs for financial institutions
Lending to support key financial markets
Large-scale purchases of high-quality assets

28. Major Speeches during June FOMC Meeting Period:

29. Major Speeches during June FOMC Meeting Period:
A Fiscal Policy named Emergency Economic Stabilization Act
has been initiated In October 2008
In February of this year, the Federal Reserve, as part of the
Treasury’s Financial Stability Plan, initiated the Supervisory
Capital Assessment Program (SCAP)

30. Contemporary Perspectives
As Ben Bernanke recalls in his memories: “In the first months
of the new administration [Obama first mandate], completing
the stabilization of the Banking System remained a top
priority.”
The Economist, in the publication of 16 May pointed out that
the bank stress test helped a lot to restore some confidence in
banking.
Both The Economist and the WSJ pointed that the FED did
not mention a concern about the possibility of deflation in the
June24 FOMC statement

31. Retrospect
Stress Tests revealed to be one of the best policy decisions
made during the economic crisis
Forecasts were close and we observed how the summer of
2009 was the turning point of the economic crisis

32. Retrospect
The Real GDP growth was lower than expected for 2009 (-2.8
instead of -1.1 forecasted)