EMBARGOED UNTIL FRIDAY, MARCH 23, 218 AT 7: P.M.; OR UPON DELIVERY Monetary, Fiscal, and Financial Stability Policy Tools: Are We Equipped for the Next Recession? Eric S. Rosengren President & CEO Federal Reserve Bank of Boston March 23, 218 1 th Conference of the International Research Forum on Monetary Policy Washington, DC bostonfed.org
Figure 1: Mentions of Financial Instability in FOMC Meetings and Periods of Instability February 11, 1987 - December 15, 28 16 Number of Mentions Black Monday Bank of New England Asian Crisis Russian Crisis/ LTCM Argentine Debt Default Bear Stearns 12 Special Session on Housing Lehman 8 11-Feb-87 6-Feb-91 1-Feb-95 3-Feb-99 28-Jan-3 31-Jan-7 Recession FOMC Meeting Date Source: Peek, Rosengren and Tootell. (216) Does Fed Policy Reveal a Ternary Mandate? Federal Reserve Bank of Boston Working Paper 16-11
Figure 2: Federal Funds Rate January 1987 - December 28 12 Black Monday Bank of New England Asian Crisis Russian Crisis/ LTCM Argentine Debt Default Bear Stearns 9 Lehman 6 3 Jan-1987 Jan-1992 Jan-1997 Jan-22 Jan-27 Recession Month Source: Federal Reserve Board, NBER, Haver Analytics
Figure 3: Forecasts for the Longer-Run Federal Funds Rate from the Summary of Economic Projections January 212 - March 218 5 3 Central Tendency Median Federal Funds Target Rate 2 Jan-212 Dec-212 Dec-213 Dec-21 Dec-215 Dec-216 Dec-217 Date of Forecast Note: The central tendency excludes the three highest and three lowest observations. Source: FOMC, Summary of Economic Projections (SEP)
Figure : Federal Funds Rate, Noting Peaks and Troughs January 196 - February 218 2 19.1 17.61 15 12.92 1 9.19 9.85 9.3 6.5 5.61 5.85 5.26 3.29 2.92 1.17.7.98 Jan-196 Jan-197 Jan-198 Jan-199 Jan-2 Jan-21 Recession Source: Federal Reserve Board, NBER, Haver Analytics
Figure 5: Federal Government Surplus or Deficit as a age of GDP 1987:Q1-28:Q Black Monday Bank of New England Asian Crisis Argentine Debt Default Bear Stearns Lehman Russian Crisis/ LTCM - -8 1987:Q1 1992:Q1 1997:Q1 22:Q1 27:Q1 Recession Quarter Note: Figures are four-quarter moving averages. Source: BEA, U.S. Treasury, NBER, Haver Analytics
Figure 6: General Government Gross Debt as a age of GDP 199-222 12 1 8 United States France United Kingdom Germany 6 2 199 1995 2 25 21 215 22 Note: Actual are through 217 for the U.S. and 216 for all other countries. CBO projections for the U.S. (218 222) do not include the recent tax changes and increases in the federal budget. Source: OMB (U.S.), CBO (U.S.), IMF (France, Germany, U.K.), Haver Analytics
Figure 7: Unemployment Rates and Stress Tests: Actual and Severely Adverse Scenario Peak 29-218 1 7 age Points 12 6 Scenario Peak minus Actual 1 5 8 6 3 Scenario Peak 2 2 Actual at Time of Scenario Development 29 211 213 215 217 1 29 211 213 215 217 Year of Stress Test Year of Stress Test Note: There was no stress test in 21. Source: Federal Reserve Board
Figure 8: Countercyclical Capital Buffers by Jurisdiction June 215 - January 219 2.5 2. 1.5 1..5 Hong Kong Norway Sweden Czech Republic Iceland Slovakia U.K. Lithuania. Jun-215 Jun-216 Jun-217 Jun-218 Note: Based on implementation date, which is generally twelve months after announcement. The U.K. initially announced a CCyB of.5% in March 216, with an implementation date of March 217, however in July 216 the CCyB was lowered to %. Source: European Systemic Risk Board, Bank of England, Hong Kong Monetary Authority
Figure 9: Capitalization Rates by Property Type 21:Q1-217:Q 1 9 8 Industrial Office Retail Apartment 7 6 5 21:Q1 2:Q1 27:Q1 21:Q1 213:Q1 216:Q1 Recession Note: The capitalization or cap rate is the ratio of net operating income produced by a property to the price paid, calculated at the time of a transaction. Based on properties of $2.5 million or more. Source: Real Capital Analytics, NBER, Haver Analytics
Figure 1: Real Commercial Property Price Indices by Property Type 2:Q - 217:Q 1 Index, Previous Peak=1 12 1 8 6 2 Apartment Industrial Office Retail 2:Q 25:Q 21:Q 215:Q Recession Note: Indices are adjusted for inflation using the GDP deflator. Indices are repeat-sales based and include properties of $2.5 million or more. Source: Real Capital Analytics, BEA, NBER, Haver Analytics
Figure 11: Distribution of S&P 5 Composite Price to Earnings Ratios June and December, 1968-217 12 1 Number of Observations P/E Ratio, December 217 8 6 2 6-7 12-13 18-19 2-25 3-31 36-37 2-3 Note: Excludes 2 outliers -- Dec 28 (6.7) and Jun 29 (122.) Source: S&P, Haver Analytics
Figure 12: Distribution of Shiller Cyclically-Adjusted S&P 5 Composite Price to Earnings Ratios June and December, 1968-217 8 Number of Observations P/E Ratio, December 217 6 2 5-6 11-12 17-18 23-2 29-3 35-36 1-2 Source: Robert Shiller, Haver Analytics