Transcript Proposal to the FOMC Dual Mandate Performance Economic Headwinds Our Policy: Explicit Commitment to Contingent Quantitative Easing.

Proposal to the FOMC
Dual Mandate Performance
Economic Headwinds
Our Policy: Explicit Commitment to
Contingent Quantitative Easing
Current Economic Situation &
Dual Mandate Performance
Sizable and Persistent GDP Gap
15,000
14,500
14,000
-$867B,
or -6.4%
Billions of US Dollars
13,500
13,000
12,500
12,000
11,500
11,000
10,500
10,000
Source: Bureau of Economic Analysis; Congressional Budget Office
Potential Real GDP
Real GDP
Underemployment & Unemployment Elevated
20.0
18.0
16.0
14.0
Percent
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Source: Bureau of Labor Statistics
Under Employment
Unemployment
Long-Term Unemployment Especially Problematic
Median Duration of Unemployment (in Weeks)
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Source: Bureau of Economic Analysis; Congressional Budget Office
Inflation Remains Stable
8.0
6.0
4.0
Percent
2.0
Core PCE
PCE
Mandate
0.0
-2.0
-4.0
-6.0
Source: Bureau of Economic Analysis; Federal Reserve
Inflation Expectations are Well Anchored
3.00
2.00
5 Year TIPS
Spread
Percent
1.00
5 Year
Average PCE,
Survey of
Professional
Forecasters
0.00
-1.00
-2.00
Lehman Brothers
Bankruptcy
-3.00
Source: Federal Reserve; Federal Reserve Bank of Philadelphia
Dual Mandate Performance
Sizable GDP Gap
Unemployment Exceptionally High
Inflation Well Anchored Around 2% Target
Economic Headwinds
Low Consumer Confidence Inhibits Recovery
120.0
110.0
Index
100.0
90.0
80.0
70.0
60.0
50.0
Source: Thomson Reuters/University of Michigan
Investors Lack Confidence in Corporate Debt
Spread of Baa Bonds over Treasuries
7.00
6.00
5.00
Percent
4.00
3.00
2.00
1.00
0.00
Source: Board of Governors of the Federal Reserve
Businesses Lack Confidence in Recovery Prospects
New Orders of Core Durable Goods (ex-Aircraft, ex-Defense)
75,000
70,000
8.00
of Dollars
Millions
Spread
Interest
Percent
7.00
65,000
6.00
60,000
5.00
4.00
55,000
3.00
50,000
2.00
1.00
45,000
0.00
40,000
Source: Bank of America Merrill Lynch, Board of Governors of the Federal Reserve
BBB Bond
Spread over
US Treasuries
“Fiscal Cliff” Poses Broad Macroeconomic Risks
Source: Congressional Budget Office
European Debt Crisis Under Control, For Now
6.0
10-year Spain
Bond Spread
5.0
10-year Italy
Bond Spread
4.0
3.0
2.0
1.0
0.0
Source: International Monetary Fund
Fall in PRFI is a Large Portion of GDP Gap
6.5
6
5.5
Percent
5
4.5
4
3.5
3
2.5
2
Source: Bureau of Economic Analysis
PRFI/Real GDP
Housing Starts Far Below Pre-Recession Levels
2300
2100
Thousands of Housing Starts
1900
1700
1500
1300
1100
900
700
500
300
Source: Census Bureau
Sluggish Economy
Conventional Monetary Policy
Interest Rate Hit Lower Bound
Unconventional Monetary Policy
Asset Purchases
Forward Guidance
Fed Actions Have Lowered Rates…
8.00
QE1
7.00
QE
2
Twist
Percent Interest
6.00
5.00
4.00
3.00
10-Year Treasury
2.00
1.00
0.00
Source: Board of Governors of the Federal Reserve
30-Year Mortgage
…And Boosted US Equities
1600
1500
QE1
QE
2
Twist
1400
1300
Index
1200
1100
S&P 500 Index
1000
900
800
700
600
Source: Standard & Poor’s
Conclusion
Weak Recovery Despite
Accommodative Monetary
Policy
Further
Stimulus
needed
Current Fed Policy:
“If the outlook for the labor market does not
improve substantially, the Committee will
continue its purchases of agency mortgagebacked securities, undertake additional asset
purchases, and employ its other policy tools as
appropriate until such improvement is achieved
in a context of price stability.”
Source: FOMC Statement, October 24th 2012
Our Policy:
“If the unemployment rate remains above 7%
and core inflation remains below 3%, the
Committee will continue its purchases of agency
mortgage-backed securities, undertake
additional asset purchases, and employ its other
policy tools as it sees fit. ”
Policy Goals:
Clarify and Commit Fed to Further Stimulus
Provide Stability to Offset Uncertainty Over Fiscal
Policy and Other Macroeconomic Risks
Induce Confidence in the Recovery to Encourage
Additional Investment and Consumption
Further Guidance Occurs If:
Inflation Rises from a Supply Shock
Natural Rate of Unemployment is Higher
than Currently Projected
Our Policy is Successful and
Unemployment Falls Below 7%
Inflation will remain controlled
Long Term Inflation Target
of 2%
Temporary Nature of Policy
Summary:
Economic Factors Warrant Further Monetary
Stimulus
Increased Commitment and Clarity of
Conditional QE Boosts Recovery Confidence
Inflation Remains Under Control