Jason Henderson Vice President and Branch Executive March 2, 2012 The views expressed are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
U.S. Real Personal Consumption Growth Annualized percent change 8 6 4 2 0 Actual Blue Chip Forecast 8 6 4 2 0-2 -4-6 What is the Risk? 2002 2004 2006 2008 2010 2012-2 -4-6 Source: Census Bureau and Blue Chip Economic Indicators, February 2012
Index (2005= 100) 160 140 120 100 80 60 U.S. Real Private Fixed Investment 160 140 120 100 80 60 40 20 0 Non-residential Structures Residential Investment Non-residential Equipment and Software 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 40 20 0 Source: Bureau of Economic Analysis
Index (2005= 100) 130 120 110 100 90 80 70 Federal Defense State and Local Federal Non-Defense U.S. Government Spending 130 120 110 100 90 80 70 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 60 Source: Bureau of Economic Analysis
U.S. Real Net Exports of Goods and Services and Value of the Dollar Billion dollars (2005 constant dollars) Index 0 120-100 -200-300 -400 Real Net Exports (left axis) 115 110 105 100-500 -600-700 Broad Dollar Index (right axis) Blue Chip Forecast Feb 2012 95 90 85-800 1996 1998 2000 2002 2004 2006 2008 2010 2012 80 Source: Bureau of Economic Analysis, Federal Reserve Board of Governors, Blue Chip Economic Indicators
Economic Projections of Federal Open Market Committee Members, Central Tendency, June 2011 Longer Run 2012 2013 2014 Real GDP Growth 2.3 to 2.6 2.2 to 2.7 2.8 to 3.2 3.3 to 4.0 Nov. 2011 proj. 2.4 to 2.7 2.5 to 2.9 3.0 to 3.5 3.0 to 3.9 Unemployment Rate 5.2 to 6.0 8.2 to 8.5 7.4 to 8.1 6.7 to 7.6 Nov. 2011 proj. 5.2 to 6.0 8.5 to 8.7 7.8 to 8.2 6.8 to 7.7 PCE Inflation 2.0 1.4 to 1.8 1.4 to 2.0 1.6 to 2.0 Nov. 2011 proj. 1.7 to 2.0 1.4 to 2.0 1.5 to 2.0 1.5 to 2.0 Source: Federal Reserve Board of Governors
Billion Dollars 3000 2500 2000 1500 Fed Agency Debt MBS Purchases Liquidity to Key Credit Markets Lending to Financial Institutions Long Term Treasury Purchases Traditional Security Holdings 1000 500 0 Source: Federal Reserve Bank of Cleveland
Overview of Federal Open Market Committee (FOMC) Participants Assessments of Appropriate Monetary Policy (Appropriate Timing of Policy Firming) Number of Participants 6 5 4 3 3 3 2 5 4 2 1 0 2012 2013 2014 2015 2016 Source: Federal Reserve Board of Governors
If Economists Use the Same Data and are Taught the Same Theory, Why Do they Come Up with Different Answers?
Fed Funds Rate = Equilibrium Real Interest Rate + Inflation Rate Deviation + of Inflation + from Target Output Gap What Can Economists Debate in the Taylor Rule? Equilibrium real interest rate Inflation rate measure Inflation target Potential GDP Weights on inflation and output gap George A. Kahn. 2010 Taylor Rule Deviations and Financial Imbalances Economic Review, Federal Reserve Bank of Kansas City, Second Quarter http://www.kansascityfed.org/publicat/econrev/pdf/10q2kahn.pdf
There are many different specification. (House rules) Was the FOMC following a rule after 1999? Taylor Rule Prescriptions George A. Kahn. 2010 Taylor Rule Deviations and Financial Imbalances Economic Review, Federal Reserve Bank of Kansas City, Second Quarter http://www.kansascityfed.org/publicat/econrev/pdf/10q2kahn.pdf
Sustainable Economic Growth Price Stability Foundation based on the Phillips Curve
Percent 14 12 10 8 6 4 2 Consumer Price Inflation - Less Food and Energy Unemployment Rate 14 12 10 8 6 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0
Personal Income Gains Unemployment Rate - 2011 Seriously Delinquent Mortgage Loans (percent of all mortgage loans serviced, Q3 2011) More than 8 % 5 % to 8 % 0 to 5 % Source: Mortgage Bankers Association
Federal Reserve Chairman Ben Bernanke Research on the Great Depression Former FRBKC President Thomas Hoenig Closed Banks in the 1980s Dissented 8 times in 2010
Non-irrigated Cropland Values (Percent change 2010:Q3 to 2011:Q3) Source: Agricultural Finance Databook, FRBKC
Billion dollars (2005 constant dollars) Index (2005=100) Exports Double Between 2006 and 2011 Exports Double In 1970s Exports Double During WWI Exports More than Double During WWII Source: Henderson, Gloy, and Boehlje (2011) Agriculture s Boom-Bust Cycles: Is This Time Different Economic Review, Federal Reserve Bank of Kansas City.
Doesn t the Federal Reserve s large balance sheet mean inflation is coming?
Quantity Theory of Money Price = Money * Velocity Quantity Definition of Inflation: Too much money chasing too few goods M V Q
Growth in Monetary Aggregates Index (Jan 2000=100) 500 500 450 400 350 300 250 200 150 M2 Monetary Base 450 400 350 300 250 200 150 100 100 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Source: Federal Reserve Board of Governors
Trillion dollars 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 Source: Federal Reserve Board of Governors Excess Reserves in Depository Institutions When will inflation start? Banks start lending Consumers start spending Businesses start investing In short, if excess reserves fall before the Fed balance sheet 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Economic activity is expected to improve, Inflation is expected to remain well-anchored, the unemployment rate could remain high. Monetary policy is art, not science. In economics, assumptions matter.