James Bullard Jan 1010

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/