EMBARGOED UNTIL WEDNEDSAY, JUNE 7, 18 AT :3 P.M.; OR UPON DELIVERY Ethics and Economics: Making Cyclical Downturns Less Severe Eric S. Rosengren President & CEO Federal Reserve Bank of Boston June 7, 18 Fourth Annual O. John Olcay Lecture on Ethics and Economics at the Peterson Institute for International Economics Washington, D.C. bostonfed.org
Figure 1: Inflation Rate: Change in Core Personal Consumption Expenditures (PCE) Price Index 19:Q1-18:Q1 Change from Year Earlier 8 19:Q1 197:Q1 198:Q1 199:Q1 :Q1 1:Q1 Note: Core PCE excludes food and energy. Source: BEA, NBER, Haver Analytics
Figure : Unemployment Rate 19:Q1-18:Q1 1 8 19:Q1 197:Q1 198:Q1 199:Q1 :Q1 1:Q1 Source: BLS, NBER, Haver Analytics 3
Figure 3: Unemployment Rate by Race and Ethnicity 197:Q1-18:Q1 Black or African American Hispanic or Latino Ethnicity Overall 1 1 197:Q1 198:Q1 199:Q1 :Q1 :Q1 Note: Based on labor force age 1 and older. Persons whose ethnicity is identified as Hispanic or Latino may be of any race. Source: BLS, NBER, Haver Analytics
Figure : Unemployment Rate by Educational Attainment 199:Q1-18:Q1 1 Less than High School Diploma High School Diploma, No College Some College or Associate's Degree Overall, Age and Older Bachelor's Degree or Higher 1 199:Q1 1997:Q1 :Q1 7:Q1 :Q1 17:Q1 Note: Based on labor force age and older. Source: BLS, NBER, Haver Analytics
Figure : Poverty Rate of Children Under Age 18 and the Unemployment Rate 19-1 3 1 8 1 1 Unemployment Rate (Left Scale) Poverty Rate of Children (Right Scale) 19 197 198 199 1 Note: The poverty rate is annual, the unemployment rate is quarterly. The most recent poverty rate is for 1. Source: U.S. Census Bureau, BLS, NBER, Haver Analytics
Figure : Growth in Real State and Local Government Spending and the Unemployment Rate 19:Q1-18:Q1 Change from Year Earlier Unemployment Rate (Left Scale) State and Local Government Spending (Right Scale) 9 3 19:Q1 197:Q1 198:Q1 199:Q1 :Q1 1:Q1 - Source: BEA, BLS, NBER, Haver Analytics 7
Figure 7: Changes in S&P State Credit Ratings June 1, 13 - June 1, 18 Number of States Number of Number of by Number of Changes Changes Changes States 1 Change Changes 3 Changes Downgrades 1 7 3 Upgrades 9 8 7 1 No Change 9 Note: While 9 states saw no change, one state saw both an upgrade and a subsequent downgrade. As a result, the states add to 1. In some instances an Issuer Credit Rating is used instead of a general obligation debt rating. Source: S&P Capital IQ 8
Figure 8: Nonperforming Loans at U.S. Banks and the Unemployment Rate 1989:Q1-18:Q1 Unemployment Rate (Left Scale) of Loan Balance 1 Nonperforming Loans (Right Scale) 8 3 1 1989:Q1 199:Q1 1999:Q1 :Q1 9:Q1 1:Q1 Note: Nonperforming loans are loans 9 or more days past due plus loans in nonaccrual status. U.S. banks include commercial and savings banks throughout the period and the former OTS-regulated thrifts beginning in. Source: Quarterly Bank Call Reports, BLS, NBER, Haver Analytics 9
Figure 9: Stylized Depiction of the Impact of the Countercyclical Capital Buffer (CCyB) Impact of a 3% Loss on Capital [without CCyB] Mgmt Excess Buffer (.%) Required Buffer 1 (.%) Required Buffer (.%) Minimum Capital Requirement (.%) Losses (3.%) Minimum Capital + Required Buffers Impact of a 3% Loss on Capital [with CCyB] Mgmt Excess Buffer (.%) CCyB (.%) Required Buffer 1 (.%) Required Buffer (.%) Minimum Capital Requirement (.%) Losses (3.%) Minimum Capital + Required Buffers Pre-Loss Capital Position Post-Loss Capital Position Pre-Loss Capital Position Post-Loss Capital Position Minimum Capital Requirement + Capital Conservation Buffer, Buffer for Systemically Important Financial Institutions, and CCyB Note: Required Buffer 1 is the Global Systemically Important Bank (GSIB) surcharge, which is the additional capital held by the largest, most systemically important banks. The. percent level is an average calculated using FR Y-1 data as of December 17. Required Buffer is the Capital Conservation Buffer, which is set at. percent and applies to all supervised financial institutions. The percent Management Excess Buffer is computed as the median buffer for the largest, most systemically important banks in the U.S., as of March 18. Source: Federal Reserve Bank of Boston 1
Figure 1: The Federal Funds Rate and the Unemployment Rate 19:Q1-18:Q1 Unemployment Rate (Left Scale) 9 Federal Funds Rate (Right Scale) 1 1 3 19:Q1 197:Q1 198:Q1 199:Q1 :Q1 1:Q1 Source: Federal Reserve Board, BLS, NBER, Haver Analytics 11
Figure 11: Forecasts for the Longer-Run Federal Funds Rate from the Summary of Economic Projections January - June 18 3 Central Tendency Median Federal Funds Target Rate Jan- Dec- Dec-13 Dec-1 Dec-1 Dec-1 Dec-17 Date of Forecast Note: The central tendency excludes the three highest and three lowest observations. Source: FOMC, Summary of Economic Projections (SEP)
Figure : The Unemployment Rate and the Natural Rate of Unemployment 19:Q1-18:Q1 1 8 Above the Natural Rate Below the Natural Rate Unemployment Rate Natural Rate of Unemployment 19:Q1 197:Q1 198:Q1 199:Q1 :Q1 1:Q1 Note: The vertical lines mark the beginnings and ends of recessions. Source: BLS, CBO, NBER, Haver Analytics 13