The First Phase of the U.S. Recovery
James BullardPresident and CEOFederal Reserve Bank of St. Louis
Commerce Bank Economic Breakfast18 November 2009
Any opinions expressed here are mine and do not necessarily reflect those of other Federal Open Market Committee members.
Plan For This Talk
The nascent recoveryHow to think about current monetary policyThe regulatory reform debate
The Nascent Recovery
-8
-6
-4
-2
0
2
4
6
8
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Real Gross Domestic Product. Actual and forecasted, percent change from previous quarter at annual rate.
Real GDP GrowthNov-2009 BC ForecastNov-2009 MA Forecast
Percent
Source: Bureau of Economic Analysis, Blue Chip Consensus, Macroeconomic Advisers.
Forecasters See Growth Ahead
Forces Driving the Recovery
Stronger-than-expected global growth, especially in Asia.Recovering consumption expenditure in the U.S.Less stress in financial markets.A stabilizing housing sector.
India8.0, 9.5, 9.0
Growth Rate in Real GDP, SAAR, Percent2009:Q2, 2009:Q3,2009:Q4
Source: Barclays Capital Global Economic Weekly.
Canada-3.4, 0.0, 5.0
U.S.-0.7, 3.5, 4.0
Latin America1.7, 4.5, 5.2
U.K.-2.3, -1.0, 1.7
EU-0.7, 1.8, 2.0
South Africa-3.0, 0.0, 2.2
Russia-2.2, 17.0, 13.7
China16.4, 12.0, 9.6
Japan2.3, 1.9, 2.4
Australia2.5, 2.0, 1.9
Global Growth is Improving
Manufacturing Around The Globe Is Improving
Source: Financial Times and Thomson Reuters Datastream.
9000
9050
9100
9150
9200
9250
9300
9350
9400
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
Billions of Chained 2005 Dollars
WTI crude oil price tops $100/barrel
Lehman Brothers' collapse
Real Personal Consumption Expenditures(Monthly Data. Last observation: Sept. 2009)
Source: Bureau of Economic Analysis.
U.S. Consumption Is Stabilizing
Source: Loan Performance/FHFA/S&P.
-30-25-20-15-10
-505
10152025
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Percent
Case-ShillerComposite 20
FHFA: POLP-HPI
Three-month percent change, annual rates (Monthly Data. Last observation: Aug. 2009)
House Prices Are Stabilizing
Source: U.S. Bureau of the Census, U.S. Department of Commerce, and Macroeconomic Advisors.
Housing Market Begins Recovery?
-40
-30
-20
-10
0
10
20
30
40
50
60
0200400600800
10001200140016001800200022002400
1987 1988 1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009
SAAR, Thousands of Units 4-quarter percent change
Residential Investment (Right Axis)
Private Housing Starts (Left Axis)
4
5
6
7
8
9
10
11
200
250
300
350
400
450
500
550
600
650
700
2007 2008 2009
Unemployment Rate
Initial Claims for Unemployment Insurance (4-week Moving Average)
Thousands Percent
Source: Bureau of Labor Statistics/Department of Labor.
Civilian Unemployment Remains High…
-800
-600
-400
-200
0
200
400
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09
Thousands
7.3 Million Jobs have been lost since December 2007
…But the Pace of Job Losses Has Slowed
Source: Bureau of Labor Statistics.
Nonfarm Payroll Employment GrowthChange from previous month (Monthly Data. Last observation: Oct. 2009).
Financial Markets and Inflation
0
100
200
300
400
500
600
700
800
Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009
Basis Points
Credit Spreads Have Narrowed
Source: Federal Reserve.
AAA
AA
BBB
Bond Spreads to 10-Yr Treasury (Monthly data. Last Observation: Oct. 2009)
Credit Default Swap Prices Are Improving
Source: Bloomberg.
0
100
200
300
400
500
600
700
800
900
1000
2007 2008 2009
JPMorgan Chase
Goldman Sachs
Morgan Stanley
Citi
Bank of America
Wells Fargo
Basis Points
Equity Markets Are Improving
Source: Standard and Poor’s and Wall Street Journal.
0
20
40
60
80
100
120
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
IndexJan. 2007=100
Dow Jones U.S. Total Stock Market Index
S&P Financial Stock Market Index
Inflation Remains Low…
Source: Bureau of Economic Analysis/Macroeconomic Advisers.
PCE Inflation3-month percentage change
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Core PCE
Headline PCE
-3
-2
-1
0
1
2
3
4
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
Percent, Constant Maturity
5 Year Forward
5 Year
10 Year
Source: Federal Reserve.
… But Inflation Uncertainty is Elevated
Monetary Policy
Three Parts to Current Monetary Policy
Liquidity programs: lending on collateral to mitigate the panic.A near-zero interest rate policy.An asset purchase program, “quantitative easing.”
Liquidity Programs
Liquidity programs: lending on collateral to mitigate the panic. Standard central bank response to a financial crisis ... ... this time on a grand scale. The liquidity programs naturally taper off as the crisis recedes. Not an inflationary concern.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
01/07 07/07 01/08 07/08 01/09 07/09
Short-Term Lending to Financial Firms and MarketsBillions $
Liquidity Programs Naturally Tapering Off
0
1
2
3
4
5
6
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09
U.K.
Euro Area
Canada
U.S.Japan
Rate (%)
Near-Zero Policy Rates in the G-7
A Near-Zero Policy Rate
A near-zero interest rate policy Past two recessions: 2.5 - 3.0 years after the recession end before
policy rate increases began. The “too low for too long” argument may weigh heavily on the
FOMC this time. The market focus on interest rates is disappointing given quantitative
easing.
Composition of Federal Reserve Assets(Weekly Data. Last Observation: Nov. 11, 2009)
0
500
1,000
1,500
2,000
2,500
3,000
01/07 07/07 01/08 07/08 01/09 07/09 01/10
Short-Term Lending to Financial Firms and MarketsRescue Operations
Operations Focused on Longer-Term Credit ConditionsTraditional Portfolio
Traditional Portfolio and Long-Term Assets
Billions $
The Asset Purchase Program
The Committee announced an intention to buy up to $1.725 trillion in assets by 2010 Q1. Considered successful as quantitative easing. Causing a large and persistent increase in the monetary base ... ... and a medium-term inflation risk.
The FOMC asset purchase program does not have a state-contingent character.Main issue: How to adjust the asset purchase program going forward and not generate inflation?
Regulatory Reform
Key Problem: Too Big To Fail
“Too Big to Fail” is an intolerable situation which must be addressed.Large, complex, global institutions, many of which are not banks.One important idea: A resolution regime for large financial firms.
Large S&P 500 Financial Firms (As of 2007:Q4)
FirmTotal Assets,
Bill.(2007:Q4 )
Pct. of Tot. Assets in S&P
500 Fin.
Cum. Percent Type of Firm
(2007: Q4)
Citigroup Inc. $2,187 10.9% 10.9% BHCBank of America Corp. 1,715 8.5 19.5 BHC
JPM Chase & Co. 1,562 7.8 27.3 BHC
Goldman Sachs Grp. 1,119 5.5 32.9 BHC
AIG 1,060 5.3 38.2 InsuranceMorgan Stanley 1,045 5.2 43.4 BHCMerrill Lynch 1,020 5.1 48.5 Inv. BankFannie Mae 882 4.4 53.9 GSEFHL Mortg. 794 3.9 56.9 GSE
Wachovia Corp. 782 3.9 60.8 BHC
Large S&P500 Financial Firms (As of 2007:Q4)
FirmTotal
Assets, Bill. (2007:Q4)
Pct. of Tot. Assets in
S&P 500 Fin.
Cum. Percent
Type of Firm(2007:Q4)
Lehman Bros. 691 3.4 64.2 Inv. BankWells Fargo 575 2.8 67.1 Thrift
MetLife Inc. 558 2.7 69.9 Insurance
Prudential Financial 485 2.4 72.3 Fin. Adv./Ins.
Hartford Financial Svcs. 360 1.8 74.1 InsuranceWashington Mutual 327 1.6 75.7 Thrift
U.S. Bancorp 237 1.1 76.9 BHCCountrywide Financial Corp. 211 1.0 78.0 Thrift
Bank of NY Mellon Corp. 197 0.9 79.0 BHCLincoln National 191 0.9 79.9 Insurance
The Role of the Fed
Discount window: The Fed needs to have a role in regulating institutions to which it may lend.Monetary policy: To be effective, the Fed needs to know the condition of the financial system through hands on regulatory involvement.Fed independence is vital in maintaining credible monetary policy.
Federal Reserve Bank of St. Louisstlouisfed.org
Federal Reserve Economic Data (FRED)research.stlouisfed.org/fred2/
James Bullardresearch.stlouisfed.org/econ/bullard/
