Download Monetary Policy and Financial Stability Eric S. Rosengren

Monetary Policy
and Financial Stability
Eric S. Rosengren
President & CEO
Federal Reserve Bank of Boston
The Business and Industry Association of
New Hampshire and the New Hampshire
Bankers Association
Manchester, New Hampshire
March 27, 2013
EMBARGOED UNTIL WEDNESDAY, MARCH 27, 2013 AT 12:30 P.M. EASTERN TIME, OR UPON DELIVERY
www.bostonfed.org
Economy Improving Slowly
 Despite headwinds – problems in Europe
and more fiscal austerity in the U.S. than
many expected – the economy is slowly
improving
 Large-scale asset purchases (LSAPs) have
helped interest-sensitive sectors and are
helping to offset fiscal headwinds
 With unemployment at 7.7 percent and PCE
inflation at 1.2 percent, the economy remains
far from where we want it to be
2
Preview
 Despite benefits of LSAPs, how large are
the costs?
 Inflation remains low, and that is expected
to continue
 Financial stability – need to monitor closely,
but seeing little evidence that monetary
policy is causing significant financial
stability problems at this time
 In short, benefits currently outweigh costs
3
Figure 1
Growth in Real GDP Components
2011 and 2012
Percent Change from Year Earlier
20
2011:Q4
2012:Q4
15
10
5
0
-5
Residential Investment
Source: BEA / Haver Analytics
Consumer Durable
Goods
Federal Government
Spending
State and Local
Government Spending
4
Figure 2
Economic Projections of Federal Reserve Board
Members and Federal Reserve Bank Presidents
September 2012 and March 2013
8.5
Unemployment Rate Range
Fourth Quarter
2.5
PCE Inflation Range
Fourth Quarter - Fourth Quarter
2.2
8.0
2.0
8.0
2.1
2.1
2.0
1.9
1.8
7.5
7.6
7.5
1.75
1.65
1.5
7.5
1.6
1.5
1.4
1.3
7.25
7.0
7.1
7.0
6.9
1.0
6.9
6.6
6.5
0.5
6.3
6.1
6.0
Sep 2012
Mar 2013
Mar 2013
Sep 2012
Projections for Projections for Projections for Projections for
2013
2013
2014
2014
Source: Federal Reserve Board
0.0
Sep 2012
Mar 2013
Sep 2012
Mar 2013
Projections for Projections for Projections for Projections for
2013
2013
2014
2014
5
Benefits of LSAPs
 Help reduce longer-term rates – promote
economic growth and more quickly return to full
employment with stable prices
 FRB Boston uses two models – one structural,
one statistical
 Both imply roughly $500 billion in asset
purchases result in one-quarter point reduction
in unemployment – almost 400,000 jobs
 Estimate is model dependent, subject to
estimation error
6
Potential Cost: Inflation
 Potential that inflation or inflation
expectations could rise too quickly
 Federal Reserve balance sheet expanded
significantly in 2008, and almost five years
later, PCE inflation is 1.2 percent – well
below 2 percent target
 This provides the Fed the ability to take
monetary policy actions to encourage
stronger growth
7
Potential Costs: Financial Instability
 Potential that interest rates at zero lower
bound may induce investors to take on
excessive risk


Too much credit risk
Too much interest rate risk
 Intent of policy, in part, is to encourage
households and firms to not be excessively
risk averse – i.e., to encourage responsible
risk-taking that advances real economic
activity and growth
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Figure 3
S&P 500 Composite Stock Price Index
January 1993 - February 2013
Index
2,000
1
1,600
1
1,200
1
800
0
400
0
0
0
Jan-1993
Jan-1997
Jan-2001
Jan-2005
Jan-2009
Jan-2013
Recession
Source: S&P, NBER / Haver Analytics
9
Figure 4
S&P 500 Composite Price/Operating Earnings Ratio
January 1993 - February 2013
Ratio
1
40
1
30
20-Year Average
1
20
0
10
0
0
0
Jan-1993
Jan-1997
Jan-2001
Jan-2005
Jan-2009
Jan-2013
Recession
Source: S&P, NBER / Haver Analytics
10
Figure 5
U.S. Regional Home Prices:
S&P/Case-Shiller Metro Area Indexes
March 2006 - January 2013
Index Level March 2006 = 100
110
100
110
Boston
100
110
Chicago
100
110
Denver
100
110
New York
90
90
90
90
90
80
80
80
80
80
70
70
70
70
70
60
60
60
60
60
50
50
50
50
50
40
40
40
40
40
30
Mar-06
30
Mar-06
30
Mar-06
30
Mar-06
Aug-09
Jan-13
110
100
Aug-09
Jan-13
110
Los Angeles
100
Aug-09
Jan-13
110
Miami
100
Aug-09
Jan-13
110
Phoenix
100
30
Mar-06
100
90
90
90
90
80
80
80
80
80
70
70
70
70
70
60
60
60
60
60
50
50
50
50
50
40
40
40
40
40
Aug-09
Jan-13
30
Mar-06
Aug-09
Jan-13
30
Mar-06
Source: S&P/Case-Shiller / Haver Analytics
Aug-09
Jan-13
30
Mar-06
Aug-09
Jan-13
110
San Diego
90
30
Mar-06
Las Vegas
100
Aug-09
Jan-13
San Francisco
30
Mar-06
Aug-09
Jan-13
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Figure 6
Price-to-Rent Ratio
1993:Q1 - 2012:Q4
Index Level 1993:Q1=100
180
160
Ratio of S&P/Case-Shiller Home Price Index to
Consumer Price Index for Rent of Primary Residence
140
120
100
80
60
1993:Q1
1996:Q1
1999:Q1
2002:Q1
Source: S&P/Case-Shiller, BLS / Haver Analytics
2005:Q1
2008:Q1
2011:Q1
12
Figure 7
High-Yield Bonds:
S&P 10-Year BB+ Industrials Bond Yield
March 1996 - February 2013
Percent
14
12
10
8
6
4
2
0
Mar-1996
Mar-2000
Source: S&P / Haver Analytics
Mar-2004
Mar-2008
Mar-2012
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Figure 8
High-Yield Bond Spread: S&P 10-Year BB+
Industrials Bond Yield to 10-Year U.S. Treasury Yield
March 1996 - February 2013
Percent
12
10
8
6
Average over Period
4
2
0
Mar-1996
Mar-2000
Mar-2004
Source: S&P, Federal Reserve Board / Haver Analytics
Mar-2008
Mar-2012
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Figure 9
Rates on Mortgage Loans, Auto Loans, and
High-Yield Bonds
January 2011 - February 2013
Percent
Percent
Percent
5.5
6.0
8.0
Rate on 30-Year
Fixed-Rate Mortgage
Rate on 48-Month
New Car Loan
5.0
5.0
7.0
4.0
6.0
3.0
5.0
4.5
4.0
3.5
Rate on S&P 10-Year BB+
U.S. Industrials Bonds
3.0
Jan-11
Jan-12
Jan-13
2.0
Jan-11
Source: FHLMC, WSJ, S&P / Haver Analytics
Jan-12
Jan-13
4.0
Jan-11
Jan-12
Jan-13
15
Figure 10
Tier 1 Common Capital Ratio for
Large U.S. Banking Organizations
2007:Q1 - 2012:Q4
Percent
12
10
8
6
4
Tier 1 Common Capital to Risk-Weighted Assets
2
0
2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
Note: Includes 14 large banking organizations that filed the FR Y-9C throughout the six-year period
Source: Consolidated Financial Statements for Bank Holding Companies (FR Y-9C)
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Figure 11
Agriculture-Related Loans as a Share of Assets
at Commercial and Savings Banks by Asset Size
December 31, 2012
Percent
8
6
4
2
0
Less than $500 $500 Million to
Million
$1 Billion
$1 Billion to
$10 Billion
$10 Billion to $100 Billion to Greater than $1
$100 Billion
$1 Trillion
Trillion
All Banks
Bank Asset Size as of December 31, 2012
Note: Includes agricultural production loans and real estate loans secured by farmland
Source: Commercial and Savings Bank Quarterly Call Reports
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Risks Seem Manageable
 Broad-based financial stability concerns
do not seem acute at this time
 Falling interest rates and rising asset
prices are expected results of the policy
 With improvement in economic outlook,
accommodation can be withdrawn
 Nonetheless, financial stability concerns
need to be monitored
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Areas to Monitor Closely
 Underwriting standards – decline in
covenant quality for leveraged loans and
high-yield bonds
 Short-term borrowing to finance long-term
assets – e.g., agency REITS
 Run risks exposed in financial crisis and
not yet resolved – e.g., MMMFs, reliance
on wholesale funding, broker-dealers
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Concluding Observations
 The economy continues to improve, but at
a painfully slow pace
 Benefits of Fed policy actions are clear
from improvement in interest-sensitive
sectors
 Need to monitor for potential financial
stability problems – but at this time the
benefits of our programs outweigh the
costs
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