Download The Economic Outlook and Monetary Policy

The Economic Outlook and
Monetary Policy
May 30, 2012
Yelena F. Takhtamanova, Economist
Yelena
F Takhtamanova Economist
Federal Reserve Bank of San Francisco
Overview
1. Goals of U.S. monetary policy
Goals of U.S. monetary policy
2. Current national situation
3 National forecast (FRBSF and FOMC)
3.
National forecast (FRBSF and FOMC)
4. Recent monetary policy actions
These remarks
Th
k representt my views
i
and
d nott necessarily
il those
th
off my colleagues
ll
in the Federal Reserve System and the Federal Reserve Bank of San
Francisco. No audio recording, video recording, or photography is permitted
without the permission of the presenter.
presenter This presentation may not be
reproduced in any form without the express, written permission of the
presenter.
The Many Roles of the Federal Reserve
• Conducting the nation’s monetary policy – the main focus of this presentation
focus of this presentation.
• Supervising and regulating banks and other important financial institutions.
• Maintaining the stability of the financial system and g
y
y
containing systemic risks that may arise in financial markets.
• Providing financial services to the U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payment system
1. GOALS OF U.S. MONETARY POLICY
U.S. Monetary Policy Goals
y
y
1) Promote maximum sustainable output and employment
2) Promote stable prices
These goals and Fed’s efforts to reach them are reported to Congress and the public on a semi‐
annual basis as part of the Chairman’s testimony and the Monetary Policy Report.
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d h M
P li R
2. CURRENT NATIONAL SITUATION
Four Plus Years After the Recession Began, Output has Finally Surpassed Pre‐Recession Levels Although Output Has Surpassed Pre‐Recession Levels, It Remains Well Below Potential as a Result of the Long and Deep Recession
Gap = - 5.4% of
Potential Real
GDP
The Private Sector Is Adding Jobs at a Moderate Rate, but Full Employment Remains a Long Way Off
1990 1 – 2007:11
1990:1
2007 11 A
Average = 135K
Jan
Feb
Mar
Apr
Total (000s)
275
259
154
115
Private
277
254
166
130
Gov’t
-2
-5
-8
-15
The U.S. Unemployment Rate Declined Notably in Recent Months, but Remains Elevated —
A d h R
And the Recent Pace of Declines May Not Be Sustainable
P
f D li
M N B S
i bl
SPF Natural Rate
Range (≈ 5-7%)
SPF = Survey of Professional Forecasters, FRB Philadelphia.
The Housing Sector Remains Depressed
Federal Government Subtracted 0.5 Percentage Point from 2012 Q1 Growth Rate
Percentage Point from 2012‐Q1 Growth Rate
State & Local Governments Continue to Shed Jobs; Sector Subtracted 0.14 Percentage Point from GDP Growth in 2012:Q1
Economic Weakness in Europe or a Greater‐than‐
Expected Slowdown in China and Emerging Asia Pose a Risk to U.S. Exports
Recent Increases in Oil and Gasoline Prices Might Restrain Consumption
p
Spending; However Energy Prices Diverge
p
g
gy
g
Modest Wage Growth Anchors Costs/Prices
TIPS Inflation Expectations Remain Anchored (
(An Important Factor for the Inflation Outlook)
p
f
f
)
Source: Federal Reserve Board.
4 NATIONAL FORECASTS
4. N
FOMC PROJECTIONS
APRIL 25, 2012
,
http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf
FRBSF ECONOMIC FORECAST
((FEDVIEWS) MAY 14, 2012
)
,
http://www.frbsf.org/index.html
FOMC’s Real GDP Projections
Percent Change in rate in real (inflation adjusted) GDP or Output
2007
2008
2009
2010
2011
2012
2013
2014
Longer
run
FOMC’s Unemployment Projections
Unemployment Rate in Percent
2007
2008
2009
2010
2011
2012
2013
2014
Longer
run
FOMC’s Inflation (Headline) Projections
Percent Change in Total Personal Consumption Expenditures (PCE) Inflation
2007
2008
2009
2010
2011
2012
2013
2014
Longer
run
Expect GDP Growth to Register About 2 75 % for 2012:H2 & 2013
2.75 % for 2012:H2 & 2013
Fedviews May 14, 2012
Moderate GDP Growth Rate Is Not Fast g
g
p Even at Enough to Close the Large Gap –
Lower Potential Growth Rate Estimates
Fedviews May 14, 2012
Gradual Decline in Unemployment Rates p
f
But the Is Expected for 2012 and 2013 –
Unemployment Gap Remains Large
Fedviews May 14, 2012
Overall Inflationary Pressures to Expected ; f
to Ease Over Time; Inflation to Come In Under 2% Goal for Headline Inflation
Fedviews May 14, 2012
5. RECENT MONETARY POLICY ACTIONS
Traditional Monetary Policy Tool (Overnight Fed Funds Rate)
Is Not Sufficient to Stimulate the Economy (b
(because of the Zero Bound on Interest Rates)
f h
d
)
“Implied” Fed Funds Target Rate
Unconventional Monetary Policy Actions Increased the Size and Changed the Composition of the Federal Reserve Balance Sheet
Unconventional Monetary Policy Actions:
g
(
)
Large‐Scale Asset Purchases (LSAPs) • LSAP 1 (often referred to as QE1)
• 11/25/2008—announcement of purchases of up to $100 billion in agency debt and up to $500 billion in agency MBS.
• 3/18/2009—announment of purchases of up to an additional $750 billion of agency [MBS], $100 billion in agency debt, and $300 billion in Treasury securities.
• LSAP 2 (often referred to as QE2)
• 11/3/2010—announcement
11/3/2010 announcement of purchases of $600 Billion in longer
of purchases of $600 Billion in longer‐
term Treasury Securities
• Maturity Extension Program (often called Operation Twist) • Announcement
Announcement of purchase $400 billion in long‐term Treasuries, to be of purchase $400 billion in long term Treasuries to be
financed by sales of short‐term Treasuries, • Reinvest principal payments from its holdings of agency debt and MBS in MBS.
• Main objective: reduce long‐term interest rates
The Fed’s Actions Have Promoted Lower Sh
Short‐Term and Long‐Term Interest Rates
T
dL
T
I
R
Estimated Effect of the Fed’s Large‐Scale Asset Purchase Program on a Long‐Term Interest Rates
Purchase Program on a Long‐Term Interest Rates
-50+ basis points
(reduction of
interest rate)
Source: FRBSF Economic Letter 2011-03
http://www.frbsf.org/publications/economics/letter/2011/el2011-03.html
Estimated Effect of the Fed’s Large‐Scale Asset P h
Purchase Program on Unemployment Rate
P
U
l
tR t
-1.5
1.5 percentage point
(reduced the
unemployment rate)
Source: FRBSF Economic Letter 2011-03
http://www.frbsf.org/publications/economics/letter/2011/el2011-03.html
Estimated Effect of the Fed’s Large‐Scale Asset Purchase Program on Inflation
Purchase Program on Inflation
+ 1.0
1 0 percentage
point (added to the
inflation rate)
Source: FRBSF Economic Letter 2011-03
http://www.frbsf.org/publications/economics/letter/2011/el2011-03.html
Movements Toward Transparency:
Brief History
Brief History
•
1978: Testimony to Congress
•
Early 1994: Announcement of fed funds target
Early 1994:
Announcement of fed funds target
•
Late 1994: Descriptions of the state of the economy and the rationale for the policy action
•
2000: Added “balance of risks” to the outlook
•
2002: Released votes of individual members
•
2003: Added forward‐looking guidance on policy
Added forward‐looking guidance on policy
•
2005: Expedited release of FOMC minutes
•
Nov. 2007: Added numerical forecasts to the FOMC minutes four times per year, with a 3‐year time horizon
Feb. 25, 2009: New website launched by the Board of Governors to provide information on the Fed's policy actions during the financial crisis April 27, 2011: Chairman’s press conference added
http://www.federalreserve.gov/monetarypolicy/bst.htm •
•
Movements Toward Transparency: Recent Changes
•
2 BOLD STEPS IN 2012
– FOMC provides statement of longer‐run goals and monetary policy strategy
that includes a 2% numerical inflation target. – Fed policymakers regularly report their short‐term interest rate projections
over the next few years.
th
tf
•
LENDING PROGRAMS DISCLOSED
With th
With the passage of the 2010 Dodd‐Frank Act, the Fed will release details of f th 2010 D dd F k A t th F d ill l
d t il f
loans to banks and thrifts after a two‐year waiting period and details of future emergency lending programs within a year of their closures.
For additional information please see FRBSF 2011 Annual Report
http://www.frbsf.org/publications/federalreserve/annual/
FOMC Target Federal Funds Rate Projections by FOMC Members by Year of Increase
by FOMC Members by Year of Increase
Number
N
b off FOMC P
Participants
i i
Expecting Rates to Increase by Year
5
4
3
3
2
AR 2012
AR:
2013
2014
2015
2016
Appropriate
Timing of Policy Firming
(Increase in2014
Fed Funds Rate
Target)
YEAR: 2012
2013
Longer
run
FOMC Projections April 25,2012
FOMC Target Federal Funds Rate Projections by Year of Increase for Each FOMC Participant
Year of Increase for Each FOMC Participant
Appropriate Pace of Policy Firming
6
Percent
5
Target Federal Funds Rate at Year-End
4
3
2
1
YEAR: 2012
2013
2014
0
Longer run
FOMC Projections April 25,2012
Summary
Economic Outlook
l k
• Moderate growth is expected to continue in 2012.
• Employment is well below maximum sustainable level.
Employment is well below maximum sustainable level.
• Modest wage growth is anchoring costs and inflation pressures.
• Risks to the forecast remain (energy prices, global Risks to the forecast remain (energy prices global
financial conditions, the pace of household balance sheet rebuilding, fiscal policy tightening).
Monetary Policy • Employment far below maximum sustainable level and p y
contained inflation that is expected to fall below the 2% target warrant continued accommodative monetary policy.
• The stimulus won’t last forever. Exit strategy is in place (see, for instance, minutes for June 2011 FOMC meeting).
THANK YOU!
QUESTIONS?
Yelena F. Takhtamanova, Economist
Yelena F. Takhtamanova, Economist
Federal Reserve Bank of San Federal Reserve Bank of San Francisco
d l
k f
Francisco
FRBSF Resources
www.frbsf.org/economics/
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