Download Slide 1

Whatever It Takes
Laurence H. Meyer
January 8, 2009
Presentation to the National Economics Club
Signature Features of MA Forecast
• Recession, transition, and recovery
– Deep recession through middle of 2009
– Transition to below trend growth in 2nd half
– Robust growth in 2011
• Inflation
– Very low, below 1% in 2009, below ½% 2010
– Serious risk of deflation
• Policy
– Whatever it takes: near zero funds rate + unconventional policy
– Fiscal: complement, second and significant stimulus package
January 2009
© Macroeconomic Advisers
2
Compared to What?
• Early 1990s: Bank capital shortage
• Fall 1998: LTCM, etc.
• 2001 Recession: Wealth destruction, bursting bubble
• 1981-82: Worst postwar recession
• Japan in 1990s: ZRP and QE
• The Great Depression: debt-deflation
• “The aftermath of financial crises” (Reinhart & Rogoff)
January 2009
© Macroeconomic Advisers
3
Aftermath of Past Financial Crises
Macro Consequences of Financial Crises1
Previous Financial Crises2
Current Episode, US
Peak to
Trough
Number of
Years
Peak to Trough
to Date
Including MA
Forecast
Housing price decline (%)
35.0
6.0
21.0
33.2
Equity prices decline (%)
55.0
3.5
52.7
52.7
Unemployment rate increase (pp)
7.0
4.0
2.3
4.0
Real per capita GDP decline (%)
9.0
2.0
0.4
-3.2
Real Government Debt (%)
86.0
3.03
--
61.0
1 From Reinhart and Rogoff, "The Aftermath of Financial Crises" prepared for AEA meetings, December 19, 2008
2 The sample of financial crises includes Spain 1977, Norway 1987, Finland 1991, Sweden 1991, Japan 1992, Asian
EM economies 1997-1998, Columbia 1998, Argentina 2001, Norway 1899, U.S. 1929
3 For government debt, Reinhart and Rogoff use the increase in government debt in the three years following each
crisis
January 2009
© Macroeconomic Advisers
4
MA Forecast Summary
GDP growth and Unemployment Forecast
10
Inflation Forecast
Percent
5.0
H F
Percent
H F
Headline PCE
8
4.0
Unemployment
rate
6
3.0
4
FOMC comfort zone
2.0
2
Core PCE
1.0
0
0.0
-2
-1.0
-4
Real GDP growth
Q4-2011
Q3-2011
Q2-2011
Q1-2011
Q4-2010
Q3-2010
Q2-2010
Q1-2010
Q4-2009
Q3-2009
Q2-2009
Q1-2009
Q4-2008
Q3-2008
Q2-2008
Q1-2008
Q4-2007
Q3-2007
Q2-2007
Q1-2007
-6
-2.0
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Sep-10
May-11
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
5
Recession Comparisons
Business Cycle
Peak
April 1960
December 1969
November 1973
January 1980
July 1981
July 1990
March 2001
Trough
Duration
GDP
(Months)
(Percent change)
Peak
Change
(Level)
10
11
16
6
16
8
8
-1.6
-0.6
-3.1
-2.2
-2.9
-1.3
-0.4
7.1
6.1
9.0
7.8
10.8
6.8
5.9
2.3
2.6
4.4
1.9
3.6
1.6
2.0
1.6
0.2
2.8
1.6
4.7
1.0
1.1
15
-2.4
8.4
4.0
3.6
11.8
8.0
-2.1
-0.8
8.2
6.4
3.0
1.8
2.2
1.0
February 1961
November 1970
March 1975
July 1980
November 1982
March 1991
November 2001
December 2007 March 2009
Average
Average
1960 - 1983
1983 - 2007
Unemployment Rate Unemployment Gap
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
6
The Assumed Fiscal Stimulus Package
Assumed Federal Fiscal Stimulus Package
Billions of dollars, calendar year
2009
2010
2011
2012
2013
2-yr
5-yr
GIA for State & Local Infrastructure Spending
30
70
100
70
30
100
300
Unrestricted GIA for State & Local Gov'ts
50
50
100
100
Increase in Medicaid Matching
20
20
40
40
Extended Unemployment Benefits
10
11
12
11
10
21
54
Individual Income Tax Cut
125
130
134
139
145
255
673
-67
-70
0
-137
153
115
516
1030
Higher-earner Income Tax Increase
Total
235
281
246
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
7
Treasury Supply: A Lot in the Pipeline
1600
$ billions
Net Treasury Borrowing
Federal Debt Held by the Public
(4-quarter rolling sum)
(% of GDP)
0.60
1400
Projected
2009Q1
1200
0.55
Projected
2010Q4
1000
0.50
800
0.45
600
400
0.40
200
0
0.35
-200
-400
1989
1991
1993
January 2009
1995
1997
1999
2001
2003
2005
2007
2009
0.30
1989
1991
1993
© Macroeconomic Advisers
1995
1997
1999
2001
2003
2005
2007
2009
8
A Synchronized Global Recession
8
Change in Real GDP
Global GDP Growth
(4-quarter moving average)
(4th quarter to4th quarter)
Percent
H F
2008
7
2009
2010
MA US GDP
MA
6
US
5
-0.7
World GDP
0.4
5.2
OE
4
Euro
-0.6
-1.1
1.4
Japan
-1.8
-1.0
1.0
2
China
7.3
8.1
10.0
1
Brazil
4.6
0.9
4.0
World*
1.0
0.4
3.5
3
0
*At market exchange rates
-1
-2
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Macroeconomic Advisers forecast prepared December 24, 2008. Note: Macroeconomic Advisers forecast for foreign GDP is based on projections by Oxford Economics.
January 2009
© Macroeconomic Advisers
9
Deflation: A Serious Threat
Deflation Risk
Inflation Forecast
5.0
Percent
5.0
H F
Headline PCE
Percent
4.0
4.0
3.0
3.0
2.0
Headline PCE
FOMC comfort zone
2.0
1.0
Core PCE
0.0
1.0
-1.0
0.0
95% confidence band
-2.0
-1.0
-3.0
-2.0
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Sep-10
May-11
-4.0
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Sep-10
May-11
Confidence band based on historical errors of consensus forecast as computed by
Reifschneider and Tulip (2007) and reported in FOMC minutes.
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
10
Deflation: A Serious Threat
Baseline Forecast
3.0
Forecast with Deflationary Concerns
Percent
3.0
H F
Percent
H F
2.5
2.5
Core PCE Inflation
Inflation Expectations
2.0
2.0
1.5
1.5
Core PCE Inflation
1.0
1.0
Inflation Expectations
0.5
0.5
0.0
2007
2008
2009
2010
0.0
2007
2008
2009
2010
Macroeconomic Advisers forecast prepared November 5, 2008.
January 2009
© Macroeconomic Advisers
11
Credit Conditions: The Dominant Forecast Factor
700
Corporate Yield Spread
Banks’ Willingness to Lend*
(Moody’s Baa less Treasury)
(Senior Loan Officer Survey)
Basis points
60
Percent of banks
40
600
20
500
0
400
-20
300
-40
200
-60
100
1997
1999
2001
2003
2005
2007
2009
-80
1985
1988
1991
1994
1997
2000
2003
2009
2006
* Share of institutions more (positive) or less (negative) willing to make
consumer installment loans.
January 2009
© Macroeconomic Advisers
12
Credit Conditions: Gradual Recovery
Baa Corporate Yield Spread
7
Conforming Mortgage Spread
Percentage points
H F
4.5
Percentage points
H F
4.0
6
Actual
3.5
5
3.0
4
2.5
Actual
Fitted
2.0
3
1.5
2
Fitted
1.0
1
0.5
0
1965
1970
1975
January 2009
1980
1985
1990
1995
2000
2005
2010
0.0
1971
1976
© Macroeconomic Advisers
1981
1986
1991
1996
2001
2006
2011
13
Fed Liquidity Policies: A Summary
Cheat Sheet for Fed Liquidity Policies
Macroeconomic Advisers
Discount Window
Primary Dealer Credit
Facility (PDCF)
Term Repos
Term Auction Facility (TAF)
Participants
Depository institutions
Primary dealers
Primary dealers
Depository institutions
Frequency
Daily (standing facility)
Daily (standing facility)
Weekly auctions for 28-day
2 auctions per month
RPs
Securities Lending
Facility
Term Securities Lending
Facility (TSLF)
TSLF Options Program
(TOP)
Primary dealers
Reciprocal Currency Swap
BoC, BoE, ECB, BoJ, SNB, Reserve Bank of
Austrailia, Danmarks Nationalbank, Norges
Bank, Sveriges Riksbank, Bank of New
Zealand, Banco Central do Brasil, Banco de
Mexico, Bank of Korea, and the Monetary
Authority of Singapore
Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility
(AMLF)
Agency Discount Note
Purchases
Commercial Paper
Funding Facility (CPFF)
Money Market Investor
Funding Facility (MMIFF)
Primary dealers
Eligible U.S. issuers of
commercial paper
U.S. money market mutual
funds (and over time could
include other U.S. money
market investors)
Unspecified
Daily (standing facility)
Daily (standing facility)
U.S. dollar denominated issues from a U.S.
issuer, and rated first-tier securities under Rule Federal agency discount notes
2a-7
Highly-rated, U.S. dollardenominated, three-month
Commercial Paper
(unsecured and assetbacked)
U.S. dollar-denominated
CDs and CP issued by
highly-rated financial
institutions and having
remaining maturities of 90
days or less
Advances may remain outstanding for the
remaining term of the ABCP that is financed,
which varies from overnight to 270 days, except Securities have maturities of
for depository institutions, where no advance
overnight to 360 days
under the AMLF may exceed a term of 120
days
Borrowers can issue 3month CP to the facility
Assets purchased under
the program must have
maturities from 7 to 90 days
Primary credit rate on date loan initiated, to be
fixed over term of loan
Auction determined rate
For unsecured CP, 100 bp
over the 3-month OIS plus
N/A (outright purchases at
a 100-bp securitization fee;
amortized cost)
for ABCP, 300 bp over 3month OIS
Depository institutions
Primary dealers
Primary dealers
Daily (standing facility)
Weekly auctions alternating In advance of periods of
between two collateral
heightened market
schedules
pressure
Daily (standing facility)
Daily (standing facility)
Same as TSLF
Foreign reserves
As needed
Eligible collateral
Broad range of collateral
all collateral eligible in triparty repurchase
arrangements with the
major clearing banks
Treasuries, GSE debt, or
GSE-guaranteed MBS
Broad range of collateral
Treasuries
Two collateral schedules:
1) only OMO collateral; 2)
OMO collateral plus
AAA/Aaa-rated privatelabel MBS, CMBS and
agency CMOs, and
AAA/Aaa-rated ABS
Term
90 days
Overnight
Various terms up to 28
days
Alternating auctions of 28
days and 84 days
Overnight
28 days
Options will be for TSLF
loans that have maturities
of two weeks or less
Rate
Primary rate is the federal
funds rate plus 25 bps
Primary rate from discount
Auction determined rate
window
User pays auctiondetermined penalty for
obtaining GC Treasury
instead of broader
collateral; minimum of 10
bps for schedule 1 and 25
bps for schedule 2
Auction determined price
for option to conduct TSLF N/A
at a rate of 25 bps
Size
Limited only by the amount Limited only by the amount
of margin-adjusted
of margin-adjusted
$80b of 28-day RPs
collateral posted to the Fed collateral posted to the Fed
$600b ($450b 84-day;$150b
28-day)
Limited by size of SOMA;
dealers can borrow up to
90% of SOMA holdings
Announced up to $200b
(Schedule 1: $50b;
Schedule 2: $150b)
ECB, SNB, BoJ,BoE unlimited; BOC $30b;
Reserve Bank of Austrailia $30b; Danmarks
Nationalbank $15b; Norges Bank $15b;
Up to $50 billion in addition
Limited by amount of eligible ABCP held by
Sveriges Riksbank $30b; Bank of New Zealand
to TSLF outstanding
money market mutual funds
$15b; Banco Central do Brasil $30b; Banco de
Mexico $30b; Bank of Korea $30b; and the
Monetary Authority of Singapore $30b
Limited by outstanding
securiites
Determined by outstanding
amount of CP from January
to August 2008; each
issuer can borrow
Up to $540 billion
maximum amount of CP
outstanding over that
period
Duration of program
Indefinite
Through 4/30/09
Indefinite
Will consider making it
permanent
Indefinite
Through 4/30/09
Currently scheduled for
year-end; other periods will
be considered based on
Through 4/30/09
auction results and market
conditions
Unspecified
Through 4/30/09
Recent announcements
On 3/16, announced cut in
discount penalty to 25 bps
and extension of term to 90
days
On 3/16, announced
establishment of PDCF; on
9/14, broadened eligible
collateral; on 12/2,
announced extension to
4/30/09
On 7/30, announced the term
would alternate auctions
between 28 days and 84
On 3/7, announced
days; on 9/29, introduced
intention to do $100b of 28forward TAF auctions; on
day RPs, but program has
10/6, increased both the 84only reached $80b
day and 28-day auctions to
$150b each, bringing the size
of the TAF to $600b
On 11/26, announced
higher limits on amounts of
securities available for
borrowing
On 5/2, announced an
expansion of the collateral
that can be pledged in
schedule 2; on 12/2,
announced extension to
4/30/09
On 12/1, announced
auction dates for year-end
On 10/13, announced that swaps with the BoE,
ECB, and SNB will accommodate whatever
quantitiy of U.S. dollar funding is demanded
and that the swap arrangements were
On 9/19, announced the establishment of the
extended to 4/30/09; on 10/14, made similar
AMLF; on 12/2, announced extension to
announcement for BoJ; on 10/28, established 4/30/09
swaps with New Zealand; on 10/29,
established swaps with Brazil, Mexico, Korea,
and Singapore
On 9/19, annoucned
establishment of this program
along with the AMLF
On 10/21, announced
On 10/7, announced the
establishment of the
establishment of the CPFF
MMMIFF
Notes
Enacted under 13(3);
Fed would like to get rid of additional fee to borrowers On 28-day RPs, they
any stigma associated with who access the PDCF
usually get all MBS
borrowing
more than 30 days out of
collateral
120 days
Enacted under 13(3); Fed
provides GC Treasuries in
exchange for other
collateral
Options to participate in
TSLF operation at the 25
bps rate on a future date;
enacted under 13(3)
The foreign central banks have to conduct
operations to inject the dollars; the swaps are
to provide them with the reserves to do so;
most foreign central banks do so through term
operations
January 2009
Swaps specific Treasuries
for other Treasuries; user
Auction determined rate with pays an auction-determined
minimum of 1-month OIS rate penalty (analogous to
specialness of borrowed
Treasury)
Like discount window, only
auctioned and less
stigma;The two forward TAF Designed to prevent
auctions conducted in
squeezes in individual
November 2008 ($150b each) Treasuries
were introduced to cover yearend pressures.
© Macroeconomic Advisers
Through 4/30/09
Enacted under 13(3); allows money market
mutual funds to shed ABCP in order to meet
Intention is to help money
redemptions; involves lending at primary rate to market mutual funds meet
banks who purchase ABS from money market redemptions
mutual funds; the loans are non-recourse
Through 4/30/09
Enacted under 13(3);
Enacted under 13(3);
allows money market
allows issuers of CP to
mutual funds to shed
know that they can roll over
assets in order to meet
their holdings
redemptions
14
Improvement in Interbank Funding Market
Libor Credit Spread
Federal Funds Rate and Libor
(Relative to OIS Rate)
6
Percent
400
Basis points
350
5
300
4
250
3-month Libor rate
3
200
150
2
3-month
rate
100
1
50
Effective funds rate
1-month rate
0
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
0
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
*Effective federal funds rate is a ten-day moving average. The range shown shows the intraday
variation, measured as +/- one standard deviation.
January 2009
© Macroeconomic Advisers
15
The New Policy Regime
Broader use of Fed’s balance sheet to achieve objectives
Intention of these policies is to influence financial conditions
-
Monitor credit conditions to gauge success
But no explicit targets
Quantitative easing of a different sort
-
Policies will inject large amounts of reserves
But goal is not the level of reserves
No single measure to summarize Fed actions
-
Watch the H.4.1
Makes communications challenging
Governance issues
-
January 2009
All decisions made by FOMC
Even though 13(3) programs under authority of Board
© Macroeconomic Advisers
16
Whatever It Takes
1. To the (almost) zero bound: why the range?
2. Purchase private assets: offset credit shock
–
–
Attempt to lower risk spreads, increasing credit availability
New programs for agency MBS; consumer, small business ABS
3. Purchase longer-term Treasuries
–
–
–
Attempt to lower long-term rates (term spreads)
Clearly within their authority
In combination with greater fiscal expansion
4. Policy commitment language
–
–
Convey staying at low rates for longer than anticipated
“Some time” similar to “considerable period” language of 2003
January 2009
© Macroeconomic Advisers
17
Monetary Policy: To the (Almost) Zero Bound
MA Call vs. Market Expectations
5.5
Percent
H F
5.0
4.5
4.0
3.5
3.0
2.5
2.0
Market
expectations
1.5
Current MA
forecast
1.0
0.5
0.0
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
18
Prescribed Funds Rate: Taylor Rule Perspective
12
Backward-looking Policy Rule
Forward-looking Policy Rule
(Based on macroeconomic outcomes)
(Based on FOMC & MA forecasts)
Percent
10
H F
Percent
H F
Policy Rule Prescription
10
8
Actual and Predicted Funds Rate
8
6
6
4
4
2
2
0
0
-2
Prescription from MA Forecast
-2
-4
-6
1987
1990
1993
1996
1999
2002
2005
2008
2011
Prescription from FOMC forecasts
Actual and Predicted Funds Rate
-4
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
19
Fed Balance Sheet: Massive and Growing
Current
Announced
August 1 2007
($ bil)
($ bil)
($ bil)
Lending Facilities (Focused on Term Credit)
28-day RPs
Term Auction Facility (TAF)
FX Swaps
Asset-backed CP Liquidity Facility (ALMF)
Purchases of agency discount notes
Commercial Paper Funding Facility (CPFF)
Money Market Investor Funding Facility (MMIFF)
Discount Window
PDCF
80
450
622
24
15
334
0
94
37
100
600
Unlimited
Unlimited*
Unlimited*
Unlimited*
540
Unlimited*
Unlimited*
0
0
0
0
0
0
0
2
0
Rescue Operations (Focused on Individual Institutions)
Maiden Lane I (Bear Stearns)
Maiden Lane II (AIG RMBS holdings)
Maiden Lane III (AIG-backed CDOs)
Credit to AIG
Non-recourse credit to Citigroup
27
20
27
39
0
Operations Focused on Asset Prices
Term Asset-Backed Securities Loan Facility (TALF)
Outright holdings of agency debt
Outright holdings of agency MBS
0
5
0
200
100
500
0
0
0
496
n/a
791
"Normal" Portfolio
Outright holdings of Treasuries
1,774
29
22.5
30
60
Up to 262
3,788
0
0
0
0
0
2
TSLF operations do not add reserves but do use the Fed's holdings of Treasuries.
*Amounts of AMLF, discount note purchases, CPFF, discount window, and PDCF are limited by amount of outstanding eligible securities.
January 2009
© Macroeconomic Advisers
20
Reserves: More than Needed
Total Amount of Reserves
900
Composition of Reserves
$ billions
1200
800
1000
700
800
$ billions
Reserves through lending programs
600
600
Excess reserves
500
400
Total reserves
400
200
300
0
200
-200
100
-400
Other reserves
Required reserves
0
Jan-06
Jun-06
Nov-06
January 2009
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
-600
Jan-06
Jun-06
© Macroeconomic Advisers
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
21
Treasury Yields: Historic Lows
Yield Curve Slope
Treasury Yields
(10 year-2 year spread)
6
3.0
Actual
2.5
5
2.0
Ten-year Treasury yield
Fitted
4
1.5
1.0
3
0.5
2
0.0
Two-year Treasury yield
-0.5
Residual
1
-1.0
0
May-07
Aug-07
January 2009
Nov-07
Feb-08
May-08
Aug-08
Nov-08
-1.5
1984
1987
© Macroeconomic Advisers
1990
1993
1996
1999
2002
2005
2008
22
Keys to an Eventual Rebound
1. Drags do not continue at current pace
-
Credit conditions begin gradual improvement
-
Equity prices rebound
-
Housing activity stabilizes
-
Home prices fall at slower pace
2. Overwhelming policy response
January 2009
–
Very large fiscal stimulus package
–
Monetary policy and balance sheet policy
© Macroeconomic Advisers
23
Housing Construction: In Search of a Bottom
House Price Indexes
Housing Activity
(4-quarter percent change)
2350
Pp
Thous. units
Housing starts (left)
H F
2.0
2100
1.5
1850
1.0
1600
0.5
1350
0.0
1100
-0.5
25
Percent
H F
20
15
10
5
FHFA purchase-only index
0
-5
850
-1.0
Contribution of residential
investment to GDP (right)
-10
Case-Shiller index
600
-1.5 -15
350
2000
2002
2004
2006
2008
2010
-2.0 -20
2001
2003
2005
2007
2009
Case-Shiller cumulative decline
-33.2
OFHEO cumulative decline
-12.9
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
24
Equity Prices: Sharp Decline, then Rebound Next Year
Household Net Worth
S&P 500 Index
2500
(4-quarter change)
Index
H F
20
Trillions $
H F
15
2000
10
Long-term fair value range
5
1500
0
1000
-5
-10
500
-15
0
1985
1989
1993
1997
2001
2005
2009
-20
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Macroeconomic Advisers forecast prepared December 24, 2008.
January 2009
© Macroeconomic Advisers
25