![Contemporary Perspectives
As Ben Bernanke recalls in his memories: “In the first months
of the new administration [Obama first mandate], completing
the stabilization of the Banking System remained a top
priority.”
The Economist, in the publication of 16 May pointed out that
the bank stress test helped a lot to restore some confidence in
banking.
Both The Economist and the WSJ pointed that the FED did
not mention a concern about the possibility of deflation in the
June24 FOMC statement](https://image.slidesharecdn.com/1b52bbcd-57a7-46a2-b50f-a1fae81f66ff-161011082038/85/Presentation_JUNE-30-320.jpg)
Presentation_JUNE
- 1. A History of Monetary Policy: Federal Open Market Committee meeting, June 2009 Antonio Alonso Gonz´alez, Congyi Lui Boston University 29 April 2016
- 2. Outline Financial and economic outlook Evolution of the Balance Sheet The Supervisory Capital Assessment Program The Large Scale Asset Purchases Liquidity facilities discussion Exit strategy Forward Guidance Inflation and Output Gap Policy options considered and the final decision Major Speeches during the FOMC meeting period Comparative perspectives Retrospective information
- 3. Financial outlook of the American Economy Much higher issue of corporate debt. The spreads of corporate debt of Treasuries were reduced by 176 and 405 basis points for the investment-grade and high-yield debt, respectively. Increase in the price of the stocks. The Standard and Poors rose a 5 percent, driven by the better prospects of banks. Decrease of the value of the dollar a 5 percent. Cause: investors moving from safe US assets to riskier assets abroad.
- 4. Financial outlook of the American Economy Key feature: yields on treasures are going up since the last FOMC meeting...
- 5. Financial outlook of the American Economy
- 6. Economic outlook The FED expected positive economic growth for the next months The FED forecasted 1.1 percent growth of the real GDP for the second half of the year. Job losses remained important, although not as many job losses than in previous months. Unemployment was expected to peak at 10 percent at the end of the year. Inflation was expected to be 1.4 percent for the whole 2009, 0.7 percent more than the previous forecast. Great program of public spending: big deficit financed by issuing debt.
- 7. Size and composition of the Balance Sheet
- 8. The Supervisory Capital Assessment Program (Stress test) During the first half of 2009, great uncertainty about the solvency of the main banks. The FED and the Treasury conducted a test to know the capital needs of the banks in the case of a worsen of the macroeconomic conditions Calculated capital needs had to be covered. If the banks could not raise the capital, Treasury would help them. Results were better than expected, the test helped to restore the confidence in the banking system.
- 9. The Supervisory Capital Assessment Program
- 10. The Large Scale Asset Purchases Program So far, the LSAP had a major impact in the MBS and Agency markets. The impact of the LSAP in the Treasuries market was smaller, because the relative size of the program compared to the market was small. Also, great debt issuance during the period. At the time, it was already known that most of the effect of the LSAP was produced by market reaction to the announcements. the FOMC rejected the proposals to reallocate the size of the programs within them. They rejected also changing the strategy of a constant pace of purchases. Finally, they rejected the purchase of securitizations of hybrid ARMs recommended by the staff.
- 11. The Large Scale Asset Purchases Program: Evolution and predicted path
- 12. Liquidity facilities discussion The FOMC discussed whether to renew or not some liquidity facilities. The FOMC decided to renew until February the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), the AMLF and the TSLF. In addition, the FOMC extended the swap lines between the FED and other Central Banks. They decided to let expire the Money Market Investor Funding Facility (MMIFF). They also decided to suspend some TSLF auctions. Even if most programs were renewed, the access to the programs became more difficult. The FOMC backed all the proposals by the staff. Even if the use of liquidity facilities had dropped considerably in the previous months, they judged useful to have the programs operative in case of an emergency.
- 13. Exit Strategy: how to unwind the measures they put in place The size of the Balance Sheet made a challenge to unwind the expansionary monetary policy. To unwind the policies several tools were considered, from the demand side and from the supply side. From the supply side From the demand side
- 14. From the Demand side
- 15. From the Supply side
- 16. In the discussion, they rejected the option of issuing FED bills because they considered this action as politically unfeasible. In the Monetary Policy Report of July to the Congress, the Chairman said that the FED had several tools available, including the reverse repurchase agreements, sales of long term assets and the ability to pay interests on balances held at the FED by depository institutions They did not include this discussion in the Statement because they did not want to confuse the market about their intentions. The discussion about the exit strategy was rather informal and the FOMC members did not vote on it.
- 17. Forward Guidance MR. Bullard pointed naming a specific date for when we might make future interest rate moves might go the wrong direction Never drawing the line in the sand
- 18. Inflation and Output gap The committee expected overall PCE (personal consumption expenditure) inflation to slow from 1.4 percent this year to 1.1 percent in 2010 The projected deceleration in core inflation reflects the substantial drag induced by economic slack
- 19. Inflation and Output Gap Mr. Kiley employed several possible explanations for the discrepancy In the Greenbook: GDP data, as currently published, may understate the contraction in real activity labor force participation may currently be boosted to an unusual degree by the Extended Unemployment Compensation program have underestimated the size of shifts in the NAIRU (non- accelerating inflation rate of unemployment) or other elements of potential
- 20. Inflation and Output Gap Various models can be utilized to estimate potential GDP Two risks to the inflation outlook expectations could shift down or ramp up the links between resource utilization and inflation Sources of distorting shocks
- 21. Policy options considered and final decision Three policy alternatives: A,B and C Alternative A: Increase the purchase of Treasuries to 750 billion by the end of the year Alternative B: Size of LSAP Program remains unchanged Alternative C: The LSAP Program will tapper off gradually by the end of the year. Alternative B was chosen. A wait-and-see policy.
- 22. Major Speeches during June FOMC Meeting Period: Kevin Warsh, Governor, at the Institute of International Bankers Annual Meeting, New York, New York, June 16, 2009 Governor Elizabeth A. Duke, at the Women in Housing and Finance Annual Meeting, Washington, D.C., June 15, 2009
- 23. Major Speeches during June FOMC Meeting Period: The governor, Kevin Warsh, made a speech titled “Defining Deviancy” This definition has expanded to describe actions that deviant from acceptable standards It is time to say no to the stability strategy when we face the deviancy of economy
- 24. Major Speeches during June FOMC Meeting Period: Stability is a fine goal, but it is not a final one Sorely maintaining stability cannot bring US economy back to the ideal development track if the policies for fiscal, regulatory, and trade all treat stability as the ultimate objective, then we might find ourselves with lower growth and diminished economic potential
- 25. Major Speeches during June FOMC Meeting Period: The Federal Reserve should not compromise another kind of stability–price stability–to help achieve other government policy objectives Productivity is still the key of growth In terms of long-term, we should not lose confidence in the inherent innovation, creativity, dynamism in the U.S. economy, and the inherent good sense of our citizens
- 26. Major Speeches during June FOMC Meeting Period: “Containing the Crisis and Promoting Economic Recovery” by Elizabeth A. Duke Credit easing focuses on the mix of loans and securities that the central bank holds as assets on its balance sheet as a means to reduce credit spreads and improve the functioning of private credit markets
- 27. Major Speeches during June FOMC Meeting Period: Targeted actions aimed at specific systemically important institutions Liquidity programs for financial institutions Lending to support key financial markets Large-scale purchases of high-quality assets
- 28. Major Speeches during June FOMC Meeting Period:
- 29. Major Speeches during June FOMC Meeting Period: A Fiscal Policy named Emergency Economic Stabilization Act has been initiated In October 2008 In February of this year, the Federal Reserve, as part of the Treasury’s Financial Stability Plan, initiated the Supervisory Capital Assessment Program (SCAP)
- 30. Contemporary Perspectives As Ben Bernanke recalls in his memories: “In the first months of the new administration [Obama first mandate], completing the stabilization of the Banking System remained a top priority.” The Economist, in the publication of 16 May pointed out that the bank stress test helped a lot to restore some confidence in banking. Both The Economist and the WSJ pointed that the FED did not mention a concern about the possibility of deflation in the June24 FOMC statement
- 31. Retrospect Stress Tests revealed to be one of the best policy decisions made during the economic crisis Forecasts were close and we observed how the summer of 2009 was the turning point of the economic crisis
- 32. Retrospect The Real GDP growth was lower than expected for 2009 (-2.8 instead of -1.1 forecasted)