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Transcript
The Federal Reserve Decision
We will pause to consider the Fed’s announcements last
week.
• It is an important new development
• We will return to Fed policies later, but this is a good
introduction.
1
Origins of the Great Recession (2007 - 2012)
• Recession turned sharply downward after the peak of the
financial crisis in the fall of 2008.
• Output fell and unemployment rose sharply.
• The unemployment rate has stagnated at 8+% since then.
• Fiscal policy is paralyzed in the political wars
• Monetary policy has taken many steps to stimulate the economy
(we will discuss these later).
• Fed has become increasingly concerned that the economy has
stagnated
2
Real GDP over the cycle
15,000
Real GDP (billions of 2005 $)
14,500
Real GDP (Actual)
Real Potential GDP
14,000
13,500
Large
GDP “gap”
13,000
12,500
12,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
3
Unemployment rate over the cycle: 1960 - 2012
11
10
9
8
7
6
5
4
3
1960
1970
1980
1990
2000
2010
4
Shaded areas are NBER recessions.
Time for an elevator quiz
5
Elevator question
What are the innovative elements or new policies
announced by the Fed in its September 2012 statement?
5 minutes, but at most ½ page.
6
Federal Reserve, Federal Open Market Committee
Release Date: September 13, 2012
…
Consistent with its statutory mandate, the Committee seeks to foster
maximum employment and price stability. The Committee is concerned that,
without further policy accommodation, economic growth might not be strong
enough to generate sustained improvement in labor market conditions….
To support a stronger economic recovery…, the Committee agreed today
to increase policy accommodation by purchasing additional agency mortgagebacked securities at a pace of $40 billion per month. The Committee also will
continue through the end of the year its program to extend the average maturity of
its holdings of securities as announced in June. …
If the outlook for the labor market does not improve substantially, the
Committee will continue its purchases of agency mortgage-backed securities,
undertake additional asset purchases, and employ its other policy tools as
appropriate until such improvement is achieved in a context of price stability….
To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the economic recovery
strengthens. In particular, the Committee also decided today to keep the target
range for the federal funds rate at 0 to 1/4 percent and currently anticipates that
exceptionally low levels for the federal funds rate are likely to be warranted at least
through mid-2015.
7
Answers
First point to emphasize is that standard tool (short-term
interest rate or federal funds rate) can not effectively be
lowered.
8
Federal Reserve, Federal Open Market Committee
Release Date: September 13, 2012
…
Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. The Committee is
concerned that, without further policy accommodation, economic
growth might not be strong enough to generate sustained
improvement in labor market conditions….
• Fed has dual mandate.
• Fed is now emphasizing “real”
rather than “inflation” objective.
• Major movement away from
proposal to target inflation (ECB
and many inflation hawks.
9
To support a stronger economic recovery…, the Committee
agreed today to increase policy accommodation by purchasing
additional agency mortgage-backed securities at a pace of $40 billion
per month.
• This is “quantitative easing.”
• Idea is to purchase long-term
securities to lower long-term
interest rates.
• Also, move to mortgage-backed
securities to help housing market
and lower risk-premium on nonTreasury securities.
10
The Committee also will continue through the end of the year its
program to extend the average maturity of its holdings of securities as
announced in June. …
• More steps to length maturity of
Fed’s holdings and push down
long-term interest rates.
11
Term structure of Treasury interest rates
5
2008
4.5
2011
4
Sep-12
3.5
3
2.5
2
1.5
1
0.5
0
1 mo
3 mo
6 mo
1 yr
2 yr
3 yr
5 yr
7 yr
10 yr
20 yr
30 yr
12
If the outlook for the labor market does not improve
substantially, the Committee will continue its purchases of
agency mortgage-backed securities, undertake additional
asset purchases, and employ its other policy tools as
appropriate until such improvement is achieved in a
context of price stability….
• Points to objective of reducing
unemployment as guideline to
policy.
• Open ended. Earlier policies were
time or $ limited.
13
To support continued progress toward maximum
employment and price stability, the Committee expects
that a highly accommodative stance of monetary policy
will remain appropriate for a considerable time after the
economic recovery strengthens. In particular, the
Committee also decided today to keep the target range for
the federal funds rate at 0 to 1/4 percent and
currently anticipates that exceptionally low levels
for the federal funds rate are likely to be warranted
at least through mid-2015.
• For at least three years!
• Statement that would not raise
rates as soon as there is recovery,
but implicitly until close to full
employment.
14
Unemployment projections
of members of the FOMC
15
Summary
• Fed has taken an important step in making a
commitment to keep stimulating the economy until on a
trajectory toward full employment.
• But does not expect full employment until after 2015.
16