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Implications of Fiscal Austerity for U.S. Monetary Policy Eric S. Rosengren President & CEO Federal Reserve Bank of Boston GIC Central Banking Conference Milan, Italy May 16, 2013 EMBARGOED UNTIL THURSDAY, MAY 16, 2013 AT 7:45 A.M. U.S. EASTERN TIME AND THURSDAY, MAY 16, 2013 AT 1:45 P.M. MILAN, ITALY TIME; OR UPON DELIVERY
Implications of Fiscal Austerity Fiscal matters are the subject of intense debate Many developed economies have adopted fiscal austerity The U.S. reduced real government spending and government employment even before recent payroll tax increase and sequester 2
Implications of Fiscal Austerity…Continued Long-term budget sustainability is critical, but timing is important While fiscal policy is only one consideration, more restrictive near-term fiscal policy will delay when we achieve the Fed’s dual mandate – currently the unemployment rate is 7.5 percent and PCE inflation is about 1 percent 3
Implications of Tepid Recovery Some call degree of monetary accommodation excessive, but based on outcomes, one could argue we have not been sufficiently accommodative (inflation is below target, unemployment is above the “full-employment” level) Part of the “miss” on inflation and unemployment is the emergence of more fiscal restraint than might have been expected (e.g., the sequester became reality) 4
Implications of Tepid Recovery…Continued Monetary policy has been effective in generating growth in interest-sensitive sectors and has in part offset the contractionary effects of headwinds – fiscal, financial, and otherwise Overall GDP growth during the recovery has been slow. Looking at the components of GDP reveals differences and provides perspective 5
Figure 1 Growth in Real Final Sales to Private Domestic Purchasers 2007:Q1 - 2013:Q1
Percent Change at Annual Rate 6
1
4 1
2 0
1
-2 0
-4 -6
0
-8 0
-10 2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
2013:Q1
Recession
Source: BEA, NBER / Haver Analytics
6
Figure 2 Growth in Real Final Sales to All Domestic and Private Domestic Purchasers 2007:Q1 - 2013:Q1
Percent Change at Annual Rate 6
1
4 1
2 0
1
-2 0
-4 -6
Recession To Private Domestic Purchasers To All Domestic Purchasers
-8 -10 2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
0
0
2013:Q1
Recession
Source: BEA, NBER / Haver Analytics
7
Figure 3 Growth in Real Government Spending 2007:Q1 - 2013:Q1
Percent Change at Annual Rate 12
12.0 10.0 8.0
8
6.0 4.0
4
2.0 0.0
0
-2.0 -4.0
-4
-6.0 -8.0
-8 2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
2013:Q1
Recession
Source: BEA, NBER / Haver Analytics
8
Figure 4 Contribution of Real Government Spending to Real GDP Growth 2007:Q1 - 2013:Q1
Percent Change at Annual Rate 2.0
2.00
1.0
1.00
0.0
0.00
-1.0
-1.00
-2.00
-2.0 2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
2013:Q1
Recession
Source: BEA, NBER / Haver Analytics
9
Figure 5 Growth in Real Government Spending by Federal and State and Local Governments 2007:Q1 - 2013:Q1
Percent Change at Annual Rate 15
Series4 Federal
10
Series2 State and Local
15.0
10.0
5
5.0
0
0.0
-5
-5.0
-10.0
-10
-15.0
-15 2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
2013:Q1
Recession
Source: BEA, NBER / Haver Analytics
10
Figure 6 Growth in Government Spending During Current and Previous Three Recoveries Index, Trough = 100 130 1982:Q4 1991:Q1 2001:Q4
120
2009:Q2
110
100
90 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Quarters from Trough
Source: BEA, NBER / Haver Analytics
11
Figure 7 Nonfarm Payroll Employment Growth: All Industries and Private Industries 2007:Q1 - 2013:Q1
Percent Change from Year Earlier 3
3.00
2
2.00
1
1.00
0
0.00
-1
-1.00
-2
-2.00
-3
-3.00
-4
-4.00
-5
Series4
Series3
Private Industries
All Industries
-6 2007:Q1
2008:Q1
2009:Q1
2010:Q1
2011:Q1
2012:Q1
-5.00 -6.00
2013:Q1
Recession
Source: BLS, NBER / Haver Analytics
12
Effects of Fiscal Restraint Fiscal restraint has been notable, and has factored into the pace of recovery Sectors that are sensitive to accommodative monetary policy have responded Monetary policy has ameliorated, but not fully offset, the impact of headwinds (fiscal and otherwise)
2 percent real GDP growth Only gradual improvement in labor markets 13
Figure 8 Inflation Rate: Change in Total and Core Personal Consumption Expenditure (PCE) Price Indexes January 2007 - March 2013
Percent Change from Year Earlier 5
1
4
1
PCE
3
Target (2%)
2 1
0
Core PCE (Excluding Food and Energy)
0
1
0
-1 0
-2 Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
Jan-2013
Recession
Source: BEA, NBER / Haver Analytics
14
Low Inflation The low inflation rate would actually be of concern if the economy suffered a negative shock Note the experience of Japan – not addressing persistently low inflation can cause deflation if a negative shock occurs Inflation expectations in the United States remain stable – however there are risks to persistently remaining below target 15
Figure 9 Three-Month Treasury Bill Yield Minus Core PCE Inflation Rate January 2007 - March 2013
Percent Change from Year Earlier 3
1
2
1
1
1
0
0
-1
0
0
-2 Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
Jan-2013
Recession
Note: Core PCE Inflation Rate is the percent change in the Core PCE from one year earlier Source: BEA, Federal Reserve Board, NBER / Haver Analytics
16
Figure 10 Central Bank Assets in the United States, the United Kingdom and the Euro Area December 2006 - April 2013
Index Level December 2006 = 100 600 United Kingdom
500
United States Euro Area (17)
400 300 200 100 0 Dec-2006
Dec-2007
Dec-2008
Dec-2009
Dec-2010
Dec-2011
Source: Bank of England, European Central Bank, Federal Reserve Board / Haver Analytics
Dec-2012
17
LSAPs and Improving Economy Unemployment rate is currently 7.5 percent – down from 7.8 percent last September Employment growth averaged over 200,000 jobs per month over the last three months But the employment-to-population ratio remains low – so some of the improvement in the rate is a result of workers leaving the labor force Need real GDP growth faster than the 2 percent we have been averaging in order to get more significant improvement in labor markets 18
Figure 11 Growth in Real Government Spending in the United States, the United Kingdom and the Euro Area 2010 - 2012
Percent Change from Year Earlier 3 2010:Q4
2011:Q4
2012:Q4
2 1 0 -1 -2 -3 United States
United Kingdom
Note: Includes only government consumption expenditures. Source: BEA, Eurostat, Office for National Statistics (U.K.) / Haver Analytics
Euro Area (17)
19
Figure 12 Estimated General Government Structural Budget Balance 2010 - 2013
Percent of Potential GDP 0
-3
-6 2010
2011
2012
2013 (Estimate)
-9 United States
United Kingdom
Euro Area (17)
Note: For the Euro area, 2012 is also based on estimates of the budget balance for some countries Source: IMF, World Economic Outlook Database
20
Concluding Observations The economy continues to gradually improve Accommodative monetary policy has been effective in interest-sensitive sectors, and partially offset by headwinds Long-term sustainable fiscal policy is important, but timing is an issue The timing and speed of restraint should depend on how the economic recovery progresses 21