The First Phase of the U.S. Recovery and Beyond James Bullard President and CEO Federal Reserve Bank of St. Louis Global Interdependence Center Shanghai, China January 11, 2010 Any opinions expressed here are mine and do not necessarily reflect those of other Federal Open Market Committee participants.
Plan For This Talk The Nascent Global Recovery The U.S. Recovery U.S. Financial Markets and Inflation Monetary Policy Asset price bubbles
The Nascent Global Recovery
Global Growth is Improving Canada 0.4, 0.5, 4.5 U.S. 2.8, 4.0, 5.0 Latin America 6.9, 4.6, 4.3 U.K. -1.2, 1.8, 2.1 EU 1.5, 1.9, 1.4 South Africa 0.9, 2.2, 3.0 India 8.0, 9.5, 9.0 13.0, 4.0, 6.0 Russia 1.0, 3.0, 7.0 China 12.0, 9.6, 8.0 Japan 1.3, 3.6, 1.0 Australia 0.8, 1.9, 2.6 Growth Rate in Real GDP, SAAR, Percent 2009:Q3, 2009:Q4,2010:Q1 Source: Barclays Capital Global Economic Weekly.
World Real GDP Growth Year-Over-Year Percent Change 7 6 5 4 3 2 1 0 Onset of Credit Crisis 2010 Est. 3.1% 2009 Est. -1.1% -1-2 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: IMF World Economic Outlook, October 2009.
IMF Growth Forecasts for 2010 2007 2008 2009 2010 World Output 5.2 3.0-1.1 3.1 G-7 Economies United States 2.1 0.4-2.7 1.5 Germany 2.5 1.2-5.3 0.3 France 2.3 0.3-2.4 0.9 Italy 1.6-1.0-5.1 0.2 United Kingdom 2.6 0.7-4.4 0.9 Japan 2.3-0.7-5.4 1.7 Canada 2.5 0.4-2.5 2.1 BRIC Economies Russia 8.1 5.6-7.5 1.5 China 13.0 9.0 8.5 9.0 India 9.3 7.3 5.4 6.4 Brazil 5.7 5.1-0.7 3.5 Source: IMF World Economic Outlook Database, October 2009. (Year-over-Year Percent Change.)
The U.S. Recovery
U.S. Forecasters: Growth Ahead Real Gross Domestic Product. Actual and forecasted, percent change from previous quarter at annual rate. Percent 10 8 6 4 2 0-2 -4-6 -8 Real GDP Growth Dec-2009 BC Forecast Dec-2009 MA Forecast 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bureau of Economic Analysis, Blue Chip Consensus, Macroeconomic Advisers.
U.S. Consumption Is Stabilizing Real Personal Consumption Expenditures (Monthly Data. Last observation: Nov. 2009) Billions of Chained 2005 Dollars 9400 9350 9300 9250 9200 WTI crude oil price tops $100/barrel Lehman Brothers' collapse 9150 9100 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Source: Bureau of Economic Analysis.
U.S. House Prices Are Stabilizing Three-month percent change, annual rates (Monthly Data. Last observation: Oct. 2009) Percent 25 20 15 10 5 0-5 -10-15 -20-25 -30 Case-Shiller Composite 20 FHFA: PO LP-HPI 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Loan Performance/FHFA/S&P.
U.S. Civilian Unemployment Remains High Thousands 700 650 600 550 500 450 400 350 300 250 Unemployment Rate (SA, Right Axis) Initial Claims for Unemployment Insurance (4-week moving average, left axis) Percent 12 11 10 9 8 7 6 5 200 2005 2006 2007 2008 2009 4 Source: Bureau of Labor Statistics/Department of Labor.
U.S. Financial Markets and Inflation
U.S. Credit Spreads Have Narrowed Bond Spreads to 10-Yr Treasury (Monthly data. Last Observation: Nov. 2009) Basis Points 800 700 600 BBB 500 400 300 200 100 AAA AA 0 Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Source: Federal Reserve.
World Equity Prices Since Trough Country Peak Date Trough Date G7 Economies Peak-Trough % Change Trough- 12/30/2009 % Change U.S. Oct. 09, 2007 Mar. 09, 2009-54% 61% Germany Jul. 16, 2007 Mar. 06, 2009-55% 62% France Jun. 01, 2007 Mar. 09, 2009-59% 56% Italy May. 2, 2007 Mar. 03, 2009-63% 59% U.K. Jun. 15, 2007 Mar. 03, 2009-49% 55% Japan Jul. 09, 2007 Mar. 10, 2009-61% 49% Canada Jun. 18, 2008 Mar. 09, 2009-50% 55% BRIC Economies Russia May 19, 2008 Jan. 23, 2009-80% 188% China Oct. 16, 2007 Oct. 27, 2008-72% 101% India Jan. 08, 2008 Mar. 11, 2009-61% 113% Brazil May 20, 2008 Oct. 27, 2008-60% 133% Source: Wall Street Journal, Financial Times, Toronto Stock Exchange, and RTS Stock Exchange.
U.S. Inflation Remains Low PCE Inflation Year-over-year percent change 5 4 Headline PCE 3 2 1 Core PCE 0 2007:01-1 2007:07 2008:01 2008:07 2009:01 2009:07-2 Source: Bureau of Economic Analysis/Macroeconomic Advisers.
Monetary Policy
Three Parts to U.S. Current Monetary Policy Liquidity programs: lending on collateral to mitigate the panic. A near-zero interest rate policy. An asset purchase program, quantitative easing.
U.S. Liquidity Programs Naturally Tapering Off Billions $ 2,000 1,800 1,600 1,400 1,200 1,000 Short-term Lending to Financial Firms and Markets: = Repurchase Agreements- Triparty + Term Auction Credit + Commercial Paper Funding Facility + Central Bank liquidity swaps + Net Portfolio Holdings of LLCs Thru MMIFF + Other Loans Less Loan to AIG + Other Assets 800 600 400 200 0 01/07 07/07 01/08 07/08 01/09 07/09 01/10 Source: Federal Reserve.
Near-Zero Policy Rates in the G-7 Percent 7 6 U.K. 5 4 3 2 1 Canada Euro Area Japan U.S. 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Source: Federal Reserve, Bank of England, European Central Bank, Bank of Canada, Bank of Japan.
Composition of Federal Reserve Assets (Weekly Data. Last Observation: Dec. 30, 2009) Billions $ 3,000 2,500 2,000 Short-Term Lending to Financial Firms and Markets Rescue Operations Operations Focused on Longer-Term Credit Conditions Traditional Portfolio 1,500 Traditional Portfolio and Long-Term Assets 1,000 500 0 01/07 07/07 01/08 07/08 01/09 07/09 01/10 Source: Federal Reserve.
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 statecontingent character. Main issue: How to adjust the asset purchase program going forward and not generate inflation?
Timeline of Monetary Policy Traditional Policy Rate Adjustment Large Scale Asset Purchase Program Extended Period? Resumption of Traditional Policy Rate Adjustment 12/08 3/10? Liquidity 10/08 Programs 02/10
Asset Price Bubbles
Two decades, two bubbles Monetary policy necessarily affects asset prices and interest rates. Historically, this did not appear to create prolonged run-ups in asset prices. But changes in the recovery of employment in the past two recessions led the Fed to keep interest rates low for a long time. Both periods featured prolonged increases in certain asset prices: for technology in the 1990s, and for housing in the 2000s. The drag on the economy from the housing decline since 2006 has been especially severe.
U.S. Housing Bubble: 2001-2008 Index: 2001=100 180 170 160 150 140 130 120 110 S&P/Case-Shiller Home Price Index: U.S. National 2001=100 Nominal GDP 2001=100 100 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: S&P, Fiserv, MacroMarkets LLC, and Bureau of Economic Analysis.
U.S. Stock Market Bubble: 1994-2003 Index: 1994 =100 590 540 490 440 390 340 290 240 190 140 90 NASDAQ Composite 1994=100 Nominal GDP 1994=100 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Wall Street Journal, Bureau of Economic Analysis.
Japanese Stock Market Bubble: 1984-1994 Index: 1984=100 350 300 Nikkei 225 Average 1984=100 250 200 150 Japan: Nominal GDP 1984=100 100 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Source: Wall Street Journal, Financial Times, IMF.
Monetary policy outcomes Still, monetary policy outcomes during the past two decades up to the current crisis have been good. Unemployment hit lows of 3.8 percent in 2000, and 4.4 percent in 2007. Inflation has been low and stable through this period. If policy was too low for too long in the 1990s and in the 2000s, why didn t we see more inflation? Yet, without an increase in inflation, asset price misalignments seem to have caused significant problems for the macroeconomy. This may mean that monetary policy should put more weight on asset prices going forward.
Summary for Asset Price Bubbles Asset price "bubbles" are a very serious issue for monetary policy. This issue has been debated extensively over the past 15 years, but the debate will now intensify. The main problem: It is hard to see what was wrong with previous policy, given conventional ideas about what policy is trying to accomplish.
Federal Reserve Bank of St. Louis stlouisfed.org Federal Reserve Economic Data (FRED) research.stlouisfed.org/fred2/ James Bullard research.stlouisfed.org/econ/bullard/