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Acting to Avoid a Great Stagnation
Eric S. RosengrenPresident & CEO
Federal Reserve Bank of Boston
Open Classroom SeriesNortheastern UniversityBoston, Massachusetts
September 26, 2012
www.bos.frb.org
Avoiding a Great Stagnation
Historians use “Great” to reflect success – e.g., Alexander the Great
Economists use “Great” to reflect difficult episodes and policy that contributes or fails to alleviate – e.g., Great Depression, Great Recession
Forceful action necessary – and being taken – to avoid a Great Stagnation
2
What Would Constitute A Great Stagnation?
Policymakers accepting as inevitable a slow growth economy and underutilized economic resources
Allowing high unemployment to become a more permanent feature of the economy
Policy only reacting to large negative shocks; accepting slow growth that makes little progress in returning to full employment
3
Acting to Avoid It: Our Monetary Policy Response to Global Slowdown
Seek faster growth than has occurred or is likely to occur without action Asset purchases (agency mortgage-backed and Treasury
securities) More open-ended focus on economic outcomes rather than
calendar dates or amounts purchased Communicating that we anticipate low short-term rates likely to be
warranted at least through mid-2015; accommodative until recovery is sustainable
Context of price stability; assessment of costs, efficacy
4
Our Monetary Policy Response Continued…
Unconventional policy has risks, but they are preferable to the risk of another year or more of economic stagnation
My rationale for policy change…
5
Real-World Example of Stagnation
Japan and Europe have both suffered long periods of slow growth
Today I will focus on Japan – despite some key differences from the U.S. Demographics – Japanese population’s average age is rapidly
rising Slow response to banking problems
6
7
Figure 1Japan’s Real Gross Domestic Product
Source: Cabinet Office of Japan / Haver Analytics
1980:Q1 - 2012:Q2
0
200
400
600
800
1980:Q1 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 2012:Q1
Trillions of Chained 2005 Yen, Seasonally Adjusted Annual Rate
Real GDP
Trend Line Estimated Over Period 1980 - 1990
8
Figure 2U.S. Real Gross Domestic Product
Source: BEA, NBER / Haver Analytics
1980:Q1 - 2012:Q2
0
0
0
1
1
1
0
4
8
12
16
1980:Q1 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 2012:Q1
Recession
Trillions of Chained 2005 Dollars, Seasonally Adjusted Annual Rate
Real GDP
Trend Line
Causes of Slow Growth
Not unusual after a financial crisis
Let’s look at a few factors (not enough time for a detailed discussion)
9
10
Figure 3Growth in Real GDP and Real GDP Excluding
Housing and Government Spending
Source: BEA, NBER / Haver Analytics
2009:Q2 - 2012:Q2
98
100
102
104
106
108
2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4 2012:Q2
Index, 2009:Q2=100
Real GDP(Average Annual Growth of 2.21%)
Real GDP Excluding Residential Investment and Government Spending
(Average Annual Growth of 2.45%)
11
Figure 4Housing Starts
Source: Bureau of the Census, NBER / Haver Analytics
1980:Q1 - 2012:Q2
0
0
0
1
1
1
0
500
1,000
1,500
2,000
2,500
2000:Q1 2002:Q1 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1
Recession
Thousands of Units, Seasonally Adjusted Annual Rate
12
Figure 5Growth in Real State and Local
Government Spending
Source: BEA, NBER / Haver Analytics
2000:Q1 - 2012:Q2
0
0
0
1
1
1
-6
-4
-2
0
2
4
6
2000:Q1 2002:Q1 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1
Recession
Percent Change from Year Earlier
13
Figure 6Change in Real GDP from
U.S. Business Cycle Peak by Country
Source: BEA, CAO, Eurostat, ONS, INSEE, StatCan / Haver Analytics
2007:Q4 - 2012:Q2
90
95
100
105
110
2007:Q4 2008:Q2 2008:Q4 2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4 2012:Q2
Canada France
Germany Japan
United States United Kingdom
Index, 2007:Q4=100
The Significant Costs of a Slow Recovery
Impact on those unemployed or underemployed
Temporary labor market problems can eventually become more permanent because of a slow recovery
14
15
Figure 7Employment-to-Population* Ratio
Source: BLS, NBER / Haver Analytics
January 2000 - August 2012
0
0
0
1
1
1
56
58
60
62
64
66
Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010 Jan-2012
Recession
Percent
*Includes population 16 years and older
16
Figure 8Long-Term Unemployment
Source: BLS, NBER / Haver Analytics
January 1980 - August 2012
0
0
0
1
1
1
0
10
20
30
40
50
Jan-1980 Jan-1984 Jan-1988 Jan-1992 Jan-1996 Jan-2000 Jan-2004 Jan-2008 Jan-2012
Recession
Percent
Percent of unemployed out of work for 27 weeks or more
What Should Monetary Policymakers Do?
Conventional response – lower short-term rates… not possible at the zero lower bound
Unconventional responses More costs Impact less certain Still, not a reason to avoid necessary actions
17
18
Figure 9Japan’s Central Bank Assets and Inflation Rate
Source: Japanese Ministry of Internal Affairs and Communications, Bank of Japan / Haver Analytics
1990:Q1 - 2012:Q2
0
40
80
120
160
1990:Q1 1993:Q1 1996:Q1 1999:Q1 2002:Q1 2005:Q1 2008:Q1 2011:Q1
Trillions of Yen
Total Assets of Bank of Japan
-3.0
0.0
3.0
6.0
1990:Q1 1993:Q1 1996:Q1 1999:Q1 2002:Q1 2005:Q1 2008:Q1 2011:Q1
Percent Change from Year Earlier
Consumer Price Index for Japan
19
Figure 10Federal Reserve System Assets and U.S.
Inflation Rate
Source: Federal Reserve Board / Haver Analytics
January 1990 - July 2012
0
0
0
1
1
1
0.0
1.0
2.0
3.0
4.0
Jan-1990 Jan-1993 Jan-1996 Jan-1999 Jan-2002 Jan-2005 Jan-2008 Jan-2011Recession
Trillions of Dollars
Federal Reserve System Assets
0
0
0
1
1
1
-2.0
0.0
2.0
4.0
6.0
Jan-1990 Jan-1993 Jan-1996 Jan-1999 Jan-2002 Jan-2005 Jan-2008 Jan-2011
Percent Change from Year Earlier
Personal Consumption Expenditure Price Index
FOMC Announcement
Asset purchases
$40 billion per month of agency Mortgage-Backed Securities (MBS)
Continued exchange of short-term Treasury securities for an equal amount of long-term securities through the end of the year – $45 billion per month – via the maturity extension program begun in June
20
Announcement Continued…
Plan is more open-ended – continue purchases until there has been sustained improvement in labor markets – end based on economic outcomes, not a set purchase amount or a date
Committee expects the highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens – currently anticipate low rates are likely to be warranted at least through mid-2015
21
22
Figure 11Financial Market Response to FOMC Announcement
Source: Federal Reserve Board, Bank of America Merrill Lynch, WSJ, Bloomberg / Haver Analytics
August 1, 2012 - September 14, 2012
September FOMC
Statement
Day After FOMC
Statement
Chairman Bernanke’s
Jackson HoleSpeech
PreviousFOMC
Statement
9/12 - 9/13 9/12 - 9/14 8/30 - 9/14 7/31 - 9/14
S&P 500(Percent Change) +1.6% +2.0% +4.7% +6.3%
Exchange Rate:Euros Per Dollar
(Percent Change)-0.1% -1.9% -4.9% -6.3%
5-7-Year Investment-Grade Corporate Bond Yield
(Change in Basis Points)-4.4 bp -3.8 bp -5.4 bp -12.9 bp
Yield on 30-Year FNMA Current Coupon MBS
(Change in Basis Points)-24.4 bp -12.5 bp -12.1 bp -1.7 bp
Conclusion
Action intended to promote faster growth and return to full employment more quickly
But monetary policy is not a panacea – large shocks can be mitigated, but likely not offset
While policy will quicken recovery – it still will take time This underlines the importance of forceful and timely action
necessary to avoid the dubious title of “Great”
23
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