Is Federal Reserve Bank Policy Working in the US? DR. RAJEEV DHAWAN Director, Economic Forecasting Center Georgia State University Presented at the Global Interdependence Center’s Meeting at the Central Bank of Chile in Santiago • January 17, 2011
AGENDA 1. Define the latest Federal Reserve Bank policy aka Quantitative Easing 2. Effectiveness metrics 3. Impediments to boosting aggregate demand; what creates job growth? 4. Ability and willingness of commercial banks to make loans to businesses (especially to small firms) 5. Concluding remarks
Quantitative Easing:The Second Round (QE2) • Quantitative Easing refers to changes in the composition and/or size of a central bank’s balance sheet that are designed to ease liquidity and/or credit constraints (Blinder 2010) • The central bank hopes that by reducing interest rate spreads/risk premiums the central bank can boost aggregate demand even at the zero lower bound for the policy interest rate
Jim Bullard’s Fear and Solution
The FOMC’s “extended period” language may be increasing the probability of a Japanese-style outcome for the United States.
…on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome. Source : James Bullard, “Seven Faces of “the Peril”, September/October 2010
U.S. Inflation Compared to Japan 4.0
(%, PCHYA)
3.0 2.0
US Deflator (starting in 2000)
1.0 0.0 -1.0 -2.0
Japan Deflator (starting in 1990)
-3.0 -4.0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82
FOMC’s December Statement To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate…. The Committee…. intends to purchase a further $600 billion of longerterm Treasury securities by the end of the second quarter of 2011.
Source: FOMC statement & FRB of NY, November 3, 2010
QE2’s Effectiveness: Inflation, Spreads & Side Effects
Risk Premium in Investment Grade Bonds
Expected vs. Actual Inflation
BB+ Corpora t e v s. 1 0-Yea r T-Bon d
(%) 4
(%) 12
3
10
2
8
1
6
0
4
2
-1
JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN 2006 2007 2008 2009 2010 2011
0
10-Y Bon d Ra t e Less T IPS Ra t e Cor e In fl a t ion (3-m on t h A n n . Gr owt h )
OCT 2006
MAR 2007
AUG
JAN 2008
JUN
Stock Market and Gold ($/T roy ounce ) 1450
12000
1400
11500
1350 11000 1300 10500 1250 10000
9500
1200
AUG 2010
SEP
DOW30 (Lef t )
OCT
NOV
Gol d (Ri gh t )
DEC
JAN 2011
1150
Instead of Flattening the Yield Curve has steepened
NOV
APR 2009
SEP
FEB 2010
JUL
DEC
Long-Term Rates: Germany vs. Japan vs. US vs. UK (%) 1.50 1.40 1.30 1.20 1.10 1.00 0.90
NOV 2010
Germa n 1 0-Y Bon d US 1 0-Y Bon d
DEC
UK 1 0-Y Bon d Ja pa n ese 1 0-Y Bon d
JAN 2011
10-Year Bond Rate and Trade Deficit 10-Year Bond Regression
Source: May 2005, Forecast of the Nation, EFC@GSU Trade Balance ($ bil.) -20 -25 -30 -35 -40 -45 -50 -55
JAN 2009
MAR
MAY
JUL
SEP
NOV
JAN 2010
MAR
MAY
JUL
SEP
NOV
US Trade Weighted Currency Index (I ndex 2000 = 100) 120
Emerging Currencies 110
100
90
Major Currencies
80
70
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Impediments to Boosting Aggregate Demand
Hom e Prices: Case-Shiller National Av erage
Consumer Confidence and Stock Market Wealth (I ndex 1966 = 100) 120
200
16000 180
100
14000 160
80
12000 140
60
10000 120
40
8000 100
20
APR AUG DEC APR AUG DEC APR AUG DEC APR AUG DEC APR AUG DEC 2006 2007 2008 2009 2010
Con su m er Con fiden ce (Left )
6000 80
1997
1998
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Wil sh ir e 5000 (Righ t )
Home Price Expectations Survey High
EFC Median
Low
Source: MaroMarkets Home Price Expectations Survey, December 2010
Employment Recovery
So What Creates Jobs?
Investment in Tech Equipment and Software as a % of GDP (%) 5.0
4.5
Golden 90’s Job Growth: 240K/Month
2003-2007 Job Growth: 132K/Month
12%
6% 4.0
3.5
3.0
2008-2009 Job Loss: 400K/Month
-15%
+19% 2010 YTD: 87K/Month
2.5
2.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Job Growth and Tech Investment Rajeev Dhawan Professor & Director Economic Forecasting Center Georgia State University
ORDERS: 1% ORDERS 0.45% TECH
CEO: 1% CEO 0.034% TECH 1% CEO 0.11% ORDERS
Employment growth (Job additions)
TECH: 1% TECH 0.059% EMP:
Harold Vasquez Research Specialist Economic Forecasting Center Georgia State University
The improvements in CEO’s perceptions about the future increases TECH investment spending. TECH investment significantly increases employment growth via durable goods ORDERS channel.
Source: “U.S. Employment Growth and Tech Investment: A New Link” By Rajeev Dhawan & Harold Vasquez, 2010
Chief Executive Confidence & Durable Goods Orders Ex pect a t i on s of Bu si n ess Con di t i on s i n Own In du st ry 6 Mon t h s Ah ea d (%, Y -O-Y ) 20
70
10 60 0 50
-10 -20
40 -30 30
II IV II IV II IV II IV II IV II IV II IV II IV II IV II IV II IV II IV 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CEO Con f i den ce (Lef t )
Du ra bl e Goods Orders Growt h (Ri gh t )
-40
Dow30 Revenue Growth and Job Gains (%, Y-O-Y)
(‘000 Jobs)
20%
2500 2000
15%
1500 10% 1000 5%
500
0%
0 -500
-5%
-1000 -10% -1500
-15%
-2000
-20%
-2500 2001 2002 2003 2004 2005 2006 2007 2008 09q1 09q2 09q3 09q4 10q1 10q2 10q3
DOW 30 (Left)
Private Job Gains (Right)
CISCO vs. WALMART Revenue Growth 30% 25% 20% 15% 10%
CISCO
5%
Walmart
0%
-5% -10% -15% -20% 2006q1 2006q3 2007q1 2007q3 2008q1 2008q3 2009q1 2009q3 2010q1 2010q3
WALMART CEO Mike Duke
Three issues that we often talk about: tax, trade, and health care.
Source: Bloomberg Businessweek, December 6, 2010
But What About the Ability/Willingness of Banks to Lend?
Source : The Wall Street Journal, September 27, 2010
Excess Reserves of Depository Institutions ($ Bil.) 1200 1000 800 600 400 200 0 -200
AUG OCT DEC FEB APR JUN AUG OCT DEC FEB APR JUN AUG OCT DEC 2008 2009 2010
Fear of Fire Sales and the Credit Freeze Douglas Diamond Professor of Finance University of Chicago
Raghuram Rajan Professor of Finance University of Chicago
“overhang� of impaired banks
an that may be forced to sell soon can reduce the current price of illiquid securities sufficiently that banks have no interest in selling. This
creates high expected returns to holding cash for potential buyers and an aversion to making term loans. Source: NBER working paper #14925, April 2009
Food-For-Thought • Job growth is a function of “tech” investment that in turn is dependent upon confidence levels (CEO’s and consumers) • Can a central bank do anything here? • Not directly, but by easing the flow of credit it can help small firms that are primarily bank finance dependent • How to do it? • Clean up the toxic debt by using the QE power (Explore setting up a Resolution Trust Corporation as in early 90’s? Reviving Treasury’s PPIP?)
Special Thanks to the Center’s Executive Sponsors Carl R. Zwerner Chair of Family Owned Businesses
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