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
Russia 1.0, 3.0, 7.0 China 12.0, 9.6, 8.0
India India 8.0, 9.5, 9.0 13.0, 4.0, 6.0
South Africa 0.9, 2.2, 3.0
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
Onset of Credit Crisis
6 5 4
2010 Est. 3.1%
3 2 1
2009 Est. -1.1%
0 -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
5.2
3.0
-1.1
3.1
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
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
World Output G-7 Economies
BRIC Economies
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
Real GDP Growth Dec-2009 BC Forecast Dec-2009 MA Forecast
-4 -6 -8 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
Lehman Brothers' collapse
WTI crude oil price tops $100/barrel
9200 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
Case-Shiller Composite 20
20 15 10
LP-HPI
5
FHFA: PO
0 -5 -10 -15 -20 -25 -30 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Loan Performance/FHFA/S&P.
U.S. Civilian Unemployment Remains High‌ Thousands
Percent 12
700 650
11
Unemployment Rate (SA, Right Axis)
600 10 550 500 450
Initial Claims for Unemployment Insurance (4-week moving average, left axis)
9 8
400
7
350 6 300 250
5
200 2005
4 2006
2007
2008
2009
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
BBB
600 500 400
AA
300 200
AAA
100 0 Jan-2007
Jul-2007
Jan-2008
Jul-2008
Jan-2009
Jul-2009 Source: Federal Reserve.
World Equity Prices Since Trough Trough12/30/2009 % Change
Peak Date
Trough Date
Peak-Trough % 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%
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%
Country G7 Economies
BRIC Economies
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 Headline PCE
4 3 2
Core PCE
1 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
U.K.
6 5
Canada 4 3
Euro Area
2 1 0 Jan-07
U.S.
Japan 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 Short-Term Lending to Financial Firms and Markets 2,500 2,000
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
12/08
10/08
Liquidity Programs
3/10
02/10
“Extended Period” ?
Resumption of Traditional Policy Rate Adjustment
?
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
S&P/Case-Shiller Home Price Index: U.S. National 2001=100
150 140 130
Nominal GDP 2001=100
120 110 100 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
NASDAQ Composite 1994=100
390 340 290 240
Nominal GDP 1994=100
190 140 90 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
Nikkei 225 Average 1984=100
300
250
200
Japan: Nominal GDP 1984=100
150
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/