Download Acting to Avoid a Great Stagnation

Acting to Avoid a Great Stagnation
Eric S. Rosengren
President & CEO
Federal Reserve Bank of Boston
South Shore Chamber of Commerce
Quincy, Massachusetts
September 20, 2012
EMBARGOED UNTIL THURSDAY, SEPTEMBER 20, 2012 AT 8:15 A.M. EASTERN TIME, OR UPON DELIVERY
Avoiding a Great Stagnation
 Historians use “Great” to reflect success –
e.g., Alexander the Great
 Economists use “Great” to reflect difficult
episodes and policy that contributes or
fails to alleviate – e.g., Great Depression,
Great Recession
 Forceful action necessary – and being
taken – to avoid a Great Stagnation
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What Would Constitute A Great
Stagnation?
 Policymakers accepting as inevitable a
slow growth economy and underutilized
economic resources
 Allowing high unemployment to become a
more permanent feature of the economy
 Policy only reacting to large negative
shocks; accepting slow growth that makes
little progress in returning to full
employment
3
Acting to Avoid It: Our Monetary Policy
Response to Global Slowdown
 Seek faster growth than has occurred or is
likely to occur without action




Asset purchases (agency mortgage-backed and
Treasury securities)
More open-ended focus on economic outcomes
rather than calendar dates or amounts purchased
Communicating that we anticipate low short-term
rates likely to be warranted at least through mid2015; accommodative until recovery is sustainable
Context of price stability; assessment of costs,
efficacy
4
Our Monetary Policy Response Continued…
 Unconventional policy has risks, but they
are preferable to the risk of another year
or more of economic stagnation
 My rationale for policy change…
5
Real-World Example of Stagnation
 Japan and Europe have both suffered long
periods of slow growth
 Today I will focus on Japan – despite
some key differences from the U.S.


Demographics – Japanese population’s
average age is rapidly rising
Slow response to banking problems
6
Figure 1
Japan’s Real Gross Domestic Product
1980:Q1 - 2012:Q2
Trillions of Chained 2005 Yen, Seasonally Adjusted Annual Rate
800
Trend Line Estimated Over Period 1980 - 1990
600
Real GDP
400
200
0
1980:Q1
1984:Q1
1988:Q1
1992:Q1
Source: Cabinet Office of Japan / Haver Analytics
1996:Q1
2000:Q1
2004:Q1
2008:Q1
2012:Q1
7
Figure 2
U.S. Real Gross Domestic Product
1980:Q1 - 2012:Q2
Trillions of Chained 2005 Dollars, Seasonally Adjusted Annual Rate
16
Trend Line
1
1
12
Real GDP
1
8
0
4
0
1980:Q1
0
0
1984:Q1
1988:Q1
1992:Q1
1996:Q1
2000:Q1
2004:Q1
2008:Q1
2012:Q1
Recession
Source: BEA, NBER / Haver Analytics
8
Causes of Slow Growth
 Not unusual after a financial crisis
 Let’s look at a few factors (not enough
time for a detailed discussion)
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Figure 3
Growth in Real GDP and Real GDP Excluding
Housing and Government Spending
2009:Q2 - 2012:Q2
Index, 2009:Q2=100
108
Real GDP Excluding Residential
Investment and Government Spending
(Average Annual Growth of 2.45%)
106
104
Real GDP
(Average Annual Growth of 2.21%)
102
100
98
2009:Q2
2009:Q4
2010:Q2
Source: BEA, NBER / Haver Analytics
2010:Q4
2011:Q2
2011:Q4
2012:Q2
10
Figure 4
Housing Starts
2000:Q1 - 2012:Q2
Thousands of Units, Seasonally Adjusted Annual Rate
2,500
1
2,000
1
1,500
1
1,000
0
500
0
0
0
2000:Q1
2002:Q1
2004:Q1
2006:Q1
2008:Q1
2010:Q1
2012:Q1
Recession
Source: Bureau of the Census, NBER / Haver Analytics
11
Figure 5
Growth in Real State and Local
Government Spending
2000:Q1 - 2012:Q2
Percent Change from Year Earlier
6
1
4
1
2
1
0
0
-2
0
-4
-6
0
2000:Q1
2002:Q1
2004:Q1
2006:Q1
2008:Q1
2010:Q1
2012:Q1
Recession
Source: BEA, NBER / Haver Analytics
12
Figure 6
Change in Real GDP from
U.S. Business Cycle Peak by Country
2007:Q4 - 2012:Q2
Index, 2007:Q4=100
110
105
Canada
Germany
United States
France
Japan
United Kingdom
100
95
90
2007:Q4 2008:Q2 2008:Q4 2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4 2012:Q2
Source: BEA, CAO, Eurostat, ONS, INSEE, StatCan / Haver Analytics
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The Significant Costs of a Slow
Recovery
 Impact on those unemployed or
underemployed
 Temporary labor market problems can
eventually become more permanent
because of a slow recovery
14
Figure 7
Employment-to-Population* Ratio
January 2000 - August 2012
Percent
66
1
64
1
62
1
60
0
58
0
56
0
Jan-2000
Jan-2002
Jan-2004
*Includes population 16 years and older
Source: BLS, NBER / Haver Analytics
Jan-2006
Jan-2008
Jan-2010
Jan-2012
Recession
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Figure 8
Long-Term Unemployment
January 1980 - August 2012
Percent
50
1
40
1
Percent of unemployed out of
work for 27 weeks or more
30
1
20
0
10
0
0
0
Jan-1980
Jan-1984
Jan-1988
Jan-1992
Jan-1996
Jan-2000
Jan-2004
Jan-2008
Jan-2012
Recession
Source: BLS, NBER / Haver Analytics
16
What Should Monetary
Policymakers Do?
 Conventional response – lower short-term
rates… not possible at the zero lower bound
 Unconventional responses



More costs
Impact less certain
Still, not a reason to avoid necessary actions
17
Figure 9
Japan’s Central Bank Assets and Inflation Rate
1990:Q1 - 2012:Q2
Trillions of Yen
160
Total Assets of Bank of Japan
120
80
40
0
1990:Q1
1993:Q1
1996:Q1
1999:Q1
2002:Q1
2005:Q1
2008:Q1
2011:Q1
1999:Q1
2002:Q1
2005:Q1
2008:Q1
2011:Q1
Percent Change from Year Earlier
6.0
Consumer Price Index for Japan
3.0
0.0
-3.0
1990:Q1
1993:Q1
1996:Q1
Source: Japanese Ministry of Internal Affairs and Communications, Bank of Japan / Haver Analytics
18
Figure 10
Federal Reserve System Assets and U.S.
Inflation Rate
January 1990 - July 2012
Trillions of Dollars
4.0
1
1
3.0
Federal Reserve
System Assets
2.0
1
0
1.0
0.0
Jan-1990
0
Jan-1993
Percent Change from Year Earlier
6.0
4.0
Jan-1996
Jan-1999
Jan-2002
Recession
Jan-2005
Jan-2008
Jan-2011
0
1
Personal Consumption
Expenditure Price Index
1
1
2.0
0
0.0
-2.0
Jan-1990
0
Jan-1993
Jan-1996
Jan-1999
Source: Federal Reserve Board / Haver Analytics
Jan-2002
Jan-2005
Jan-2008
Jan-2011
0
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FOMC Announcement
 Asset purchases


$40 billion per month of agency MortgageBacked Securities (MBS)
Continued exchange of short-term Treasury
securities for an equal amount of long-term
securities through the end of the year – $45
billion per month – via the maturity extension
program begun in June
20
Announcement Continued…
 Plan is more open-ended – continue purchases
until there has been sustained improvement in
labor markets – end based on economic
outcomes, not a set purchase amount or a date
 Committee expects the highly accommodative
stance of monetary policy will remain
appropriate for a considerable time after the
economic recovery strengthens – currently
anticipate low rates are likely to be warranted
at least through mid-2015
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Figure 11
Financial Market Response to FOMC Announcement
August 1, 2012 - September 14, 2012
September
FOMC
Statement
Day After
FOMC
Statement
Chairman
Bernanke’s
Jackson Hole
Speech
9/12 - 9/13
9/12 - 9/14
8/30 - 9/14
7/31 - 9/14
S&P 500
(Percent Change)
+1.6%
+2.0%
+4.7%
+6.3%
Exchange Rate:
Euros Per Dollar
(Percent Change)
-0.1%
-1.9%
-4.9%
-6.3%
5-7-Year Investment-Grade
Corporate Bond Yield
(Change in Basis Points)
-4.4 bp
-3.8 bp
-5.4 bp
-12.9 bp
Yield on 30-Year FNMA
Current Coupon MBS
(Change in Basis Points)
-24.4 bp
-12.5 bp
-12.1 bp
-1.7 bp
Previous
FOMC
Statement
Source: Federal Reserve Board, Bank of America Merrill Lynch, WSJ, Bloomberg / Haver Analytics
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Conclusion
 Action intended to promote faster growth
and return to full employment more quickly
 But monetary policy is not a panacea – large
shocks can be mitigated, but likely not offset
 While policy will quicken recovery – it still
will take time
 This underlines the importance of forceful
and timely action necessary to avoid the
dubious title of “Great”
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