economic update boston 2011
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1
ECONOMIC DEVELOPMENTS FOR THE U.S. AND N.E.
REVIEW OF MONETARY POLICY ACTIONS
PRESIDENTS’ FORUMTHE ENTREPRENEURSHIP INSTITUTE
JEFF FUHRER, EVP AND SENIOR POLICY ADVISORFEDERAL RESERVE BANK OF BOSTON
OCTOBER 6, 2011
2
First, my apologies
2012
FED ECONOMIST
Jeff
3
Economic Developments: Challenges Ahead
The outlook Tepid growth likely
Recent data suggest growth of 2-2.5% in second half
High unemployment for a while—Structural? Housing likely to be weak for some time Elevated inflation (how to interpret recent rises?) Concern over developments in Europe
Some recent positive signs Initial claims down, capital goodsorders up, ISM up a bit Suggests continued slow growth 0
75001500022500300003750045000525006000067500
0
100
200
300
400
500
Cap. Goods ordersInitial ClaimsISM index
4
…but nothing as bad as this!
(cats and dogs living together—a sign
of the Apocalypse)
5
The recovery has lost steam
2009:Q3
2009:Q4
2010:Q1
2010:Q2
2010:Q3
2010:Q4
2011:Q1
2011:Q2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
GDP growthLong-run sus-tainable growth
Sources: Bureau of Economic Analysis, Haver Analytics
6
The labor market:Slowing job growth, rising unemployment
-1000
-800
-600
-400
-200
0
200
400
4
5
6
7
8
9
10
11Labor markets
3-mo. Avg. change, total em-ployment
3-mo. Avg. change, private employment3
-mon
th a
vera
ge c
han
ge i
n
em
plo
ym
en
t
Civ
ilia
n u
nem
plo
ym
en
t ra
te, %
of
lab
or
forc
e
Employment growth
Total Private
August 0 17
June-Aug avg
35 83
Sources: Bureau of Labor Statistics (employment, initial claims), Haver Analytics
7
Structural unemployment?
ConstructionManufacturing
Wholesale tradeRetail trade
MVTransportation
InformationFinancial
Prof. and Bus. ServicesEduc. And Health
Leisure and hospitalityGovernment
-30 -25 -20 -15 -10 -5 0 5 10
Peak-to-trough employment declines during the recession were large and widespread,
across almost all sectors
PercentSources: Bureau of Labor Statistics, Haver Analytics
8
Structural unemployment? Wages have decelerated noticeably over
the past two years Despite rather strong productivity growth
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Avg. hourly earnings
Sources: Bureau of Labor Statistics , Haver Analytics
9
Structural unemployment
Likely some increase in structural unemployment
But most of the rise has been due to very weak demand
However, a prolonged state of weak demand could turn cyclical unemployment into structural unemployment
This is a risk to monitor
10
Weak housing continues
I know you were expecting me to huff and puff and all that. But it is the 21st century, so I’m just going
to foreclose on you. And then roast you with a nice honey glaze.
11
Weak housing continues
200
200
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200
200
200
200
200
200
200
200
200
201
201
201
201
201
0
200
400
600
800
1000
1200
1400
1600
1800
-25
-20
-15
-10
-5
0
5
10
15
20HousingSingle-family sales (left)Single-family permitsNational house price index excl. distressed sales (Core Logic, right scale)including distressed sales (right scale)
Th
ou
san
ds
12
-mon
th p
ctg
. ch
an
ge
Sources: Census Bureau (permits), National Association of Realtors (home sales), Core Logic (house price indexes), Haver Analytics
12
Why is housing so weak? What will help it recover?
Low housing demand, sizable vacant stock 1/3-1/2 of existing home sales are REO, etc.
Why is demand weak? Unemployment Fear of job loss Low and falling house prices
Weak house price expectations mute demand Low house prices affect equity
What will help? We will return to this
13
Negative Equity is a significant problem
Eliminates some down payments and thus weakens sales
Limits or eliminates refinancing options
22.5
5
72.5
Equity position as of 2011:Q2 (Core Logic)
Negative equityNear-negativePositive equity
Sources: Core Logic
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Expect a very challenged housing market for some time
200
200
200
200
200
200
200
200
200
200
200
200
201
201
201
201
201
201
201
201
300
400
500
600
700
800
900
Historical data
Macro Advisers Forecast
Real residential investment spending
Sources: Census Bureau, Macroeconomic Advisers
15
A foreign threat
20080101200807312009030220090930201004302010113020110630-6.0
-1.0
4.0
9.0
14.0
19.0
24.0Sovereign spreads over comparable German
ratesGreeceIre-landPor-tugal
Sources: Reuters, Haver Analytics
16
What to make of elevated inflation?
Both overall and so-called “core” measures have risen of late
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
Core CPI, 3-mo. ChgCore CPI, 6-mo. Chg.Core CPI, 12-mo. Chg.Cleveland Fed weighted median, year-over-year
Sources: Bureau of Labor Statistics (CPI), Federal Reserve Bank of Cleveland (weighted median), Haver Analytics
17
Commodity price hikes signal widespread inflation?
Little influence of commodity prices on wages
Many temporary factors—auto prices (Japan), energy, food—have led to spikes in overall inflation
But no acceleration in wages—2/3 of production cost
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 20
0.5
1
1.5
2
2.5
3
3.5
4
4.5
ECI (right scale)
Sources: Bureau of Labor Statistics , Haver Analytics
18
Most likely inflation scenario
Commodity price pressures are easing We will see a gradual decline in inflation
to somewhere between 1 and 2%
Sources: The Wall Street Journal, Haver Analytics
201101032011020920110318201104262011060220110711201108172011092360708090
100110120130140150160
CopperWheatOilCotton
Ind
ex,
Jan
20
11
=
10
0
Jan. 2011
19
New England has generally fared better than the rest of the country…
200
200
200
200
200
200
200
200
200
200
200
200
201
201
201
201
201
201
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0 Civilian unemployment ratesRI
US
CT
New England
MA
ME
NH
VT
… although the states
vary significantly
Sources: Bureau of Labor Statistics, Haver Analytics
20
In part because the housing cycle was less pronounced here
1995
:Q1
1996
:Q1
1997
:Q1
1998
:Q1
1999
:Q1
2000
:Q1
2001
:Q1
2002
:Q1
2003
:Q1
2004
:Q1
2005
:Q1
2006
:Q1
2007
:Q1
2008
:Q1
2009
:Q1
2010
:Q1
2011
:Q1
100
120
140
160
180
200
220
240
260 House prices indexes, 1995=100
Boston (Case-Shiller)
NE (FHFA)
Ind
ex, 1
99
5:Q
1=
10
0
Sources: Case-Shiller, FHFA, Haver Analytics
21
But delinquencies and foreclosures are still a
significant problem
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 200
1
2
3
4
5
6 Delinquent 90 days or more, % of all mortgagesRI
USNECT
Sources: Mortgage Bankers’ Association, Haver Analytics
22
Effective Macro Housing Policy
HAMP has not worked as well as hoped, HARP has not worked as well as hoped, Hope for Homeowners didn’t work at all
HAMP-UP has had very limited take-up What to do?
Forbearance for unemployed/economically stressed homeowners
Expedite unavoidable foreclosures Incentives to convert owner-occupied stock to rental stock House price insurance that limits exposure to severe price
declines Limit late “push-backs” by Fannie/Freddie (e.g. after 2 or 3
years) More dramatic measures?
23
With the crisis now hitting close to home, we’re hopeful that effective action
will be taken soon
24
What Hath the Fed Wrought?
Quick tour of our liquidity and alternative monetary policy efforts
The Crisis evolved in two phases:1. Liquidity crisis (shortage of short-term funds)2. Macro crisis
Made more complicated by the Zero Lower Bound We responded to the two phases with two
types of tools Lending to institutions that couldn’t get short-
term funds Pursuing policies to lower longer-term interest
rates (QE1, QE2, “Twist”)
25
What the Fed did and whyPhase I: Liquidity programs
Enormous effort to fix short-term credit markets (“liquidity”)
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 20
200
400
600
800
1000
1200
Assets on the Federal Reserve Balance Sheet
CB Swaps CPFF TAF
Bil
lio
ns o
f $
Sources: Federal Reserve Board H.4.1 Release, Haver Analytics
26
What the Fed did and why Hitting the Zero Lower Bound
20 20 200 20 20 20 20
0 20 20 20 200 20 20 20 20
1 200
1
2
3
4
5
6Target federal funds rate
At the “zero lower bound”
Sources: Haver Analytics
27
What the Fed did and whyPhase II: Macro stimulus programs
Liquidity policies phase out, macro stimulus policies phase in, viz our balance sheet
0
500000
1000000
1500000
2000000
2500000
3000000
Agency and MBS
CB Swaps
CPFF
TAF
Treasuries
Sources: Federal Reserve Board H.4.1 Release, Haver Analytics
28
Phase II: Alternative ways to stimulate the economy
We’re stuck at the ZLB How do we normally affect the economy?
By moving the federal funds rate This in turn affects key borrowing rates:
Auto loans Mortgages Business loans Education loans
Also effects equity valuations, the exchange value of the dollar
When stuck at the ZLB, pursue policies to affect these rates directly
29
Our latest alternative policy: Operation Twist (II)
Leaves size of balance sheet the same Sell short-term Treasuries, buy long-term
Goal: to lower long-term interest rates
Likely effects Lower long-term rates (15-25bps)—pretty confident Spur spending, increase jobs 0.5-0.7M—less confident
Fed Balance Sheet: AssetsBefore Twist
After Twist
Short-term Treasury securities (3 years or less, incl. Bills)
$535B $135B
Long-term Treasury securities (6 years or greater)
$567B $967B
Mortgage-backed securities $995B $995B
Sources: Federal Reserve Bank of New York, http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html
30
…and a small measure to help housing
Re-investing maturing/prepaid MBS back into MBS
Reverse some of the widening spread between mortgage rates and Treasuries
201101032011021620110401201105172011063020110815201109281.52.02.53.03.54.04.55.05.5
1.2
1.4
1.6
1.8
2.0
2.2
2.4
30-year fixed rate mortgage (left scale)
Sources: Federal Reserve Board H.15 Release (10-year Treasury yield), NY Times (30-year mortgage rate), Haver Analytics
31
Summary
It has been a fascinating period
The Fed has done things it never did before
To accomplish two goals: Keep financial markets working, so that
business can continue To directly stimulate the economy, to create
economic growth and employment
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