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S. HRG. 111-53
FEDERAL RESERVE'S FIRST MONETARY POLICY
REPORT FOR 2009
HEARING
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
FEBRUARY 24, 2009
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota
ROBERT F. BENNETT, Utah
JACK REED, Rhode Island
JIM BUNNING, Kentucky
CHARLES E. SCHUMER, New York
MIKE CRAPO, Idaho
EVAN BAYH, Indiana
MEL MARTINEZ, Florida
ROBERT MENENDEZ, New Jersey
BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii
JIM DEMINT, South Carolina
SHERROD BROWN, Ohio
DAVID VITTER, Louisiana
JON TESTER, Montana
MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin
KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
COLIN McGlNNIS, Acting Staff Director
WILLIAM D. DUHNKE, Republican Staff Director
AMY FRIEND, Chief Counsel
AARON KLEIN, Chief Economist
JONATHAN MILLER, Professional Staff Member
DREW COLBERT, Legislative
Assistant
LISA FRUMIN, Legislative
Assistant
PEGGY KUHN, Republican Chief Economist
ANDREW OLMEM, Republican
Counsel
HESTER PEIRCE, Republican
Counsel
JlM JOHNSON, Republican
Counsel
MARK CALABRIA, Republican Professional Staff Member
DAWN RATLIFF, Chief Clerk
DEVIN HARTLEY, Hearing Clerk
SHELVIN SIMMONS, IT Director
JIM CROWELL, Editor
(ID
C O N T E N T S
TUESDAY, FEBRUARY 24, 2009
Page
Opening statement of Chairman Dodd
Opening statements, comments, or prepared statements of:
Senator Shelby
Senator Johnson
Prepared statement
1
4
62
WITNESS
Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve
System
Prepared statement
Response to written questions of:
Senator Shelby
Senator Johnson
Senator Bennett
Senator Tester
Senator Crapo
5
62
66
72
78
80
81
ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD
Monetary Policy Report to the Congress dated February 24, 2009
(III)
88
FEDERAL RESERVE'S FIRST MONETARY
POLICY REPORT FOR 2009
TUESDAY, FEBRUARY 24, 2009
U.S. SENATE,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,
Washington, DC.
The Committee met at 10:11 a.m., in room SH-216, Hart Senate
Office Building, Senator Christopher J. Dodd (Chairman of the
Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman DODD. Mr. Chairman, welcome. I hope that was instructive for you, Mr. Chairman.
[Laughter.]
Chairman DODD. I am sure the Federal Reserve operates in a
similar pattern as we do here on the Banking Committee. Do you
get as much luck as the Chairman as I just did on that?
Well, let me tell you how we will proceed here this morning, and
we welcome you, Mr. Chairman, to the Committee. We have got a
good turnout of our Members here for all the obvious reasons.
When the Chairman of the Federal Reserve comes before our Committee, it is obviously of deep interest to the country, and we welcome you here this morning. I will take a few minutes for some
opening comments, turn to Senator Shelby for any opening comments he may have, and then we will go right to you, Mr. Chairman, for your statement this morning, and we will try and follow
the 5-minute rule so that everybody gets a chance to raise questions with you. And if we need a second round, we will do so. The
record will stay open for a few days to submit questions, and any
and all statements, documents, and other materials that my colleagues and others feel would be important to include in the record
will be considered included at this moment, without objection.
Well, Chairman Bernanke, we welcome you to the Committee to
present the Fed's semiannual monetary policy report to the U.S.
Congress. We meet obviously at a very important moment for our
country, with our Nation in the midst of the worst economic crisis
in generations. Since the end of World War II, America's business
cycles have oscillated between periods of growth and rising inflation, with the Fed raising interest rates to slow the economy, creating a recession, which then caused inflation to slow. The Fed
then typically lowered interest rates, restarting the Nation's economy again. And while the Fed manages our recessions, our economic recoveries have typically been led by the housing and automobile sectors, which are highly sensitive to interest rates.
(l)
In the past, the typical American worker saved during the good
times for rainy days, and when recession hit, they may have been
laid off. But once the recession receded, they not only had some
savings hopefully stored up, but also a reasonably good chance of
getting their jobs back or finding new employment.
This time, however, Mr. Chairman, our housing and auto sectors
are leading us not out of recession but into it in many ways. This
time our recession is being caused not by rising interest rates but,
rather, a massive credit crunch, resulting from years of reckless
spending and, as the Banking Committee has uncovered during the
80 hearings and meetings in the last Congress, regulatory neglect
as well. Such neglect allowed for and even encouraged a problem
that began in the subprime mortgage market to spread throughout
our Nation and the entire global financial system like a cancer.
This time, nearly half the jobs we have lost are not likely to come
back, we are told, and that is why the American Recovery and Reinvestment Act is so essential. This time, the American people entered this recession with a negative personal savings rate and a
false sense of confidence that we can count on the value of our
homes and stocks to go up forever.
In fact, Mr. Chairman, I read with great interest that your own
boyhood home recently went into foreclosure. I am saddened by
that, as I am sure you are. Most recently, that home was owned
by a soldier in the South Carolina Army National Guard, who reportedly volunteered to go on active duty during wartime in order
to try and save his home and your former home.
Mr. Chairman, I do not suggest that you are to blame for any
of this. Quite the contrary. I happen to commend your conduct of
monetary policy during your tenure. Last year, you began to cut interest rates in the face of opposition from some regional bank presidencies at the Fed. You followed through on your commitment that
you made, a meeting which I will never, ever forget in August of
2007, when you were in my office with Hank Paulson. And I will
never forget the words you spoke to me that day when asked what
we could about the problems, and you said at that time you would
use all the tools at your disposal to attack the problems in the global financial market. And I commended you for those comments
then, and your efforts, through aggressive and often innovative
monetary policy.
You have worked creatively to adapt the Fed to handle the greatest financial market crisis in any of our lifetimes. If, as it is said,
those who do not study history are doomed to repeat its mistakes,
I am relieved we have one of the foremost scholars of the Great Depression at the helm of the Fed at this moment.
But for all the successes the Fed has had in carrying out its core
mission—monetary policy—its regulation and consumer protection
missions have been abject failures, in my view. And while many of
these failures predate your arrival, they cannot be ignored.
When I am approached by a constituent in New London, Connecticut, for instance, who was outraged that some of these banks
were allowed to grow into behemoths and given a clean bill of
health, only to turn around months later on the verge of bankruptcy, asking for billions of dollars in taxpayer funding, I am re-
minded of the shortcomings in the Fed's regulation of bank holding
companies.
When a family in Bridgeport, Connecticut, with their 5,000 foreclosures in that one city in my home State pending, who have lost
everything ask me where the cops were on the beat, where were
they to stop the abusive predatory mortgages from being written,
I am reminded of the Fed's failure to implement the law Congress
passed in 1994 to protect consumers and regulate mortgage lending
practices.
When I learn a direct marketing business in greater Hartford
has to close its doors, not because they missed a payment to their
bank but because the bank is having capital problems, I cannot
help but remember your predecessor's fondness for "regulatory
competition," as he called it, for actually encouraging bank regulators to compete with one another to see who could provide the
most effective regulation of our banks, but apparently at the least.
As a result, today countless banks are left with dangerously low
cash reserves and a massive buildup of leverage, which have created a veritable boomerang of debt that has now snapped back, ensnaring countless honest small businesses in the process.
Finally, when I am asked how our Government could have allowed these toxic financial products to proliferate, products that
served to dilute the appearance of risk rather than the risk itself,
I remember the Federal Reserve's mantra of financial innovation
and its leaders' repeated warnings against any additional Government regulation of any kind. I remember very, very clearly the
mood in January of 2007 when I became Chairman of this Committee and the mantra—the mantra in those months was, "Deregulate, fast, before everyone runs to London."
Mr. Chairman, you have an extraordinarily difficult task ahead
of you, not only to fulfill the Fed's primary mandate to conduct
monetary policy to create maximum economic growth, full employment, and price stability, you do so in the face of an economy in
deep recession, closing credit markets and unemployment rising at
its fastest pace in a generation, having already cut interest rates
to almost zero. You do so managing a balance sheet that has spiked
to $2 trillion and now includes the remnants of an investment bank
and the control of the world's largest insurance company. You do
so having to conduct monetary policy in ways never tried before to
unlock frozen credit markets, and you do so with an agency whose
structure is virtually unchanged since its creation in 1913, when
nearly a third of the Americans worked on farms, even as your
mission has expanded exponentially from regulating the smallest
banks in the country to the largest bank holding companies, from
protecting consumers to being the lender of last resort for any company in the Nation.
Mr. Chairman, I would say your plate is full, to put it mildly. As
this Committee works to modernize our Nation's financial regulatory structure, the question is whether we should be giving you
a bigger plate or whether we should be putting the Fed on a diet.
I do not question your track record on monetary policy, as I have
said—the Fed's primary goal. But when you keep asking an agency
to take on more and more and more, it becomes less and less and
less likely that the agency will succeed at any of it. And at the
same moment, in my view, nothing will be more important for the
Federal Reserve than getting monetary policy right. It is absolutely
paramount, and I know you know that as well.
So we welcome you to this Committee, and let me turn to Senator Shelby for any opening comments he may have.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator SHELBY. Thank you, Chairman Dodd.
Chairman Bernanke, we welcome you back to the Committee.
You have spent a lot of time with us.
The economic and financial climate has deteriorated significantly
since our last monetary policy hearing in July of 2008. In response
to the Congress, the administration and the Federal Reserve have
taken dramatic steps to navigate our way through this crisis. Since
last summer, the Federal Reserve's balance sheet has more than
doubled in size and presently stands at about $2 trillion. This expansion is a result of extraordinary actions taken by you and the
members of the Board of Governors. Some of these actions were institution specific while others involved establishing new programs
aimed at providing liquidity to the banking system and unfreezing
credit markets.
Because it would take too much of our time this morning to describe each action and program in detail, I will be brief and only
discuss a few of them. I would, however, strongly encourage Chairman Dodd to conduct hearings on all of these programs. The Federal Reserve has provided assistance to several large financial entities, according to their words, "in order to ensure financial market
stability."
Acting along with Treasury and the FDIC, the Federal Reserve
has intervened to rescue Citigroup and Bank of America by providing a backstop for large pools of their loans. The Federal Reserve has extended the safety net beyond the banking system by
establishing two new lending facilities in connection with the bailout of AIG. These facilities are winding down AIG's holdings and
mortgage-backed securities and credit default swap contracts. The
Federal Reserve will continue to run a virtual alphabet soup of liquidity facilities through April 30, 2009, at the least.
In more recent months, the Federal Reserve announced initiatives aimed specifically at stabilizing our housing and
securitization markets. The Fed has announced that it will purchase up to $100 billion in debt obligations of Fannie Mae, Freddie
Mac, and Federal home loan banks, as well as up to $500 billion
of mortgage-backed securities backed by Fannie Mae, Freddie Mac,
and Ginnie Mae.
Most recently, with securitization markets for all types of consumer credit virtually frozen, the Federal Reserve has announced
the establishment of the Term Asset-backed Securities Loan Facility, or TALF. Under the TALF, the Federal Reserve Bank of New
York will lend up to $200 billion on a non-recourse basis to holders
of certain AAA-rated asset-backed securities backed by newly and
recently originated consumer and small business loans. The New
York Fed will lend an amount equal to the market value of the
ABS less a haircut. The U.S. Treasury Department under the
TARP will provide $20 billion of credit protection to the New York
Fed in connection with the TALF.
Given the scope of the Federal Reserve's recent actions, it seems
unlikely that any future student will conclude that today's Federal
Reserve was too timid in the face of this crisis, Mr. Chairman.
Whether the Federal Reserve pursued the most effective actions
will be another question, and that will also be the case for the efforts of the administration and the Congress, too.
I hope that this Committee will use today's hearing to explore
the effectiveness of the Federal Reserve's recent actions. One of the
questions foremost in my mind, Mr. Chairman, is whether the Federal Reserve has thought about the long-term implications of its
programs, its new programs.
Chairman Bernanke, you have already begun discuss the need
for an exit strategy, some of which will happen as credit conditions
return to normal. Some of the new programs, however, have longer
maturities. This presents a problem not only to you but for us. How
do you decide when and how to remove the Federal Reserve from
the market? This uncertainty may require the Fed to provide more
clarity on when and how it will terminate these programs. In addition, Mr. Chairman, the Federal Reserve is likely to take more
credit risk through the TALF than is customarily the case of its
lending operations.
This raises additional questions about transparency and what
taxpayers should expect, and perhaps demand, from the Federal
Reserve. Hopefully, Chairman Bernanke can begin to address these
and other questions today.
Thank you, Chairman.
Chairman DODD. Thank you very much, Senator.
Let me just inform my colleagues, by the way, that there will be
a vote at 11:15 on the D.C. voting rights bill, and, Senator Menendez, we will try and work it so we just continue with the hearing
and go in tranches. We use the word "tranche" a lot these days, so
we go in tranches to vote and continue the process of the Committee.
Mr. Chairman, we thank you again for being before us this morning, and we welcome your statement.
STATEMENT OF BEN S. BERNANKE, CHAIRMAN,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. BERNANKE. Thank you. Chairman Dodd, Senator Shelby, and
Members of the Committee, I appreciate the opportunity to discuss
monetary policy and the economic situation and to present the Federal Reserve's monetary policy report to the Congress.
As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the
unemployment rate has moved up to 7.6 percent. The deteriorating
job market, considerable losses of equity and housing wealth, and
tight lending conditions have weighed down on consumer sentiment
and spending. In addition, businesses have cut back capital outlays
in response to the softening outlook for sales, as well as the difficulty of obtaining credit.
In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness
6
in domestic spending, exports slumped in the second half as our
major trading partners fell into recession and some measures of
global growth turned negative the first time in more than 25 years.
In all, U.S. real gross domestic product declined slightly in the
third quarter of 2008, and that decline steepened considerably in
the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009.
The substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have
contributed to a substantial lessening of inflation pressures. Indeed, overall consumer price inflation measured on a 12-month
basis was close to zero last month. Core inflation, which excludes
the direct effects of food and energy prices, also has declined significantly.
The principal cause of the economic slowdown was the collapse
of the global credit boom and the ensuing financial crisis, which
has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of the housing booms in the United States and
other countries and the associated problems in mortgage markets,
notably the collapse of the U.S. subprime mortgage market.
Conditions in housing and mortgage markets have proved a serious drag on the broader economy, both directly through their impact on residential construction and related industries and on
household wealth, and indirectly through the effects of rising mortgage delinquencies on the health of financial institutions. Recent
data show that residential construction and sales continue to be
very weak, house prices continue to fall, and foreclosure starts remain at very high levels.
The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the Government-sponsored enterprises Fannie
Mae and Freddie Mac into conservatorship, and Lehman Brothers
Holdings filed for bankruptcy. In the following weeks, several other
large financial institutions failed, came to the brink of failure, or
were acquired by competitors under distressed circumstances.
Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual
funds to be virtually risk free, to withdraw large amounts from
such funds. The resulting outflows threatened the stability of shortterm funding markets, particularly the commercial paper market,
upon which corporations rely heavily for their short-term borrowing
needs.
Concerns about potential losses also undermined confidence in
wholesale bank funding markets, leading to further increases in
bank borrowing costs and a tightening of credit availability from
banks.
Recognizing the critical importance of the provision of credit to
businesses and households from financial institutions, the Congress
passed the Emergency Economic Stabilization Act last fall. Under
the authority granted by this act, the Treasury purchased preferred
shares in a broad range of depository institutions to shore up their
capital basis. During this period, the FDIC introduced its Temporary Liquidity Guarantee Program, which expanded its guaran-
tees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury, in concert with the Federal Reserve and the FDIC, provided
packages of loans and guarantees to ensure the continued stability
of Citigroup and Bank of America, two of the world's largest banks.
Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including
through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt.
Faced with the significant deterioration of financial market conditions and the substantial worsening of the economic outlook, the
Federal Open Market Committee continued to ease monetary policy
aggressively in the final months of 2008, including a rate cut coordinated with five other major central banks. In December, the
FOMC brought its target for the Federal funds rate to a historically low range of zero to one-quarter percent, where it remains
today. The FOMC anticipates that economic conditions are likely to
warrant exceptionally low levels of the Federal funds rate for some
time.
With the Federal funds rate near its floor, the Federal Reserve
has taken additional steps to ease credit conditions. To support
housing markets and economic activity more broadly and to improve mortgage market functioning, the Federal Reserve has begun
to purchase large amounts of agency debt and agency mortgagebacked securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1
percentage point. The Federal Reserve also established new lending
facilities and expanded existing facilities to enhance the flow of
credit to businesses and households.
In response to the heightened stress in bank funding markets,
we increased the size of the Term Auction Facility to help ensure
that banks could obtain the funds they need to provide credit to
their customers, and we expanded our network of swap lines with
foreign central banks to ease conditions in interconnected dollar
funding markets at home and abroad. We also established new
lending facilities to support the functioning of the commercial
paper market and to ease pressures on money market mutual
funds.
In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with
the Treasury to announce the Term Asset-backed Securities Loan
Facility, or TALF. The TALF is expected to begin extending loans
soon.
The measures taken by the Federal Reserve, other U.S. Government entities, and foreign governments since September have
helped to restore a degree of stability to some financial markets.
In particular, strains in short-term funding markets have eased notably since last fall, and London Interbank Offered Rates, or
LIBOR, upon which borrowing costs for many households and businesses are based, have decreased sharply.
Conditions in the commercial paper market also have improved,
even for lower-rated borrowers, and the sharp outflows from money
market mutual funds seen in September have been replaced by
modest inflows. Corporate risk spreads have declined somewhat
from extraordinarily high levels, although these spreads remain
elevated by historical standards.
Likely spurred by the improvements in pricing and liquidity,
issuance of investment-grade corporate bonds has been strong, and
speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat. As I mentioned earlier, conforming
fixed mortgage rates for households have declined. Nevertheless,
despite these favorable developments, significant stresses persist in
many markets. Notably, most securitization markets remain shut
other than that for conforming mortgages, and some financial institutions remain under pressure.
In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for
further actions. This plan includes four principal elements.
First, a new Capital Assistance Program will be established to
ensure that banks have adequate buffers of high-quality capital
based on results of comprehensive stress tests to be conducted by
the financial regulators, including the Federal Reserve.
Second is a Private-Public Investment Fund in which private
capital will be leveraged with public funds to purchase legacy assets from financial institutions.
Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially
other types of asset-based securities as well.
And, fourth, the plan includes a range of measures to help prevent unnecessary foreclosures.
Together, over time, these initiatives should further stabilize our
financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery.
The Federal Reserve is committed to keeping the Congress and
the public informed about its lending programs and balance sheet.
For example, we continue to add to the information shown in the
Fed's H41 statistical release, which provides weekly detail on the
balance sheet and the amounts outstanding for each of the Federal
Reserve's lending facilities. Extensive additional information about
each of the Federal Reserve's lending programs is available online.
The Fed also provides bimonthly reports to the Congress on each
of its programs that rely on the Section 13(3) authorities. Generally, our disclosure policies reflect the current best practices of
major central banks around the world.
In addition, the Federal Reserve's internal controls and management practices are closely monitored by an independent Inspector
General, outside private sector auditors, and internal management
and operations divisions, and through periodic reviews by the Government Accountability Office.
All that said, we recognize that recent developments have led to
a substantial increase in the public's interest in the Fed's programs
and balance sheet. For this reason, we at the Fed have begun a
thorough review of our disclosure policies and the effectiveness of
our communication. Today, I would like to highlight two initiatives.
First, to improve public access to information concerning Fed
policies and programs, we recently unveiled a new section of our
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Web site that brings together in a systematic and comprehensive
way the full range of information that the Federal Reserve already
makes available, supplemented by explanations, discussions, and
analyses. We will use that Web site as one means of keeping the
public and the Congress fully informed about Fed programs.
Second, at my request, Board Vice Chairman Donald Kohn is
leading a committee that will review our current publications and
disclosure policies relating to the Fed's balance sheet and lending
policies. The presumption of the committee will be that the public
has the right to know and that the non-disclosure of information
must be affirmatively justified by clearly articulated criteria for
confidentiality based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need
to ensure the effectiveness of policy.
In their economic projections for the January FOMC meeting,
monetary policymakers substantially marked down their forecasts
for real GDP this year relative to the forecast they had prepared
in October. The central tendency of their most recent projections
for real GDP implies a decline of one-and-one-half percent to oneand-one-quarter percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half
of this year, combined with an anticipated gradual resumption of
growth in the second half.
The central tendency for the unemployment rate in the fourth
quarter of 2009 was marked up to a range of eight-and-a-half percent to eight-and-three-quarters percent. Federal Reserve policymakers continue to expect moderate expansion next year, with a
central tendency of two-and-a-half percent to three-and-a-quarter
percent growth in real GDP and a decline in the unemployment
rate by the end of 2010 to a central tendency of 8 percent to eightand-a-quarter percent.
FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of one-quarter percent to 1
percent, reflecting expected weakness in commodity prices and the
disinflationary effects of significant economic slack. The projections
for core inflation also were marked down to a central tendency
bracketing 1 percent. Both overall and core inflation are expected
to remain low over the next 2 years.
This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably
outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and
financial conditions to an even greater degree than currently expected.
Another risk arises from the destructive power of the so-called
adverse feedback loop in which weakening economic and financial
conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal
stimulus with strong government action to stabilize financial institutions and financial markets.
If actions taken by the administration, the Congress, and the
Federal Reserve are successful in restoring some measure of financial stability, and only if that is the case, in my view, there is a
reasonable prospect that the current recession will end in 2009 and
10
that 2010 will be a year of recovery. If financial conditions improve,
the economy will be increasingly supported by fiscal and monetary
stimulus, the salutary effects of the steep decline in energy prices
since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.
To further increase the information conveyed by the quarterly
projections, FOMC participants agreed in January to begin publishing their estimates of the values to which they expect key economic variables to converge over the longer run, say at a horizon
of 5 to 6 years, under the assumption of appropriate monetary policy and in the absence of new shocks to the economy. The central
tendency for the participants' estimates of a longer run growth rate
of real GDP is two-and-a-half percent to two-and-three-quarters
percent. As to the longer rate of unemployment, it is four-andthree-quarter percent to 5 percent. And as to the longer rate of inflation, it is one-and-three-quarter percent to 2 percent, with the
majority of participants looking for 2 percent inflation in the long
run.
These values are all notably different from the central tendencies
of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than 2 or 3 years.
The longer-run projections for output growth and unemployment
may be interpreted as the Committee's estimates of the rate of
growth of output and the unemployment rate that are sustainable
in the long run in the United States, taking into account important
influences such as the trend in growth rates of productivity in the
labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development, or the labor market and other factors.
The longer-run projections of inflation may be interpreted, in
turn, as the rate of inflation that FOMC participants see as most
consistent with the dual mandate given to it by the Congress, that
is the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.
This further extension of the quarterly projection should provide
the public a clearer picture of the FOMC's policy strategy for promoting maximum employment and price stability over time. Also,
increased clarity about the FOMC's views regarding longer-run inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too
high or falling too low.
At the time of our last monetary policy report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded
dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these
developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial
market functioning.
Toward that end, we have reduced the target for the Federal
Funds Rate close to zero and we have established a number of programs to increase the flow of credit to key sectors of the economy.
11
We believe that these actions, combined with the broad range of
other fiscal and financial measures being put into place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation. We
will continue to work closely with the Congress and the administration to explore means of fulfilling our mission of promoting maximum employment and price stability.
Thank you, Mr. Chairman.
Chairman DODD. Thank you very much, Mr. Chairman.
I am going to try to follow this 5-minute rule pretty carefully
today with a lot of Members here so we get around the table as
quickly as we can.
I am not a Pollyanna, nor are you, and so I don't want to overstate the case, but I found the paragraph, the second paragraph on
page four, in reading your statement last evening, and the words
on page seven, where you talk about the possibility of coming out
of this recession in 2010, to be encouraging. I wanted, in the context of your responses today—because obviously, the risk is on the
downside. Your statement is pretty stark and certainly a bleak picture, but there is some hope that I think it is important for us to
transmit to the American people, as well, that we can and we will
get out of this along the way. I think confidence and building that
confidence, not false confidence but confidence based on tough decisions that we can make and should make, I think are important
to communicate, as well.
Let me, if I can, raise two quick questions with you. I had a town
hall meeting on Sunday in Manchester, Connecticut, at Manchester
Community College, on higher education, how to navigate student
loans. A couple raised a question after we had a presentation of
what steps could be taken and the kind of information available for
people and they got up and they said, look, we have put aside. We
bought stock. We did things to prepare for our children's education
and all of a sudden it is gone. Here we are with children age 15,
16, or 17 getting ready now to go on and the very nest egg we were
building for them is no longer there.
In a sense, what I would like to ask you, given the fact that we
have seen an 18 percent decline in the housing values, a 40 percent
decline in the stock market over the last several years, can people
who are in an age group—put aside education for a minute, the
student loans—can people on the brink of retirement, in your view,
can they retire? Are people going to be prohibited from retiring because of what they have lost in the value of their homes and in the
stock market, 401(k), for instance?
Mr. BERNANKE. Well, Mr. Chairman, it is going to depend on individual circumstances. I am afraid it is the case that some people
will find that their assets are not, at this point, adequate to allow
them to retire as they had planned. Many people have suffered
from losses in asset values. It is in part related to a correction relative to perhaps inflated asset values, particularly in the housing
market, prior to this time. But we are also seeing very heavy risk
aversion and liquidity premiums, that is, people are just very, very
averse to risk at this point and that is also driving down asset
prices.
12
So I understand that this is a very difficult situation for savers
as it is for workers and homeowners, and all I can say is the Federal Reserve is committed to doing everything we can to restore
economic stability. I do believe that once the economy begins to recover, we will see improvements in financial markets. In fact, I
think those two things go very closely together.
Chairman DODD. So your statement or your response would be
that, one, it would depend on individual cases, but that you believe
that people will be able to retire with some security.
Mr. BERNANKE. Well, I certainly hope so. Certainly, Social Security and other programs, defined benefit plans, still remain. But I
know from my own case and my friends and relatives that losses
in defined contribution retirement funds have been significant, particularly in stock portfolios, and that is certainly going to affect
people's plans in the short term. I am hopeful that we will see
some improvement as the economy improves over the next year or
two.
Chairman DODD. Did I sense a sigh of relief that we didn't privatize Social Security?
Mr. BERNANKE. Well, we never got that far on that proposal, Mr.
Chairman.
Chairman DODD. Gratefully, would you agree?
Mr. BERNANKE. Well, it depends on the details. There were so
many different plans being proposed.
Chairman DODD. Can you imagine if your Social Security were
tied into the stock market today, what it would be like?
Mr. BERNANKE. Well, if they were all tied to the stock market,
that would certainly be a problem, right.
Chairman DODD. Yes. Let me, if I can in the minute or so left
here, I noted in my opening comments that housing and autos have
historically led us out of recessions in many ways. I don't know if
you agree or not, but it is ironic that housing, and to a lesser degree autos, have led us into this recession. Who is going to lead us
out of this recession? What sector of the economy?
Mr. BERNANKE. Well, we have seen a very broad-based weakness.
Housing is very central. At this point, the housing market has reversed the boom that we saw earlier in the decade. In fact, we are
now at levels of construction and price declines that we have not
seen for a very long time, if ever, and so I would anticipate some
stabilization in the housing market going forward and eventually
demographic trends, household formation, economic growth will
begin to create recovery in the housing market.
Likewise, people are very reluctant right now to make commitments to consumer durables like automobiles. I think the current
rates of auto sales are below what we will see once the economy
begins to normalize. So I think those sectors will be part of the recovery. But in general, as we see confidence coming back, particularly consumer spending on discretionary items, those areas will
begin to strengthen and we will see a broad-based recovery.
Chairman DODD. I should have mentioned in prefacing my question, I am, at least for my part, anyway, grateful to the administration for stepping up on the housing issue, the $75 billion that has
been committed in the mitigation on foreclosures. I wish we had
13
done that a year ago. It might have made the situation less dramatic than it is today, but I welcome that move, as well.
With that, let me turn to Senator Shelby, and look at that, right
on the money here, so 5 minutes.
Senator SHELBY. I will try to do the same, Mr. Chairman. Thank
you.
Adequacy of bank capital, I would like to get into that. Mr.
Chairman, regulators from each part of the banking industry, including the Federal Reserve, have testified multiple times before
the Banking Committee in the past few years that the banking industry was healthy and strong, yet we are now discussing taking
very drastic measures to recapitalize the very same system. A lot
of people wonder, where were the regulators in the past 5 or 6
years, including the Federal Reserve.
For example, in 2004, before the Banking Committee, FDIC
Chairman Powell said, and I quote, "I am pleased to report"—that
is to the Banking Committee—"that the FDIC insured institutions
are as healthy and sound as they have ever been."
Additionally, in 2004, OTS Director James Gilleran stated before
the Banking Committee, and I quote, "It is my pleasure to report
on a thrift industry that is strong and growing in asset size. While
we continue to maintain a watchful eye on interest rate risk in the
thrift industry, profitability, asset quality, and other key measures
of financial health are at or near record levels."
Also before this committee in 2004, Comptroller of the Currency
John Hawke testified, "National banks continue to display strong
earnings, improving credit quality following the recent recession
and sound capital positions." He even said that banks have adopted
better risk management techniques.
In 2005, your predecessor of the Fed, Chairman Alan Greenspan,
said before the Banking Committee here, "Nationwide banking and
widespread securitization of mortgages make financial intermediation less likely to be impaired than it was in some previous episodes of lethal house price correction."
In fact, as recently as 2008, Chairman of the FDIC Bair testified
and said, and I quote, "The vast majority of institutions remain
well capitalized, which will help them withstand the difficult challenges in 2008 while broader economic conditions improve."
Comptroller Dugan, Comptroller of the Currency, said here before the Banking Committee in 2008, and I will quote, "Despite
these strains, the banking system remains fundamentally sound, in
part because it entered this period of stress in a much stronger
condition."
Finally, in 2008, Federal Reserve Vice Chairman Kohn testified
before this Committee, and I quote, "The U.S. banking system is
facing some challenges, but it remains in sound overall condition,
having entered the period of recent financial turmoil with solid capital and strong earnings. The problems in the mortgage and housing markets have been highly unusual and clearly some banking
organizations have failed to manage their exposures well and have
suffered losses as a result. But in general, these losses should not
threaten their viability."
Chairman Bernanke, are your capital measures and amounts of
capital adequate? You are regulator of the largest banks. What
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does the present state of the banking industry tell us about our
capital regime, and what does it mean if banks are adequately capitalized, yet somehow we need to spend billions, if not trillions, of
dollars to stabilize the system?
Mr. BERNANKE. Well, that is a very long question, Senator
Shelby.
Chairman DODD. You have a minute and 30 seconds to answer
the question.
Mr. BERNANKE. The banks did have extensive capital coming into
this crisis, but, of course, the crisis itself was extraordinary in its
size. We could talk at some length about the failures of regulators,
including the Federal Reserve, to prevent the credit crisis and prevent the losses that have been affected.
Going forward, we need to think about the Basel II regime, on
which capital rules are now set. The general principles of the Basel
II regime are that capital should be related to the risks of the assets which are being held.
But I think we have learned several things. First, that we need
to be more aggressive in figuring out what the risks are and make
sure that we are stress testing, making sure that we are being conservative in terms of assigning capital to individual kinds of assets.
There certainly were some assets that were underweighted in
terms of their risk characteristics when the capital was assigned.
We need to look at a variety of other things, like off-balance sheet
exposures and other things that were not adequately represented
in the Basel II framework.
And there are other elements which the Basel Committee is looking at. Just to mention two, there probably were improvements in
risk management and risk measurement over the period discussed,
but they weren't adequate, obviously, and we need to do a lot more
work for making sure that bank companies have enterprise-wide
comprehensive risk management techniques. In addition, and this
is something that the Basel Committee has been focused on, we
need to make sure they have adequate liquidity, as well as capital.
So there is a lot to be done. You are absolutely right in pointing
out the deficiencies and there is a lot of work that we regulators,
the international community, has to do to strengthen that capital
standard.
Senator SHELBY. Thank you. My time is up.
Chairman DODD. Thank you, Senator.
Senator Reed.
Senator REED. Thank you very much, Mr. Chairman, and thank
you, Chairman Bernanke.
Let me associate myself with Chairman Dodd's remarks about in
a crisis, you have been providing very helpful and thoughtful leadership. I also would associate myself with consumer protections
and other supervisory activities which we will correct going forward, but thank you for your leadership in this crisis.
You point out repeatedly in your comments and the Open Market
Committee statement that unemployment is a significant problem
in the country. In fact, the Open Market Committee indicates that
it could reach 9.2 percent in 2009 and 2010, even with an improving financial market and the credit markets. Is that the conclusion,
for the record?
15
Mr. BERNANKE. The actual forecast was a little under—was
under 9 percent.
Senator REED. Under 9 percent?
Mr. BERNANKE. But certainly within the range of error is 9 percent would be included.
Senator REED. One of the things that has been done in the stimulus package is extended unemployment benefits. Many economists
indicate that that is a very wise investment, since for every dollar
of benefits, you get roughly $1.60 in GDP growth. Is that your presumption or your conclusion also?
Mr. BERNANKE. I don't have a precise number. From a spending
perspective, though, it is certainly true that unemployment benefits
are much more likely to be spent than the average dollar because
people don't have the income. They need those benefits.
Senator REED. Also, in the Open Market Committee report, they
indicate that the labor market is very weak but the declines might
be tempered a bit because of the availability of extended unemployment benefits, that, in fact, people are still in the market looking
for jobs because they have the benefits to sustain them in that
search. Again, I assume you share that conclusion?
Mr. BERNANKE. Well, unemployment benefits can have the effect
of slightly raising the unemployment rate because people have a
little bit more time to look. That is a negative in one sense—that
the unemployment rate is a bit higher. On the other hand, it gives
people more time and more resources so they can find a better job
and not take the first thing necessarily that they see.
But unemployment benefits are obviously a very useful policy
tool and have been used in every recession. In a situation like the
present, where unemployment is very high, it is certainly understandable that Congress would want to provide some relief for the
unemployed.
Senator REED. There has been some discussion that certain
States would decline to participate fully. If that was not a few individual States but a significant number, that would effectively contradict the stimulus effect of the unemployment benefits, let alone
not help people who need help, is that a
Mr. BERNANKE. Which effect? I am sorry.
Senator REED. It would contradict the stimulus effects, that if a
widespread declining of extended unemployment benefits by States
refusing to participate in programs, if that was done on a
Mr. BERNANKE. If unemployment benefits are not distributed to
the unemployed, then obviously they won't spend them and it won't
have that particular element of stimulus.
Senator REED. SO if this was done on a wide basis, it would be
counterproductive, not productive?
Mr. BERNANKE. It would reduce the stimulus effect of the package, yes.
Senator REED. Let me follow up briefly, because my time is short,
on Senator Shelby's comments about capital standards. Yesterday,
the regulators said, currently, the major U.S. banking institutions
have capital in excess of the amount required to be considered well
capitalized, which begs the question, what is the measure, Tier I
capital, or tangible common equity, or any other measure? Can you
help us understand?
16
Mr. BERNANKE. Well, the major banks all meet current regulatory capital standards, and well capitalized is a well defined regulatory term. The purpose of these assessments we are going to do
going forward is to make sure that banks have enough capital not
only to be well capitalized in what we expect to be the weak conditions that we will see in the next year, but even under conditions
that are weaker than expected. And moreover, we want to make
sure that they have good quality capital, that is that a sufficient
portion of their capital is in common stock and not in other forms
of capital.
So the purpose of these tests is to try to assess how much additional capital and what kind of capital they need so they will be
able to lend and support the economy even in a situation worse
than we currently expect.
Senator REED. Listening to your response to Senator Shelby,
though, you seem to be skeptical about the adequacy of the current
test, the current capital test, capital definitions. So even if we move
through this very difficult moment, someone passes the stress test
or gets help if they can't pass the stress test, there is real question
in your mind about how regulators measures capital, what should
be included, is that a fair assessment?
Mr. BERNANKE. We need to do work on that, certainly. For the
moment now, we are trying to be conservative and trying to make
sure that the banks will be able to fulfill their functions going forward.
Senator REED. Thank you very much. Thank you, Mr. Chairman.
Chairman DODD. Thank you, Senator, very much.
Senator Bunning.
Senator BUNNING. Thank you, Mr. Chairman.
Welcome, Chairman Bernanke. Outstanding Fed lending hit
about $2.3 trillion in December. It has fallen to about $1.9 trillion,
but you have pledged another $1 trillion in new lending. The total
volume of loans made over the last months may be many times
higher than that, but those of us outside the Fed do not have access to that information.
Your testimony before this Committee on TARP was that we
needed transparency so the American people could understand.
One of the causes of the recession is the American people don't believe you or anybody sitting here is telling them the truth. That is
one of the problems. But you have not been open about the Fed's
balance sheet. I think the American people have a right to know
where that money is going. When are you going to tell the public
who is borrowing from the Fed and what they have pledged as collateral? When are we going to get the transparency from the Fed?
Mr. BERNANKE. Well, Senator, as I mentioned in my testimony,
we are going to go beyond what is best practice among the world's
central banks and go a step further and make sure we provide all
the information we can. We have just unveiled the new Web site,
which has extensive information, including information about collateral, including descriptions and discussions of each of the programs, and
Senator BUNNING. TO whom the money is going?
Mr. BERNANKE. We are looking at all aspects. By the way, it is
not all lending. Half-a-trillion is just Treasury securities we hold,
17
so you could count that as lending to the Treasury, I guess. But
about half the money we hold is short-term collateralized recourse
loans to financial institutions which assures them of sufficient liquidity so that they will be stable and able to make loans and
know that there is liquidity there when it is available.
Now, hundreds of years of central banking experience shows that
if you publish the names of the banks that receive those loans,
there is a risk that the market will say that there is something
wrong with them, that there is a stigma of some kind, and they
will refuse to come to the window in the first place and that causes
the whole purpose of the program to break down.
So we can provide a great deal of information about the number
of institutions. There are hundreds of them. They are well
collateralized, short-term loans. They provide an important public
purpose. But to provide the names of each borrower, and it would
include most of the, or many of the banks in the United States,
would defeat the important purpose of the policy.
Senator BUNNING. OK. I have been trying to get to the bottom
of who signed off on the original TARP loans to Citigroup and the
Bank of America for several months. Those loans were only supposed to go to healthy—that is in the legislation—healthy banks.
Did you approve those initial loans, or who did if you didn't?
Mr. BERNANKE. Well, Senator, that would be the Treasury's approval, but as I recall, the programs had several components. There
was a broad-based CPP, Capital Purchase Program, that was
aimed at so-called healthy or viable banks, and that was widely
available to any bank that wanted to apply for it. But there was
also a special targeted program that was for banks that were in
significant trouble and needed support to remain viable and
healthy, and that particular program included, among other things,
tougher conditions and tougher restrictions on executive compensation, for example. So that was a different component of the TARP.
Senator BUNNING. Well, we know all those things, but we don't
know who approved the amount of money that went
Mr. BERNANKE. The Treasury. The Treasury.
Senator BUNNING. The Treasury. You are telling me the Treasury?
Mr. BERNANKE. Yes.
Senator BUNNING. DO
you believe the chaos that followed Lehman Brothers' bankruptcy was a result of the bankruptcy itself or
the market realization that not everyone would be bailed out?
Mr. BERNANKE. Well, Senator, as I discussed in my testimony,
the whole period from mid-September to early October was an intense financial crisis that was, in turn, triggered to some extent by
a weakening economic condition both in the United States and
around the world. To some extent, Lehman was a result of the
broad financial crisis that was hitting a number of firms. You
know, quite a number of large firms came under pressure during
that period. And so in some sense, Lehman was a symptom as well
as a cause. But I do think that the failure of Lehman was a
major
Senator BUNNING. But there was picking and choosing between
winner and loser here. You picked Bear Stearns to save and you
let Lehman Brothers go down the tubes.
18
Mr. BERNANKE. TWO points, Senator. First, we did not choose to
let Lehman fail. We had no option because we had no authority to
stop it.
But second, I do believe that the failure of Lehman Brothers and
its impact on the world financial market confirms that we made
the right judgment with Bear Stearns, that the failure of a large
international financial institution has enormously destructive effects on the financial system and consequently on
Senator BUNNING. In other words, there are too many—there are
some banks that are too big to fail?
Mr. BERNANKE. Absolutely.
Senator BUNNING. Thank you.
Chairman DODD. Thank you, Senator.
Senator Schumer.
Senator SCHUMER. Thank you, Mr. Chairman. Thank you, Mr.
Chairman.
First question, it is clear one of the key problems over the past
few years has been excessive risk taken by financial institutions.
Some of that was by big depository institutions. Some was by
smaller hedge funds, private equity funds.
Do you agree with me we need to more greatly supervise smaller
players, such as hedge funds and private equity funds, particularly
in terms of transparency and systemic risk which we find smaller
and smaller places can cause? And do you agree more broadly we
need to put in place stronger curbs on risk taking in particular on
the amount of leverage that financial institutions, whether large or
small, use in their investing strategies?
Mr. BERNANKE. Well, Senator, I think we need a more
macroprudential oversight approach, which means that we need to
be looking at the whole market, the whole financial system, not
just each individual institution thought of as an individual entity.
And that would require, I think, at least gathering information
about a range of financial institutions and markets to understand
what is developing in those markets.
Senator SCHUMER. Isn't it true that smaller institutions can
cause systemic risk because there are counterparties, it is almost
like a ping-pong ball bouncing from one place to another?
Mr. BERNANKE. Well, they can, but it is more likely if either
there is a large number of them in the same boat
Senator SCHUMER. In the same
Mr. BERNANKE. For example, mortgage companies a couple years
ago. Or, on the other hand, I think for a given institution, a much
larger, more complex institution is more likely to
Senator SCHUMER. But you do not rule out some regulation of the
smaller
Mr. BERNANKE. Well, we already have regulation. I think we
should have an oversight of the whole system. But, Senator, I
guess I would say that given the "too big to fail" problem, and
agreeing with Senator Bunning that that exists, I was not saying
that I in any way approved of it. I think it is a major issue, a major
problem. One approach to dealing with "too big to fail" is to
strengthen the oversight of those firms which may be considered
too big to fail.
19
Senator SCHUMER. Well, that does not answer my question. I
asked you about the small ones, and you are giving me an answer
about the big ones.
Mr. BERNANKE. Well, you know, I think if you are going to
prioritize resources, you have to look where the biggest risks are.
And I think big risks are in the big firms. But you also have to look
at the system as a whole, and that would involve looking perhaps
not so much at the individual bank on the corner, but maybe at an
industry group. It is like mortgage brokers, for example.
Senator SCHUMER. Yes. You know, one of them might not have
caused the problem, but a whole bunch did.
Mr. BERNANKE. That is what I was trying to convey, yes.
Senator SCHUMER. The same thing with smaller institutions as
well, and you do have to look at them—for instance, registration?
Mr. BERNANKE. NO, I think that clearly one of the lessons is that
uneven oversight and regulation of mortgage extension was a big
issue.
Senator SCHUMER. And would you address the leverage question
I asked?
Mr. BERNANKE. Well, leverage is the inverse of the capital ratio,
and that boils down to making sure that our capital standards are
strong and appropriately adjust for risk and the like. And as I said
to Senator Shelby, we need to make sure going forward that our
capital standard is
Senator SCHUMER. There are a lot of institutions with no capital
standards, but they were not banks and regulated by you, who
used huge leverage, 30:1, 40:1, 50:1. So even the lowly mortgage
became very risky at that level.
Mr. BERNANKE. Whose leverage are you referring to?
Senator SCHUMER. YOU know, when somebody would put $1 of
capital and borrow $30 and invest $31, and yet they lose that $1
and they are kaput.
Mr. BERNANKE. I think you do need to make sure there is adequate capital in financial institutions, and when they extend
loans—for example, mortgages—they need to do a good job of underwriting. And that would involve adequate downpayments and
verification of income, for example.
Senator SCHUMER. But, again, I am saying there are institutions
that use this leverage that you did not have any capital standards
for because you were not statutorily required to do it.
Mr. BERNANKE. If I may
Senator SCHUMER. HOW
do we deal with the leverage issue for
non-depository institutions is what I am asking.
Mr. BERNANKE. Well, I think more broadly
Senator SCHUMER. If at all.
Mr. BERNANKE. More broadly, the Congress needs to think about
how to create a more uniform regulatory oversight over the entire
system and avoid existing gaps or uneven coverage. And that is a
problem not just for leverage, but for all other aspects.
Senator SCHUMER. Right. Another question, a broader question.
You, of course, studied the Great Depression. Many people say that
we are in a different type of an economy because it is more interconnected; knowledge is more interconnected; financial relationships are more interconnected. It means in a certain sense things
20
go down quicker because it does not take time to spread from one
place to the other, whether it be countries, industries, or whatever.
But then when things change, the psychology changes, you hit bottom, it goes up quicker.
Do you buy that? I am asking you, were you more a student of
the V theory or the L theory in terms of where we are? We know
we are going down now, and we have not hit bottom yet. But will
we bounce up quickly, in all likelihood, or just stay flat?
Mr. BERNANKE. Senator, if there is one message I would like to
leave you, it is that if we are going to have a strong recovery, it
has to be on the back of a stabilization of the financial system, and
it is basically black and white. If we stabilize the financial system
adequately, we will get a reasonable recovery. It might take some
time. If we do not stabilize the financial system, we are going to
founder for some time.
Senator SCHUMER. Just one final comment. Saying that we will
be back moving forward in 2010 is pretty much a V theory, not an
L theory, if we stabilize the system.
Mr. BERNANKE. Well, the projections we gave are for the labor
market still to be weak through 2010. We have seen in the last few
recessions that the labor market has been slow to recover after the
real economy, in terms of total output, has begun to recover.
Senator SCHUMER. Thank you, Mr. Chairman.
Chairman DODD. Thank you very much, Senator.
Senator Corker.
Senator CORKER. Thank you, Mr. Chairman, and, Chairman
Bernanke, thank you for your service, and certainly that last comment, which I think many people have been saying. The cure is
stabilizing the financial system, and I know we have done a lot of
different things over the last 5 or 6 weeks. But that, in essence,
is the cure.
I wonder if there is a vision or some kind of integrated discussion
that is taking place between what you are doing and Treasury. I
get the sense that we continue to sort of create programs, which
I appreciate some of, but is there a vision or some kind of integrated sense of purpose that is being discussed and an outcome, I
guess, that the two of you and others are arriving at?
Mr. BERNANKE. Yes, sir. The Treasury plan that Secretary
Geithner proposed recently is a Treasury product. They are the
lead on that. But it was developed in close consultation with the
Federal Reserve and with the other regulatory agencies, like the
OCC and the FDIC. And we are all going to work together on it,
and we see it as having the major components.
If you look at historical examples of recoveries of financial systems, you have supervisory review to make sure that you understand what is on the balance sheets. You have capital being injected. You have taking bad assets off the balance sheet, the asset
purchases. In our case, we are doing also the asset-backed securities program, foreclosure mitigation—all those things. So it is a
multiple-component plan, and we are all working together on it to
try to make it as effective as possible.
Senator CORKER. YOU have talked about the stress test, and I
guess I am—you know, the markets roil because they do not know
really know what that means exactly. Can you expand a little bit
21
so maybe for the first time we would be educated as to what that
stress test is going to be comprised of?
Mr. BERNANKE. Yes. There will be more information, I believe,
very soon, but let me give you my view of that.
The assessment will look at the balance sheets and the capital
needs of each of our 19 largest, $100 billion plus banks over the
next 2-year horizon, under both a consensus forecast of where we
think the economy is likely to be, based on private sector forecasts,
and an alternative which is worse, that is, a more stressed situation. I should emphasize that the outcome of this test is not going
to be, say, you pass, you fail. That is not the outcome. The outcome
is going to be: Here is how much capital this institution needs to
guarantee that it will have high-quality capital and to be well capitalized sufficient to be able to lend and to support the economy,
even if the stress scenario arises.
So the purpose of the test is to try to ensure that even in a bad
scenario, banks will have enough capital, including enough common
equity, to meet their obligations to lend.
Senator CORKER. SO what I would take from that is, in earlier
comments about—I guess our concern still is about systemic risk
and that there are organizations and institutions that are too large
to fail. That is what you said earlier. And so, if I am to understand
this right, the stress test would simultaneously in many cases, my
assumption would be, show there is a need for additional large
amounts of capital; and what you are saying is you are going to
solve that problem—I think what you are saying is you have a plan
to solve that problem simultaneously.
Mr. BERNANKE. That is correct.
Senator CORKER. And we know that the private markets right
now are not funding that, so I think this is pretty educational.
Could you lay out how exactly that is going to occur? And then
what is the term that we use to describe that? You know, there has
been a lot of words that have been thrown around in the last week
or so, again, that have concerned the markets. So when you find
there is stress and when we simultaneously agree that we are
going to put public dollars into these institutions, what is it that
we call that?
Mr. BERNANKE. Providing sufficient capital to make sure that the
banks in private hands can continue to provide the lending and liquidity needed for the economy to recover.
If I might, Senator, if I may, the way this will be provided
Senator CORKER. Well, let me ask you this: What is the role of
the common shareholders at that point?
Mr. BERNANKE. The common shareholders will still have ownership shares and still be co-investors in the bank.
Senator CORKER. And they would be, I guess, hugely diluted
under that scenario?
Mr. BERNANKE. Well, to the extent that there is more common
put in, then depending on existing expectations and pricing, it may
or may not affect the prices of the common. It depends on expectations where the price is today
Senator CORKER. But I guess—and I know my time is up, and
I think you know I have a great deal of respect and I appreciate
the way the interaction has been. So, in essence, we have decided
22
that there are a number of institutions in our country that are too
large to fail. We are going to stress test them—and really, to me,
it is not so much about capital. It is our ability to calculate risk
in the past, and I think we are going to look at that risk in a much
different way. And then simultaneous to that, as a Government entity, we are going to be providing capital to these institutions on
a go-forward basis. And so the signal to us and to the markets—
and I am just clarifying—is that there are institutions in this country that absolutely will not fail, and we will go to whatever lengths
necessary with public sector dollars to ensure that that does not
occur.
Mr. BERNANKE. Well, we are committed to ensuring the viability
of all the major financial institutions. Fortunately, it does not come
up in the sense that none of the major institutions are subject at
this point to any kind of FIDICIA or prompt corrective action rules,
Senator CORKER. But they will be when these stress tests take
place.
Mr. BERNANKE. NO, I do not think so. Remember, we are looking
not just at the main-line scenario; we are asking how much additional capital would be needed if you get this worse case, a stressed
case. And it is important to add—Mr. Chairman, if I could have
just a moment.
Chairman DODD. Please.
Mr. BERNANKE. That the way the capital we provided will be in
the form of a convertible preferred stock, so this capital is available
to the bank, but it does not have an ownership implication until
such time as those losses which are forecast in the bad scenario actually occur. At that time, then the bank could convert the preferred to common to make sure it has sufficient common equity,
and only at that time going forward, if those losses do occur, would
the ownership implications become relevant.
Senator CORKER. Thank you, Mr. Chairman.
Chairman DODD. Thank you, Senator. Very important set of
questions. Thank you, Mr. Chairman, for your responses.
Senator Menendez.
Senator MENENDEZ. Thank you, Mr. Chairman.
Thank you, Chairman Bernanke. Let me ask you, on page 7 of
your testimony, you were talking about the economic outlook, and
you said, "Another risk derives from the destructive power of the
so-called adverse feedback loop in which weakening economic and
financial conditions become mutually reinforcing." And to break
that loop, it is—these are your words—"essential that we continue
to complement fiscal stimulus with strong Government action to
stabilize financial institutions and financial markets."
My question is: Is what is already being done sufficient? Are
those the strong actions that you are talking about, or is there
more to be done? And do those actions require greater capital infusions? And if so, there are some who suggest that some of the
major banks in the country already are somewhat in a frozen state
because they may continue to lose significant amounts, and they
are frozen. And what we ultimately want to see them do, which is
lend into the marketplace. And if that is going to take even greater
23
infusions of capital from the Government, at what point are we not
ultimately being the entity that is running those banks?
So give me a sense of what strong Government actions you are
talking about here, because it is not about—I read your comments
about it is not just simply about the financial institutions, it is
about our economy as a whole that will depend upon whether or
not these financial institutions are strengthened.
Mr. BERNANKE. Well, I think if the basic elements in the Treasury plan, supported by Federal Reserve actions of the type we discussed, our lending programs and so on, are effectively executed,
patiently executed, that it will lead to stabilization of the financial
system. We do not know exactly what the costs will be. It will be
up to Treasury to make the determination. We will have to see how
the economy evolves. We will have to see how the assessments
evolve.
But I think we need to follow through and understand that it is
going to take a bit of time and certainly some resources to make
sure that these institutions and markets are functioning again, because we all know—and we can see this in many, many other historical examples—that if the financial system is dysfunctional, the
economy cannot recover.
Senator MENENDEZ. But isn't it true that, largely speaking, at
least at this point in time, these banks cannot raise the type of private capital that they need? And if they cannot raise the private
capital that they need and all we are doing is a flow and infusion
of capital, wouldn't we be better off in getting to where we are
going to have to get anyhow, to do it sooner rather than later? I
think it will be less costly. We will begin to see the recovery a lot
sooner. But it seems to me that we have a reticence to come forth
to the American people and say, look, this is the true picture of the
nature of what we face, and here is what it is going to cost. And
at the end of the day, let's quantify that and then let's deal with
it so that if we are going to have to get there by dribs and drabs
at the end in a torturous process that will be increasingly more difficult politically, increasingly more difficult for the economy, and
increasingly less likely to produce the turnaround as quickly as we
would like to see, even understanding it is going to take time, isn't
that really what we should be doing right now?
Mr. BERNANKE. Well, Senator, I think it is very important that
we do our very best to assess the costs and the need for capital as
accurately as we can, recognizing that since we do not know exactly
how the economy is going to evolve and how the housing market
is going to evolve, you cannot put an exact number on the value
of a mortgage asset, for example, but we can do the best we can.
I would like to address, I think, a perception that we are putting
capital into the banks and we are letting them do whatever they
want. That is absolutely not the case. First of all, the regulators
are now very actively engaged, particularly with the more troubled
institutions, working with them to restructure, to sell assets, to
take whatever steps they need to be viable again and profitable
again. We are not going to let them do what they want. We are
going to be very, very vigilant and make sure that they are taking
the tough decisions they need to get back to viability.
24
Beyond that, we have the TARP, which also has its own set of
rules and oversight, and beyond that, if the Government has some
ownership rights, that also has an effect.
Senator MENENDEZ. SO are you telling the Committee that what
you have already—you collectively, the Federal Reserve, the administration, Treasury—what you have announced, if implemented
well, will be sufficient to meet our challenge? Or are there other
chapters yet to be had?
Mr. BERNANKE. Well, nobody's record in forecasting this thing
has been particularly good, but I think that this
Senator MENENDEZ. We are agreed on that.
Mr. BERNANKE. We are agreed on that. I think, as I said earlier
to Senator Corker, that this program has all the major components,
including tough supervisory and Government oversight, of previous
successful financial stabilization plans. If it is well executed and
forcefully executed, it is our best hope of stabilizing the system.
Senator MENENDEZ. Thank you, Mr. Chairman.
Chairman DODD. Thank you very much, Senator.
Senator Johanns.
Senator JOHANNS. Thank you, Mr. Chairman.
Chairman Bernanke, yesterday I had the privilege actually of
reading the farewell address from George Washington on the Senate floor. And it is hard to read; it is kind of a tough read, so I
spent some time with it. And one of the things President Washington warned the very young Nation about was debt and the calamity that that can create for a nation.
I want to turn to page 23 of the document that we got today to
talk to you a little bit about maybe a big-picture issue, and that
is the national savings rate.
According to this document, in the third quarter of 2008, net national savings stood at a negative 1.75 percent of the GDP. But this
is what I found most alarming by this report. It goes on to say,
"National savings will likely remain low this year"—that is not
very surprising—"in light of the weak economy and the recently enacted fiscal stimulus package. Nonetheless, if not boosted over the
longer run, persistent low levels of national saving will be associated with low rates of capital formation, which is the engine that
drives our economy, certainly in part, and heavy borrowing from
abroad, which would limit the rise in the standard of living of U.S.
residents over time and hamper the ability of the Nation to meet
the retirement needs of an aging population."
I find those statements enormously concerning because what we
are saying here is, with all that we are doing—and I agree with
others. I think you are doing everything you can to try to get out
in front of this problem. But all we are doing is borrowing money,
borrowing money, TARP was financed with borrowed money, stimulus financed with borrowed money, national deficit will be $1 trillion or more this year, borrowed money, and it goes on and on and
on.
Tell me how we deal with that, because if we don't, I think what
this report says is our children will suffer, and this aging population—baby boomers I think is what you are referring to—we may
not be able to deal with their retirement. So give me the big picture here.
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Mr. BERNANKE. Well, Senator, you are absolutely right. Your
point is very well taken. The short story is that for the last decade
or so, Americans have been made wealthy by either their stockholdings if they had a 401(k) or by the value of their house. And
if the value of your home goes up, you feel richer, but you do not
save more because you feel richer. Your house is saving for you in
some sense. And as a result, over that period, as asset prices were
rising, Americans saved less and borrowed more from abroad.
Now, earlier Senator Dodd asked me about asset values. As those
asset values have come down, that means there has been a very
painful adjustment. People, in order to rebuild their balance sheets,
are going to have to save again. And in a way, that is good because
we will turn over the next few years to a higher rate of national
saving, less foreign borrowing, lower current account deficits, and
that is a desirable place to go.
The transition, though, is very difficult because as people switch
from being high-spending to trying to save, the decline in consumer
spending has contributed to this great weakness in the economy,
and we have a situation where instead of saving more, we are just
getting a deeper and deeper recession.
So we have currently an emergency situation that includes both
a very severe recession and a significant financial crisis, which
must be addressed or else we will not have the kind of growth we
need to support saving and investment going forward.
So we need to address that in the short term, but as we do that,
we also have to keep a very close eye on the need to reestablish
fiscal discipline, to increase Americans' savings, to reduce our current account deficit. And in doing all those things, over time we
will be able better to address those issues that you referred to. But
we are in the middle of a transition where, frankly, if we were to
try to balance the Federal budget this year, it would be very
contractionary and probably counterproductive.
Chairman DODD. Thank you, Senator, very much.
Senator Bayh, you get a chance here. You were at the end of the
line.
Senator BAYH. Sneaking in under the wire.
Chairman DODD. Sneaking in under the wire. Have you voted
yet, Senator?
Senator BAYH. I have not.
Chairman DODD. I will let you decide whether or not you
Senator BAYH. I will, quickly.
Mr. Chairman, my first question involves the importance of confidence in resolving the crisis that we face. It seems to me that an
understanding of human psychology on both the individual and the
group level is at least as important as quantitative analysis in getting this resolved. We have taken extraordinary action—you at the
Fed, the Treasury, the Congress. We have tried to stabilize our financial institutions. We have moved to prop up consumer demand.
We are trying to mitigate the adverse effects of home foreclosure.
And yet confidence has not improved. As a matter of fact, very
often the markets sell off the day that these programs are announced, suggesting that the public either does not have confidence
in the solution or in our ability to implement the solution correctly.
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What will it take, in your opinion, to improve confidence and to
improve the psychology that will be necessary to ultimately heading in a better direction?
Mr. BERNANKE. Well, I think ultimately the words are not
enough to inspire confidence. You have to start to show results. So
I think we have to have a bit of patience to see fiscal stimulus, to
see the financial program.
Senator BAYH. It is a bit of a dilemma, isn't it? The results are
somewhat dependent on confidence, which, of course, is affected by
results.
Mr. BERNANKE. That is right. But, nevertheless, I think as, say,
the Federal Reserve's programs begin to open up some of our key
credit markets—and we have—to give you an example, we have
seen significant improvement in the commercial paper market,
money market mutual funds, and some other areas where we have
intervened. And those improvements have been sustained despite
the general deterioration in the stock market and some other financial markets.
So I think enough concerted effort and finding our way forward,
history will perhaps put this whole episode into some context. It
has been a very, very difficult episode. Obviously, many people
have failed to anticipate all the twists and turns of this crisis. But
it is an extraordinarily complex crisis, and being able to solve it immediately is really beyond human capacity.
As we move forward, as we show commitment to solving the
problem, as we take credible steps in that direction and we begin
to see progress, I think the confidence will come back. And I agree
with you 100 percent that a lot of this is confidence.
Senator BAYH. SO perhaps there is a lag between material improvement, albeit modest and gradual, and the popular appreciation of that improvement. There is some lag there before people
have comprehended and, therefore, confidence
Mr. BERNANKE. There well could be, yes.
Senator BAYH. My second question involves the popular anger at
the crisis that we face and some of the steps that have been proposed to deal with it, and it really gets to the dilemma between
balancing the risk of contagion versus the risk of moral hazard. It
has been said by some that some of the steps that we have taken
to contain the damage in the aggregate have had the unintended
consequence of absolving some individuals of mistakes that they
have made in their individual capacity. This has been expressed by
commentators on the financial shows and that sort of thing, and
one this last week asked a question or basically made the statement: "Our policies are rewarding bad behavior."
A lot of people feel that way who behaved in prudent fashion,
who did not extend themselves. They were not working on Wall
Street taking these enormous risks.
What would you say to them when we seem to absolve the people
who created the crisis from bearing its full effects?
Mr. BERNANKE. First of all, Senator, I hear that all the time, and
I fully understand the sentiment. A lot of this goes against American values of self-reliance and responsibility. And I am very, very
aware of that.
27
I think I would give the following example: If your neighbor
smokes in bed and sets his house afire, and you live in a neighborhood of closely packed wooden houses, you could punish him very
severely by refusing to send the fire department, and then he
would probably learn his lesson about smoking in bed. But, unfortunately, in the process you would have the entire neighborhood
burning down.
I think the smart way to deal with a situation like that is to put
out the fire, save him from the consequences of his own action, but
then going forward, enact penalties and set tougher rules about
smoking in bed or the fire code or whatever it may be.
So as we talk about these financial actions to the public, we have
to say this is really a two-legged program. On the one hand, we are
doing what we have to do now to prevent the economy from going
into a deeper, protracted downturn associated with the financial
crisis; but we have to commit, as part of this going forward, that
we will do a substantial reform of financial regulation, that we will
take all the steps necessary to make sure that this does not happen
again and that the same situations do not arise in the future.
Senator BAYH. Thank you, Chairman. I am going to need to run
to vote. I have got 15 seconds left. The question I was going to ask,
which I think Chairman Shelby raised in the course of his comments, it is going to take the wisdom of a Solomon to know when
to change course on our current policies dealing with the crisis that
we face, dealing with the longer-run risk of inflation and so forth.
I would be interested at some point in knowing what sort of
metrics you will be looking at to assess when a recovery has
achieved enough momentum to begin to then shift the policy. But
a question for another day, and that would be a happy state of affairs to face.
Mr. BERNANKE. We have put extensive work into that, Senator.
Senator BAYH. Thank you, Mr. Chairman.
Senator REED [presiding]. Senator Tester.
Senator TESTER. Thank you, Senator Reed.
Thank you, Mr. Chairman, for being here. You have mentioned
several times in your testimony and through some of the questions
that you have answered about the global nature of this economic
downturn. Could you give me any insight into what the European
banks' status are? Is it similar, worse shape, and are all the skeletons out of their closets?
Mr. BERNANKE. Well, the stories that relate this purely to the
United States have to account for the fact that the entire industrial
world has suffered from this credit crisis and many banks in Europe and in the U.K. have taken very significant losses. The U.K.,
Irish, and Germans have been involved in some interventions. So
I think it depends really country by country. I don't want to generalize and create any misperceptions.
But it is obvious that there have been very significant problems
in the European banking system, and they face some issues which
we may not face to the same degree. For example, there has been
recent concern about Eastern Europe and the exposure they may
have in that direction. So they are contending with the same set
of issues that we are here.
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Senator TESTER. OK. And you made the statement several times
that the only way we are going to get out of this is if our financial
markets are healthy, to pull us out of this. What impact does Europe, and as far as that goes, the Pacific Rim have if they don't do
anything or do far less than they need to do on our economy?
Mr. BERNANKE. Well, it will have impacts because of the interconnected nature of our global financial system and the interconnected nature of our global economy, as we depend on each
other for trade and other terms.
Senator TESTER. Right.
Mr. BERNANKE. The Europeans have been somewhat more reluctant to engage in fiscal expansion than we have, although they
have taken steps in that direction. The Germans, for example, after
initially being disinclined, actually took a fairly significant step.
But they are working also along similar lines as the United States
to deal with bad assets, to deal with capitalization, and they are
addressing many of the same situations.
Senator TESTER. DO we have the ability to get out of this financial situation if they don't make proper investments financially if
they are in, regardless of what we do at this end?
Mr. BERNANKE. I think we can improve our situation. I will give
you an example
Senator TESTER. But can we get out of the situation?
Mr. BERNANKE. I think a complete recovery would require a global recovery and that would require
Senator TESTER. Have you gotten any assurances from the banking markets that they are inclined to do that?
Mr. BERNANKE. Senator, they are very aware of the situation. I
talk frequently with Europeans. We were just at the G-7, the Secretary and I, in Rome and we discussed all these issues
Senator TESTER. Right.
Mr. BERNANKE.
and they are quite interested in addressing
them.
Senator TESTER. Injection of capital is something that we have
been talking about now for 6 months or so. Can you give me any
sort of prediction, under the assumption that Europe does what
they need to do and the Asian markets do what they need to do,
can you give me any sort of prediction on how much money it will
cost, how much capital do we need to inject into the marketplace?
Mr. BERNANKE. Well, we have already done quite a bit.
Senator TESTER. Yes.
Mr. BERNANKE. We have done quite a bit. Honestly, Senator, I
think it is not up to me to make that judgment. That is going to
depend on the economy, on the scenarios, and on the amount of
margin of safety that the decision is made to address. Ultimately
the Treasury and the administration have to make that proposal.
Senator TESTER. OK. I would sure like your input on that, if that
is possible. I mean, we are going to be talking about some—I mean,
we have already directed some serious dollars and it is, from everything I am hearing, it is going to require some more. The worst
thing that could happen is if we don't get cooperation from Europe,
from Asia, we end up pumping a bunch of money in and then all
it does is increase the debt. We don't get out of the situation we
are in.
29
Mr. BERNANKE. I hear what you are saying.
Senator TESTER. OK. The other issue revolves around, just very
quickly, the dollars that came from TARP, and Senator Bunning
talked about for a little bit, you know, who is getting the money
and where is it going to. Somebody pointed out to me in the banking industry that the banks aren't loaning this money out because
they are using it to buy Treasury notes with, which is an interesting concept. Could you give me any insight into that? Is that
what is occurring? Is that what they are doing with the TARP dollars?
Mr. BERNANKE. Senator, the direct impact of the TARP dollars
is to expand the capital bases of these companies which allows
them to do all the activities they do, including lending
Senator TESTER. But the lending hasn't freed up, from everybody
I have talked to.
Mr. BERNANKE. Well, a big part of that is the non-bank component, is the securitized markets, for example, which is what the
Fed is working on right now. Let me just say that the Treasury's
new proposal does involve more concentrated attempts to get banks
to document how much they are lending, how much they would
have lent without the TARP, and so on. It is a difficult problem,
though, because you don't know what they would have done in the
absence of the TARP money.
Senator TESTER. OK. Thank you very much, Mr. Chairman.
Senator REED. Senator Martinez.
Senator MARTINEZ. Thank you very much, Senator.
Mr. Chairman, thank you for being with us and thank you for
the terrific work that you are doing in very difficult stress circumstances.
I wanted to ask about the housing market. You indicated that
one of the things, and I agree with you, that we need in order to
stabilize the entire situation in our economy is to stabilize the
housing market and that it will help—I am not trying to paraphrase what you said, I may have said it wrong, but in any way,
that it may help in the recovery.
What additional steps can we undertake, in your estimation, that
would help stabilize the housing market? I continue to be concerned by the rate of foreclosures. I welcome some of the ideas that
the administration put forth last week. I continue to be concerned
in places like Florida about a tremendous inventory of unsold
homes that obviously needs to be drawn down before there will be
vitality in the marketplace again. And obviously the same issues of
credit continue to creep into the problem, particularly if we look at
nonconforming loans and things of that nature. Any additional
steps you think could or should be taken?
Mr. BERNANKE. Well, the two principal steps that are being
taken, first, is the set of measures to try to reduce preventable
foreclosures, which will reduce the supply of homes in the market
and would be helpful to prices and construction.
The other step has been the Federal Reserve's concerted efforts
to lower mortgage rates by the purchase of GSE securities. We
have had some success in that direction. So house prices are down
quite a bit, obviously, and interest rates are pretty low. So affordability is not the issue it was a few years ago.
30
So at this point, I would recommend focusing broadly on the
economy and the financial system as a whole. People are not likely
to buy houses when they are feeling very unsure about their jobs,
for example. So the more we can do to strengthen the overall economy and stabilize the financial system, and along Senator Bayh's
line, restore confidence, I think that will be the best thing to get
the housing market going again.
Senator MARTINEZ. In December, the Federal Reserve reduced
the fund rates further, and then obviously you noted on February
18 that widening credit spreads, more restrictive lending standards, and credit market dysfunction have all worked against the
monetary easing and have led to tighter financial conditions overall. What other tools is the Fed employing to ease credit conditions
and to support the broader economy?
Mr. BERNANKE. Senator, we have gone beyond interest rate policy to try to find new ways to ease credit markets, and I have
talked about in some recent speeches and testimonies three general
types of things we have done.
The first is to make sure that there is plenty of liquidity available for banks and other financial institutions, not only in the
United States, but around the world in dollars. So we have been
lending to banks to make sure they have enough cash liquidity so
they won't be afraid of loss of liquidity as they plan to make commitments on the credit side.
Second, as I already indicated, we have been involved in purchasing GSE securities, which has brought down mortgage rates.
The third group of activities encompasses a number of different
programs which have been focused primarily on getting non-bank
credit markets functioning again. We were involved, for example,
in doing some backstop lending to try to stabilize the money market mutual funds and also to stabilize the commercial paper market, and we have had some success in bringing down commercial
paper rates and commercial paper spreads and giving firms access
to longer-term money than they were getting in September and October.
Likewise, one of our biggest programs is just commencing now,
which is an attempt to provide backstop support to the assetbacked securities market. That market is one where the financing
for many of our most popular types of credit—auto loans, student
loans, small business loans, credit card loans, all those things—
have historically been financed through the asset-backed securities
market. Those markets are largely shut down at this point.
Through our TALF facility which is about to open, we, working
with the Treasury, expect to get those markets going again and
help provide new credit availability in those areas.
So it is not just the banks. If we are going to get the credit system going again, we need to address the non-bank credit sources
and we are aggressively looking at all the possible ways we can to
do that.
Senator MARTINEZ. Speaking about the TALF and the credit facilities that have been opened, at some point, the concern shifts to
what happens after a recovery begins to unfold in anticipation of
perhaps in the latter part of this year, with some good fortune, and
perhaps in the beginning of the next if not, that we will be in the
31
recovery mode. At that point, how long will it take to phaseout
those types of facilities like the TALF and what factors will determine the timing and the process by which you will do that?
Mr. BERNANKE. Senator, that is a very important question, the
exit strategy. We have been spending a lot of time working on that.
In order to be able to start raising interest rates again and going
back to more normal monetary policy, we are going to have to bring
down the size of our balance sheet. Fortunately, a very large part
of our balance sheet, well over half of our lending, is in very shortterm types of loans, 3 months or even in some cases just a few
days, so as the need for that credit weakens, is reduced by the
strengthening economy, those programs will naturally tend to contract and the balance sheet will naturally tend to decline.
So a lot of it will just happen as the economy strengthens, as the
need for that credit dissipates, and in particular, since for many of
the program we have created, the terms are somewhat more punitive than would be normal under normal circumstances, as the
markets begin to normalize, then borrowers will tend to move away
from the Fed facilities and into the private sector facilities. So we
think that those markets, those programs will tend to contract on
their own to some extent and we can always, of course, contract
them ourselves as we determine that we need to reduce the size of
the balance sheet.
We have a number of other tools, and I don't want to take all
your time, Senator, but just to give one example. In the EESA bill
last October, the Congress gave the Fed the ability to pay interest
on excess reserves, and our ability to do that will help us raise interest rates at the time it is needed even if the balance sheet is
not all the way back down to where it was when we started this
process. So we are very, very focused on making sure that we are
able to normalize monetary conditions at the appropriate time. At
the same time, we also don't want to give up opportunities where
we think we can help the markets function better and provide some
support for this economy.
Senator MARTINEZ. Thank you very much, Mr. Chairman.
Senator REED. Senator Kohl.
Senator KOHL. Thank you very much.
Chairman Bernanke, I am sure you have given this some
thought and perhaps discussed it with many people down at the
Federal Reserve. How much money do you think we will have to
invest in our banks in order to make them stable and to resume
their normal functions?
Mr. BERNANKE. Well, Senator, as I said to Senator Tester, we
have already put in quite a bit. How much more we will have to
do depends on the state of the banks. It depends on how the economy evolves. And it depends on the margin of safety we want to
have. So I am afraid I can't give you a number. I am going to have
to leave that to the Treasury and administration. They are going
to have to come up with a view on what is needed. But obviously,
I think we have already done quite a bit and it has been helpful.
It has stabilized the system to some extent.
Senator KOHL. One of the assessments that you make with respect to our recovery is based on the stimulus. How would you assess the stimulus in terms of its size, its priorities, the amount of
32
money we are spending quickly? If you would have written it yourself, what are some of the things you might have done differently?
Mr. BERNANKE. Well, Senator, last October, in front of the House
Budget Committee, I did indicate that given the weakness of the
economy, given that the Federal Reserve was running out of space
to lower interest rates, it was appropriate for Congress to consider
a significant fiscal program. But I have deferred to Congress's prerogatives and not involved myself in adjudicating these elements
which are obviously contentious.
There is a tradeoff between the size of the program, the amount
of debt that is incurred in the program, the efficiency of the spending. So it really depends a lot on Congress's judgments about how
effective the spending will be, how quickly it can be put out. So I
would prefer not to involve myself in that other than to say that
I did agree and acknowledge that some substantial fiscal action
was appropriate in helping get the economy moving again in the
current environment.
Senator KOHL. So you, in a general way, might have supported
the stimulus plan that we finally passed?
Mr. BERNANKE. I supported a substantial fiscal program, but I
recognize the legitimate disputes and controversies about the size
and the composition and the like and I, frankly, don't feel that it
is my place in my particular role to try to intervene on that.
Senator KOHL. Sure. Chairman Bernanke, one of the biggest reasons that we got into such a difficult situation obviously is the
home buyers, the mortgage mess, and the loans that they were receiving that they could not afford from unsupervised lenders, and
most of these lenders were overseen at the State level. In 2008, the
Federal Reserve finalized rules to better protect home buyers from
unfair and deceptive practices in the mortgage market which will
take effect in October of this year.
While these new rules will apply to all mortgage lenders, those
who are not routinely subject to Federal oversight might not adhere to the new rules closely enough to make them, in effect, work.
So what steps is the Federal Reserve taking to ensure full understanding and compliance with the new regulations by mortgage
lenders which are not routinely examined by Federal regulators?
Mr. BERNANKE. Well, Senator, we have a mismatch of the regulatory authority and the enforcement authority, as you point out,
and we have worked hard to try to address that. The Federal Reserve has a very good relationship, for example, with the Conference of State Bank Supervisors, which brings together bank supervisors from around the country. We have engaged in a number
of outreach efforts to work with them, and we have also conducted
joint examinations with the State bank supervisors and other State
authorities to provide each other information on how we go about
our own assessments and try and establish some degree of consistency across State and Federal oversight.
So we are doing as much as we can to try to increase the cooperation and communication between the Federal Reserve and the
various State regulators. Having said that, it is certainly inevitable
that some States will put more resources and effort and personnel
into these oversight functions than others and so there is inevitably
going to be a certain amount of unevenness in oversight. But we
33
are doing what we can to work with the State authorities as best
we can.
Senator KOHL. But you would agree that, going forward, it is
critical that we have this kind of oversight, and regulatory oversight, it was the lack of it that created the mess that we are in
right now?
Mr. BERNANKE. Well, it is by no means the only factor. There are
plenty of things that went wrong. But it was certainly one factor,
and as we look at regulatory reform, we need to ask the question,
are all the sectors of the economy that need oversight, are they
being watched by somebody or are there major gaps where there
is no effective oversight where there needs to be, and that is, I
think, a very basic aspect of the reform that Congress needs to address.
Senator KOHL. Thank you. Thank you, Mr. Chairman.
Chairman DODD [presiding]. Thank you very much, Senator.
Senator Hutchison.
Senator HUTCHISON. Thank you, Mr. Chairman and Mr. Chairman.
I want to go back to the inflation threat, which I think today and
also previously you have said that it is not a worry, that half of
your obligations are short-term. But I am looking at the overall picture, where some economists are beginning to look at the $10.6 trillion debt that we have plus last week's stimulus, or 2 weeks' ago
stimulus with interest is another trillion, and starting to look at
the tipping point. Twenty-five percent of our debt is held by foreign
entities. What if they start saying, hey, this risk is too high and
they want a higher interest rate? That, on top of half of your obligations being somewhat long-term.
Are you concerned in looking at the overall picture about the possibility of inflation and what could you do to keep that from happening through any kind of policy, because obviously that would be
a devastating turn for our country.
Mr. BERNANKE. Well, inflation is primarily the responsibility of
the Federal Reserve and we consider that to be a critical element
of our mandate. Our view is that over the next couple of years, inflation, if anything, is going to be lower than normal, given how
much commodity prices have come down, given how much slack
there is in the economy. When the economy begins to recover, it is
important that we raise interest rates and do what is necessary to
prevent an overheating that would lead to inflation down the road,
and as I have mentioned, we are confident that we can do that.
Every time we use our balance sheet to try to support the economy,
we are thinking about how can we unwind that in a way that will
be kindly and allow us to take the actions we need to take.
That is a somewhat separate issue from the debt issue. It seems
to be, at least for now, that the dollar and U.S. debt are still very
attractive around the world and there is a lot of demand for holding our Treasuries. That said, it is self-evident that we can't run
trillion-dollar deficits indefinitely. It is going to be very important,
as we emerge from the crisis and begin to go into a recovery stage,
that we get control of the fiscal situation and begin to bring down
the deficit to a sustainable level.
34
So I agree with you that we do need to address that issue. For
the moment, foreign demand for U.S. securities is strong, but you
are absolutely right. If we don't get control of it, eventually, they
are going to lose confidence.
Senator HUTCHISON. Let me shift to the issue that many of us
have talked about and that is getting credit into the marketplace.
Because the balance sheet of the banks has gone up so much now,
holding their reserves in the Fed, and you are still paying interest
to the banks, do you think that is having an impact on banks leaving their money in the Fed to get interest and having the reverse
effect on what we all want, which is getting credit out into the
marketplace?
Mr. BERNANKE. NO, Senator. I don't think it works that way. If
you like, one way of thinking about what is happening is that the
banks are nervous about lending given their concerns about their
own capital positions and about risk aversion and credit issues in
the marketplace. So in a way, what the Fed is doing is borrowing
by paying interest on reserves to the banks, and that is where we
get the money, and then we are standing in between the banks and
the marketplace, using that money, recycling it into commercial
paper, asset-backed securities, and other forms of credit. So in a
way, we are becoming the counterparty between the markets and
the banks.
Right now, we are paying one-fourth of 1 percent interest on reserves. When banks feel they have any kind of good opportunity to
invest at better than one-fourth of 1 percent, they will. That will
begin to create expansion in credit and money supply and will be
the signal for the Fed to begin to pull back. But right now, it is
clear that the banks are more willing to hold reserves at one-quarter of 1 percent than they are to make loans, so therefore we are
stepping in to try to stimulate credit markets.
Senator HUTCHISON. Let me just ask you, then, what practical
advice would you give us to try to help get that credit out into the
marketplace, because no matter what we say in Washington, go
visit any person in a small business or medium-sized business that
is trying to get credit for their business and they say it is impossible.
Mr. BERNANKE. That is why the economy is under such pressure.
Absolutely. There is—it is useful to think about credit as coming
from two places, the banks and then the non-bank sources like
asset-backed securities and commercial paper.
On the banking side, our objectives, for example, working with
the Treasury, are to try to stabilize the banking system, make sure
they have enough capital to lend, and make sure they have enough
liquidity. In addition, as part of our supervisory oversight, we want
to make sure there is an appropriate balance between caution,
which is critical—banks need to be cautious in their loans—but on
the other hand, we want to make sure that they make loans to
credit-worthy borrowers and are not turning down good borrowers
because their regulator told them they can't make a loan. We don't
want that to happen. We know sometimes it does happen, so we
are trying hard to tell our examiners if the bank has a good loan
to make and it is a good customer, let them make that loan. We
want that to happen. So that is the banking side.
35
On the non-bank side, again, it is a difficult problem, but the Fed
is doing its best to work through some of these markets together
with the Treasury to try to get credit flowing again through assetbacked securities markets and other types of non-bank markets.
Senator HUTCHISON. My time is up. Thank you, Mr. Chairman.
Chairman DODD. Thank you very much, Senator.
Senator Warner.
Senator WARNER. Thank you, Mr. Chairman, and thank you,
Chairman Bernanke, for your comments this morning.
I have got two areas I would like to press on. One is that we talk
about the stress test process, and I was happy to hear this morning
a little more clarity on that. I understand you are talking about
now 19 banks. I have heard 14 banks, 20 banks, 19 banks. I think
the sooner we lay out to us and the markets which banks are actually going to go through this stress test so that we can make clear
that there are hosts of many community-based banks and local
banks recognizing it is not your regulatory oversight for these
smaller banks, that these banks are still healthy and in good
shape, I think we take an important step forward, at least to the
markets, because in my State and I know so many of my colleagues' States, our local-based banks are getting drubbed down by
this overall tower that is hanging over the industry at large.
But as we go through this stress test, I guess you in some of the
press reports yesterday gave us a little more clarity, but it seems
like you are going to do a stress test that is going to say, if conditions get worse, will these banks have adequate capital. But that
presumes, I suppose, that you are going to accept the banks' current recognition of what bad assets they may have and how they
are marking them on their current balance sheets. You are not
going to go in—I tried to press Secretary Geithner a little bit on
this—you are not going to go in in the stress test and try to evaluate the so-called toxic assets or put a pricing on them.
Mr. BERNANKE. We are going to evaluate them but according to
the accepted accounting principles. So there are two classes of assets, broadly speaking, the mark-to-market assets, and we try to
evaluate whether they are using appropriate models or information
to do that. There is also banking broker accrual assets, which
banks don't have to mark to market because they are holding them
to maturity. They do have to recognize credit losses and the like.
We want to make sure that they are applying the right GAAP procedures there, and we are going to be looking not just at 1 year
ahead, but 2 years ahead. The usual practices focus on the first
year, but we want to make sure that even 2 years ahead, they are
looking at projected losses and taking that into account.
So we are going to be doing, as we always do, examinations
based on Generally Accepted Accounting Principles, and we are not
allowing the banks to hide anything or not provide adequate information. Indeed, we are going to make a special effort to coordinate
among the supervisory agencies to make sure as much as possible
that we have consistency across banks so there won't be any view
that some banks are laggards and others are leaders in terms of
writing down appropriate assets. We want to get a clear estimate
of the capital needs.
36
And the way we want to address the stress scenario is, again, by
providing this convertible capital which starts off as preferred. It
is in the bank, but only if the losses actually materialize that we
are projecting and that capital gets eaten into will they need to
make the conversion from preferred to common so to ensure that
even in this bad scenario they have both enough capital to meet
well-capitalized standards, but also enough common equity to meet
high-quality standards that enough of their Tier I capital is in common.
Senator WARNER. If I understand you correctly, you are saying
these banks that through the potential of falling below their minimum capital requirements will require some additional infusion.
This additional infusion, you are assuming, would be entirely public funds that would be in this preferred position, correct? Is that
correct?
Mr. BERNANKE. Preferred, but convertible to common.
Senator WARNER. Convertible. But the other piece of the program
that Secretary Geithner outlined, which was the effort to try to get
a public-private partnership of some level of private capital in here
to help us, in effect, price some of these bad assets and buy them
out, you don't think the stress test will divide the line between
those banks that are going to get public capital and those banks
that are going to end up falling into this public-private purchase
program?
Mr. BERNANKE. SO if the public-private program, which will take
a bit of time to get up and running, works well, it will improve the
situations of some banks by removing bad assets from their balance
sheets. We are not taking that into account at this stage because
we don't know exactly what effect that will have.
Senator WARNER. SO the bank will be
Mr. BERNANKE. SO we are going to look at the current balance
sheets as we do that evaluation.
Senator WARNER. And the bank will then have, in effect, two options. It can either unload some of its assets to this public-private
purchasing entity or
Mr. BERNANKE. We will start with the capital. If it turns out that
the bank, because of good economic outcomes or because they are
able to sell assets, doesn't need all the capital we gave them, then
they can pay it back eventually.
Senator WARNER. I know my time is up. Can I ask one more
quick question, though? I was happy to see yesterday your Web site
and some of your comments this morning about more transparency,
but one of the things, Dr. Elmendorf was in recently and did a
pretty good outline of all of the various initiatives that have been
started, and we realize you are fighting multiple fires on multiple
fronts, but my count was there are eight new initiatives that the
Fed has started since last fall.
You have made investments or potential investments in four separate institutions, as some of my colleagues mentioned, increased
the balance sheet by about a trillion dollars with the potential of
going up to $4 trillion. Some of these are clearly purchasing of normal Treasury securities, but there is a whole series of new areas
where you are taking on assets, AIG in particular and others,
where the role of the Fed seems to be evolving into not only mone-
37
tary policy and regulatory oversight, but more and more a holder
of debt or equities in a series of institutions.
Do you have the capabilities inside the institution to play this
role, and looking back on the Bear Stearns when it looked like we
had to bring in what at that point, now in retrospect $29 billion
looks like a fairly minor challenge, but now with this potential of
a trillion dollars added to your balance sheet, the potential of going
to $4 trillion, how do you have the capabilities to manage all these
assets inside the Fed?
Mr. BERNANKE. Senator, I want to make a very clear distinction
between our programs that address broad credit markets—like
asset-backed securities and commercial paper—and the rescue efforts we were involved for a couple of large firms. Those rescue efforts make up about 5 percent of our balance sheet. We got involved in them, frankly, because there is no clear resolution authority, in the United States for dealing with systemically critical
failing institutions except for banks. But in the case of an investment bank or an insurance company, for example, there is no such
regime, and we and the Treasury believe that if we allowed those
institutions to fail, it would have done enormous damage to the
world financial system and to the world economy.
So we did what we had to do. We were very unhappy about doing
it. We do not want to do it anymore. We would be delighted if the
Congress would pass a substantial resolution regime that would
create a set of rules and expectations for how you deal with a firm
of this type that is failing and leave the central bank out of it entirely. So I hope very much that it will happen as you
Senator WARNER. And I do not think I am—at least my intent
is not to be critical, and I know the Chairman has the intention
to pass legislation about it. But you still have these assets that you
have got to manage in this ensuing time.
Mr. BERNANKE. Yes.
Senator WARNER. DO you have the capabilities to
Mr. BERNANKE. We do. We do, and we have hired
private sector
firms as needed to manage
Senator WARNER. I would like to see some more information on
that.
Thank you, Mr. Chairman.
Chairman DODD. Before I turn to Senator Merkley, I was just
going over the—this is a form that has forms of Federal Reserve
lending to financial institutions. I count 15 of them, 12 of which
have been started since August of—the earliest was August of
2007, most of them in 2008. So it is a rather elaborate chart and
sort of daunting as well, from my point of view.
Senator Merkley.
Senator MERKLEY. Thank you, Mr. Chair, and thank you, Mr.
Bernanke, for your testimony.
A year ago, March 4 a year ago, you were giving a speech to
bankers primarily about the challenges we face in the mortgage
world, and you called for very vigorous response. You called for
lenders to pursue aggressively renegotiation of loans. You also in
that speech pointed out some of the challenges that exist to renegotiation. Those challenges included the fractured ownership of mortgages and the potential for lawsuits from those who owned dif-
38
ferent cash-flows, the fact that ownership trusts vary in the type
and scope of modifications they are legally permitted to make. And
in addition to your points that you made, there has been a lot of
discussion of the fact that in general, when we start looking at the
number of borrowers all seeking renegotiation at the same time,
that lenders are ill equipped with the kind of trained workforce to
be able to pursue those negotiations.
In fact, I held a foreclosure mitigation workshop out in Oregon
last week, and the single message that came through was the enormous frustration of homeowners trying to get in contact with anyone who could actually have the authority to talk to them about renegotiating their loan.
My concern has been that these obstacles are worse now than a
year ago and that they remain a significant obstacle to date of the
type of strategy that we are pursuing that is embedded in the plan
that the Treasury Secretary put out last week.
Could you just comment on how you see the evolution of these
obstacles, whether we can overcome them?
Mr. BERNANKE. Well, securitization remains a severe problem.
The one element of the administration proposal which could address potentially both of the issues is the fact that they propose
bounties or payments to the servicers who renegotiate loans. That
aligns better their incentives with the incentives of the borrower in
the sense that, without that, they do not necessarily have the incentive to try to get a better arrangement for the borrower. And,
second, it gives them the funding to provide the manpower to go
out and get in touch with the borrowers, work with them, and so
on. So that is one element that may help on that side.
There has been some progress in terms of accounting
verifications and the like about getting loans out of MBS, and to
the extent that MBS are being acquired more and more by Government agencies, we are working now toward a uniform renegotiation
and protocol for all mortgages held by Fannie and Freddie and by
the Fed or any other Treasury or any other Government-related
body.
But that still remains a problem, the existence of the
securitization trust and the restrictions they place on when you can
renegotiate a loan.
Senator MERKLEY. Thank you. And I do hope those incentives
and perhaps also the club that was laid out in the President's plan
could be helpful, that club being the possibility of bankruptcy
judges to be able to renegotiate the terms.
In your speech, you also laid out the refinancing option as another strategy, and I keep wondering if indeed we are not able to—
if we do not make progress, significant progress on the loan-by-loan
modification, the different type of class actions, if you will—not
lawsuits in this sense, but addressing the problem systematically.
And you laid out one such idea, which was the Hope Now Alliance's
potential freeze on subprime loans at the introductory rate, keeping
that frozen for 5 years.
Yesterday, I was up on Wall Street, and a banker was saying another strategy would be—a very bold strategy would be for the U.S.
Government to guarantee essentially every home loan in America,
and the basic math was $10 trillion, 10-percent failure, it is $1 tril-
39
lion, you lose 50 percent on each transaction, so it is half a trillion
dollars. But it is not only helping the homeowners, it is reinforcing—it is setting—kind of restoring a foundation, if you will, for
the derivatives related to those loans and, therefore, also compensation not just for the mortgage strategy, but also the strategy
to reinforce our financial institutions.
Any thoughts about that kind of action?
Mr. BERNANKE. Well, obviously, as your calculations suggest, it
could be extremely costly, particularly if—and I hate to say it, but
there might be some people who would say, well, if I am guaranteed anyway I will not lose my house, why don't I stop paying my
mortgage? Unfortunately, that might be in some cases the response.
That seems to me to be a very costly way to go about doing it.
I think you are better off, for example, by the administration plan
and other plans, like Sheila Bair's FDIC plan, which is closely related, which focuses not on every mortgage but looks at people according to their characteristics. So, for example, in the administration plan, you start with people who have very high ratios of payments to incomes, and then you try to get those down to, say, 31
percent, which is a more sustainable level.
So you are better off focusing on subpopulations where there is
obviously a lot of stress, and that would probably be a more costeffective way to get improvements in the foreclosure rate.
Senator MERKLEY. Well, other strategies—I believe my time has
expired. I will just leave you with a thought, which is that we need
to continue to think about if the loan-by-loan modification approach
simply cannot handle the volume of change that we need, what
group strategies are worthy of consideration?
Thank you.
Chairman DODD. Senator Bennet.
Senator BENNET. Thank you, Mr. Chairman. Chairman
Bernanke, thank you for your testimony and endurance here today.
It is getting to me.
I appreciate your comments about the commercial paper market
because I think that was a place where the intervention seemed to
be pretty effective, and I wanted to use my time to do a couple
things today. One was to mention the crisis at our local governments and our public-oriented nonprofits like schools and hospitals
are facing. As you know, that is an enormous segment of our economy, $2 trillion of shovel-ready projects, and with real capacity to
help spur this recovery, I think. Those markets also are locked
down. They are frozen, just as many of the other credit markets
area. The markets for short-term auction rate and variable rate
bonds have been particularly hard hit, and a lack of liquidity,
which, as I said, is a problem plaguing all segments of the market,
has stymied the local bond market, too. And banks receiving TARP
money, nevertheless, have remained on the sidelines, unwilling to
venture back into the local bond market. The variable-rate market
is frozen. To borrow from the statute that empowers the Fed, the
lack of liquidity results from the unusual and exigent circumstances facing financial institutions.
It seems to me that the Fed could make an enormous difference
by providing temporary support for liquidity in these markets just
40
as it did in the commercial paper market that you mentioned earlier. In those case, those issuers happen to be taxpayers of States
and localities, and the corporations happen to be public, not private. I do not know why we should restrict ourselves to cases of
private investors but not also help local schools and hospitals in
Colorado and across the Nation.
This is not a matter of making loans to State and local governments. I am asking your consideration to supporting regulated financial institutions in cases where their letters of credit or other
obligations provide liquidity to our financial markets, markets in
this case which happen to involve State and local governments.
So I wonder if you have got any thoughts about that piece of our
economy.
Mr. BERNANKE. Well, the auction rate securities market is pretty
much defunct. It was a class of markets that were essentially trying to finance long-term credit with short-term borrowing, and the
appetite of investors for those kinds of markets has greatly diminished. So that particularly attractive, relatively cheap form of credit for States and localities has largely dried up, as you correctly
point out. The State and local bond market in general still remains
strained. It has improved somewhat, and we are watching that
very carefully.
I am not quite sure I follow the issue on banks. Going back to
my earlier comment to Senator Hutchison, we certainly want to encourage banks to make loans to creditworthy borrowers wherever
that is consistent with safety and soundness. That would include,
of course, States and localities.
From the Fed's perspective, there are a couple of reasons why we
have not prioritized those markets with commercial paper. For example, we do, in fact, have a capacity constraint, which, as I discussed with Senator Hutchison and Senator Bunning and others,
is the need for us to unwind our portfolio at an appropriate time.
And so we cannot expand, particularly for longer-term liabilities,
indefinitely. And in looking at various areas where we thought we
could be helpful, for technical reasons first we thought we could do
more, say, in the commercial paper market but, in addition, two
other reasons.
One is that the Congress obviously has been very involved in addressing State and local fiscal issues, including in the recent fiscal
package, and it seems more appropriate, given the close relationship between the Federal and State governments, for that to be the
locus of addressing those issues.
And the other point I would make is that our extraordinary authority which we have invoked to make these loans, say, in the
commercial paper market, does not include States and localities. So
it would take some stretch beyond, I think, congressional intent to
include them in some of these programs.
But we understand the issue, and we are obviously paying very
close attention to it, because, as you correctly point out, the inability of States and localities to finance themselves is having a direct
impact on the services they provide and on the economy.
Senator BENNET. Then if I could just say on that—and I want to
see if the Chairman will let me ask my other question as well—
it just seems like such a tough case, because there is no issue with
41
the underlying credit here, unlike in some of the other things that
we are talking about. It is purely the consequence of the loss of liquidity in the market. And at a time when we are spending, you
know, $800 billion from here to do these shovel-ready projects, it
would seem that if there were a way to create an environment,
some sort of backstop of some kind to be able to get these governments in a position to be able to do the work they are intending
to do anyway, with balance sheets and credit ratings that we know
are good, that seems to me to be a really lost opportunity to leverage what we are doing here, which is the only reason I raise it.
The second question I had, Mr. Chairman, if—I have got a couple
seconds left.
Chairman DODD. As quick as you can, Senator.
Senator BENNET. Very quick. You talked about how critical it
was to stabilize the financial institutions as a way of getting our
market going, and which everybody here agrees with. Can you give
us some thoughts about how to ensure that the right level of rigor
is applied to make sure that we really are valuing these assets and
liabilities in a way that does not create a stasis where we are stuck
in this for many years because we have not done an honest assessment of where things really are?
Mr. BERNANKE. That is very, very important. We learned from
other examples that you need to figure out what these assets are
worth. The supervisory efforts are using all our tools to get good
valuations, but in this respect, I think the idea of using a publicprivate partnership in an asset purchase facility is potentially appealing. If you set up a program where both private sector investors and the public purse contribute capital to a facility, and then
the purchases and pricing are done by private sector investors who
are interested in making a profit, then there is a much better reason to think that the prices that come out will reflect true market
realities rather than accounting fictions. So that is one reason to
try to involve the private sector in this asset purchase program.
But it is a very hard problem, and as I said earlier, it is not just
a question of going in and saying this is the truth. Because the fact
is that a mortgage could be worth X today, and then tomorrow you
get news about the housing sector then maybe it is only worth
0.9X. So it is more difficult than just coming clean. It is really trying to make judgments about the whole future of the economy and
the housing market as you try to assess the value of a given piece
of paper.
Senator BENNET. Thank you.
Chairman DODD. Thank you, Senator.
Mr. Chairman, before I just turn to Senator Brown, on the major
question—the first question raised by Senator Bennet, Senator
Warner has done a lot of work on this as well, on this whole issue
involving municipal bonds and AAA-rated where you are talking
about investors, and the purchasing of those by the TALF, we are
doing floor plans for cars, we are doing student loans. It seems to
me AAA-rated bonds out of municipalities for schools and hospitals
has got to be at least as creditworthy as a student loan, with all
due respect to students and the car plan, the floor plan for cars.
I would like to recommend, if we could, that Senator Bennet and
Senator Warner—there are others who are interested—maybe
42
could spend some time with you or your staff to talk about this, because I think we did give the congressional authority to that. As
the Chairman of the Committee—and I joined them in their letter
they sent down, and I believe the authority exists under the Congress for you to be able to do that under TALF with municipal
issues.
Now, that is my opinion. That is not a deciding opinion, but that
is my conclusion, and I would be appreciative if some people could
maybe sit from the Federal Reserve and talk to these Senators
about this idea and explore it further if we could.
Mr. BERNANKE. Senator, if I may, of course, the TALF is a joint
Federal Reserve Treasury program.
Chairman DODD. We will involve the Treasury.
Mr. BERNANKE. They would need to be involved in any kind of
discussion.
Chairman DODD. We will involve the Treasury as well. I think
it is just worthy—they came to me with the idea, and it made all
the sense in the world to me, and I would like to see us possibly
pursue that.
Senator Brown.
Senator BROWN. Thank you, and, Chairman Bernanke, thank
you.
Let me share what I think is one of the most dramatic measures
of our economy. Twenty years ago, in 1987—these numbers are
1987 and 2007. In 1987, manufacturing made up 17.1 percent of
our GDP; financial services made up 5.6 percent. In 2007, manufacturing made up 11.7 percent, and financial services, 8 percent, before all the meltdown. So manufacturing, the percent of GDP—
granted that GDP grew hugely in those 20 years, but the percent
of GDP, manufacturing dropped by about a third, and financial
services went up about 40 percent, roughly.
We spend a lot of time talking about the financial services industry, as we should. Manufacturing seems to be relatively ignored—
not so much certainly in these discussions, not as important, but
generally in Government policy. Talk to me, if you would, as we
talk about reviving the credit markets, how much focus we should
bring to credit markets to help the auto industry, whether it is individual car buyers, whether it is for the dealers, and then perhaps
more broadly, your comments on manufacturing generally as our
economy shifts in the years ahead.
Mr. BERNANKE. Well, the auto companies have obviously a number of issues, long-term structural issues and the like, but part of
the
Senator BROWN. I am talking more on the demand side here, on
the demand side for buyers.
Mr. BERNANKE. Right. I was just going to say that part of the
problems recently have to do with the credit markets and demand,
and we have tried to address that. First, you know, our program
in the commercial paper market has tried to improve financing for
companies. Even though we lend only to the highest-rated companies, even the lower-rated companies have seen their rates come
down quite considerably, and that also relates to our interest rate
policy.
43
In our Asset-Backed Securities program, as Chairman Dodd was
just noting, among the things that we are allowing in the ABS program are auto loans, which has been an issue, and floor plans and
RVs, things related to the demand for automobile production.
So to the extent that credit markets are the problem, we are
doing our best to try to address those and to lower interest rates.
As Senator Dodd also mentioned, traditionally autos respond well
to low interest rates. Obviously, there are a lot of other issues right
now affecting the demand for autos.
I think on the issue of manufacturing, in general, you do not
want to set specific percentage targets for different industries. Obviously, there is an international division of labor which takes
place over time, and different industries migrate to different parts
of the world, depending on the relative complements of labor and
capital in each area. But I think it may be that part of the impact
on our manufacturing has been the trade deficit, which has been
associated with a reduction in manufacturing because trade is very
much conducted in manufacturing. So the movement in the trade
deficit has been associated with greater imports of manufacturing,
and that to some extent has been a competitive issue. And I realize
that I am going to contradict myself here, but on the other hand,
we should not put U.S. manufacturing down. It has actually had
a pretty good performance overall. Productivity gains in U.S. manufacturing have been quite extraordinary over the last 10 years.
And, in fact, that is part of the reason why manufacturing employment has been so weak. It is that even as output stays more or less
stable, the number of workers needed to produce that output has
gone down.
So in the short term, we are doing what we can to improve credit
markets to help support autos and other industries. In the longer
term, relating back to Senator Hutchison and others, if we have a
better saving rate and more balanced trade flows, that may redound to some extent to the benefit of U.S. manufacturing. But in
many States—Senator Tester was here. I have been to Montana
and seen some of their manufacturing innovations. U.S. manufacturing has in many cases filled high-level niches, very sophisticated
niches, and very high-value production. So I would not write U.S.
manufacturing off. There is a lot of value there. But clearly there
are a lot of challenges as well.
Senator BROWN. I would make the case—and then one real quick
question after that—that manufacturing, while productivity has
gone up immensely in the last many years in manufacturing,
wages have not kept pace with that productivity, which is the first
time we have seen that disconnect, at least since your writing on
the Great Depression—which, speaking of that, all—and I will not
ask you a question about—this is just—well, listen to a quick comment about this. All my life I have sort of—when I have read about
Roosevelt and the New Deal, there is almost unanimity, almost
consensus from darn near everybody, that most of what Roosevelt
did worked, the regulatory structure, the Government spending,
and all that. Only in the last few months has it become so politicized and we have seen some revisionism in our history that Roosevelt and the New Deal were failures. I mean, it has come from
some newspaper columnists, some pundits, some ideologues.
44
Specifically what worked that Roosevelt did? What did we learn
from that? What worked that applies to now?
Mr. BERNANKE. Well, there were two things that he did within
months of taking office that were extremely important. One was
the bank holiday and subsequent measures like the deposit insurance program that stabilized the banking system. This is a point
I have been making all morning, that we need to stabilize the
banks. The second thing he did was to take the U.S. off the gold
standard, which allowed the Federal Reserve to ease monetary policy, allowed for a rise in prices, which, after 3 years of horrible deflation, allowed for recovery. So those were the two perhaps most
important measures that he took.
He did some counterproductive things, like the National Recovery Act, which put the floors under prices and wages and prevented
necessary adjustment. The most controversial issue recently, of
course, has been fiscal policy, and I think there are two sides to
that. The classic work on this by an old teacher of mine from MIT,
E. Cary Brown, said that fiscal policy under Roosevelt was not successful but only because it was not tried, and he argued that it was
not big enough relative to the size of the problem. Other writers
have argued that this was not the right medicine. So that one is
more controversial, but if you asked me what I think the most important things were, I think they had to do with stabilizing monetary policy and stabilizing the financial system.
Chairman DODD. Maybe what we ought to do with the Committee sometime is maybe have just an informal dinner one night
with interested Members and have a discussion about those days.
I think it would be an interesting conversation.
Senator Akaka.
Senator AKAKA. Thank you very much, Mr. Chairman.
Welcome, Chairman Bernanke. It is good to see you. I can recall
back on September 23, 2008, when we had a Banking meeting with
four of you: Treasury Secretary Paulson, Cox, and you, and also
with Jim Lockhart. At that time we were trying to learn what the
crisis was all about and what we were going to do about it. And
as I recall, we came out—really, what came out of it was the $700
billion was to bring confidence to Wall Street. But since then, many
things have happened, and well before the current economic crisis,
the financial regulatory system was failing to adequately protect
working families from predatory practices and exploitation.
Families were being pushed into mortgage products with associated risks and costs that they could not afford. Instead of utilizing
affordable, low-cost financial services found at regulated banks and
credit unions, too many working families have been exploited by
high-cost, fringe financial service providers such as payday lenders
and check cashers.
Additionally, too many Americans lack the financial literacy,
knowledge, and skills to make informed financial decisions, and I
have two questions for you. What I am asking is what must be
done. What must be done as we work toward reforming the regulatory structure for financial services to better protect and educate
consumers?
Mr. BERNANKE. Well, I think this is absolutely critical because,
as you point out, it was bad products that created a lot of the prob-
45
lem that consumers took, either knowingly or unknowingly. One direction which the Federal Reserve has taken is just to try to outlaw
certain practices.
We found, for example, in the context of credit cards, that people
just do not understand double-cycle billing. I am not sure I fully
understand it myself, to tell you the truth. And it is probably not
worth the effort of trying to teach people what that means. It is
probably better just to get rid of that practice because it is deceptive and people do not know how to understand it or work with it.
There are other issues, though, relating to just the simple arithmetic of interest rates and so on that people really need to understand. It is not just a school issue. It is very much an issue for life.
You know, people's hopes and dreams are tied into buying a house
or sending a child to college and so on. And if they want to do that,
they have to become reasonably acquainted with financial products
and how to make choices and how to make good decisions. And it
is good for the economy, too, because you get more competition, you
get better products from that.
So you and I, Senator, we have discussed this many times in the
past. I think we strongly agree with each other that financial literacy is crucially important, and it is something that should get
more attention than it already does in the schools.
The Federal Reserve is very involved in this. We have done a lot
of programs. We have worked with a lot of community organizations and others to try to create programs, to try to support efforts
to spread financial literacy. I have to concede, though, that we have
not got the magic bullet yet. It is difficult. People—kids, particularly—do not tend to be that involved or that interested in the topic
until the actual time comes when they have to make some kind of
financial decision. And so the most effective time is typically
around the time at which the person is making their mortgage decision or their car-buying decision.
So there is some case, I think, to do it in schools, but I think
there is also a case to have better counseling so that people who
are making financial decisions have access to some help and assistance so they can make better choices. But I absolutely agree with
you that, just as in any other market, if you do not have informed
consumers, you are not going to have an effective market. And that
is very important.
Senator AKAKA. And what must be done to improve access to
mainstream financial institutions in economically unserved communities?
Mr. BERNANKE. This is the issue of the unbanked, or the underbanked, again, an important issue. You have many people who, for
whatever reason, haven't bothered or don't know how to open up
a checking account and they end up paying money to cash their
checks or to get a very short-term loan.
We encourage banks and other financial institutions to do outreach, to try to provide services in underserved neighborhoods, to
have multilingual tellers and so on, and I think that is not only
good public policy, it is good business for them to reach out to
broader groups in the population. So I think that is another important issue in which we bring people into the banking system.
46
One way to do that, as I talked about in the past, in many cases,
you have immigrants who want to make remittances back to their
home country and some of the vehicles for making remittances are
costly. Bringing them into the regular financial system, they can
find cheaper, more effective, safer ways to send money home, and
in doing so, they become acquainted with their local financial institution and become able to partake of the other services, like a
checking account and a savings account.
So that is very closely related to the financial literacy issue,
about bringing people into the financial mainstream. Once again,
that is one of the best things we can do for people, to allow them
to make better use of their incomes and they get to have a better
life.
Senator AKAKA. Thank you for your response.
Thank you, Mr. Chairman.
Chairman DODD. Thank you very much, Senator. That completes
the round.
I know my colleagues—I have a couple of questions for you, Mr.
Chairman, as well. I think Senator Shelby, and I see Senator
Corker here, as well, and I don't know if Senator Bennet may want
to follow up, and I apologize to you, but you have seen the interest
obviously in the membership showing up.
I want to raise a couple of questions, one about bank holding
companies, one about the potential of the Fed to buy Treasury
bonds, and maybe one or two others.
I mentioned in my opening comments some of the largest institutions that are experiencing significant problems were regulated by
the Fed at the bank holding company level. Now, in addition to the
bank holding companies that you historically regulated, we have
many new companies that are applying for and been granted the
bank holding company status by the Fed, including Goldman
Sachs, Morgan Stanley, American Express, GMAC.
Let me ask you a couple of questions. One is a basic question.
I think I know the answer you want to give me, but I want to give
you the chance to do so. As Chairman of the Federal Reserve, are
you still committed to maintaining the separation between banking
and commerce? And then second, given the problems that we have
just seen with the more traditional bank holding companies, what
assurances can you give the Committee that these new companies,
the new applications that are coming through, which in many ways
are different than the traditional bank holding companies, are
going to be adequately regulated?
Mr. BERNANKE. Well, I do support the separation of banking and
commerce, and in recent examples like GMAC, for example, we imposed very tough conditions about disentangling themselves from
General Motors and from other commerce activities to become a finance company, essentially. So in that respect, we have been consistent.
On bank holding companies, on the general principle, I think
that consolidated supervision of large, complicated organizations is
still very important, even more so important than we thought it
was before because of the potential for a consumer finance company there or broker-dealer there to create a risk for the entire organization. So consolidated supervision, I think, is very important.
47
We at the Fed are committed to doing that. I think, if anything,
what we need to do is be even more aggressive at looking not only
at the holding company level, but going down into the underlying
companies beneath the holding company to make sure that they
are observing consumer protections, safety and soundness, and the
like. There was some tendency, I think, to defer entirely to the
functional regulators who are responsible for the companies underneath the holding company. Indeed, we want to respect those priorities in the way that the Congress set up the rules, but the holding
company supervisor, I think, does have a responsibility to make
sure that not just at the holding company level, not just at the
level of the policies that are being set by the top management, but
down in the various organizations below that level that the policies
are being followed and that companies are safe and sound.
Chairman DODD. Well, I welcome that and I would hope there is
no additional authority that you need at the Fed in order to be able
to exercise that authority.
Mr. BERNANKE. There has been some ambiguity. An example I
would give would be consumer protection. What authority does the
Fed have to look into a consumer finance company which is a subsidiary of a bank holding company when technically the primary
regulator might be the FTC, for example.
Chairman DODD. Well, if it goes to the systemic safety and
soundness and systemic risk of that institution, it would seem to
me you have all the authority in the world.
Mr. BERNANKE. Well, before now, there were legal issues about
what the appropriate priority was, who was primarily responsible,
and so on, and what I am saying is that I think that what we have
learned from this episode is that the holding company supervisor
must have some ability, in conjunction with the functional regulator, to look at the condition and behavior of the firms below the
holding company level, and that is something I have started doing
and we intend to do.
In terms of the new holding companies that have come in, we
have been very assiduous in making sure they have adequate capital, that they have restricted themselves to the activities which
are appropriate for holding companies, so they are not involving in
all kinds of other commercial activities, and we believe we are able
to deal with those companies. But more generally, we are revisiting
and rethinking our whole holding company supervision approach to
make sure that we have a really comprehensive enterprise-wide approach that looks at all the risk factors, not just at the holding
company level but also throughout the organization.
Chairman DODD. Well, we need to stay closely in touch with you
on that because that will be part of it.
The second question I have has to do with, over the years, the
Fed has not been active as a public trader in Treasury notes. In
fact, it has been decades, I guess you could say, going back maybe
to the very time that you are talking about historically, preferring
instead to use the short-term Fed funds rate to manage interest
rates. With the Fed's target interest rate basically at zero, you
have been forced to consider other means of conducting monetary
policy.
48
In December, the FOMC said it was, and I quote, "evaluating the
benefits of purchasing long-term Treasury securities." In January,
FOMC said it is now prepared to do this if, quote, "evolving circumstances indicate that such transactions would be particularly
effective in improving conditions in private sector markets." Can
you be more specific about those conditions that would lead the
Federal Reserve to purchase long-term Treasury securities?
Mr. BERNANKE. Well, Senator, our objective is to improve the
functioning of private credit markets so that people can borrow for
all kinds of purposes. We are prepared, and we want to keep the
option open to buy Treasury securities if we think that is the best
way to improve the functioning or reduce interest rates in private
markets. So we are certainly going to keep that option open.
I should say, though, that we do obviously have a couple of other
things going on right now. One is the purchases of the agency MBS
and securities. The other is the proposed expansion of the TALF.
So those are two directions that are certainly going to be taking up
a lot of our attention in the short run. So we will keep that option
open, but we are looking at some other ways of addressing the private markets, as well.
Chairman DODD. And just in that regard, raising the question,
is it your view that an unacceptable rise in longer-term Treasury
rates slow economic growth, resulting in the Fed actually buying
longer-term Treasury securities?
Mr. BERNANKE. Well, we want to look at the overall state of the
economy, and I would just note that one possible scenario would be
the Japanese, where there was a more general quantitative easing
approach, and the focus was not on specific credit markets but
broadening the monetary base in general. In that case, the Japanese have and currently are buying long-term government bonds.
That would be one possible scenario.
But again, the basic goal here is to improve the functioning of
private credit markets. We are not trying to affect the cost of government finance, per se, rather the private sector.
Chairman DODD. I have gone over a little bit. Let me turn to
Senator Shelby and then Senator Corker.
Senator SHELBY. Mr. Chairman, Secretary Geithner stated that
the Treasury will direct bank regulators, including the Federal Reserve, to begin a form of stress testing. Now, I believe it was a
writer with the New York Times, Gretchen Morgenson, she wrote
a week or so ago something that said, you know, before you can do
a stress test on somebody, you have got to find the pulse, indicating
that some of these banks were walking dead. I believe that was a
term that Senator Corker used one time.
If you are propping them up, how long can you prop them up and
should you prop them up, because a lot of us don't believe anything
is too big to fail. Obviously, you think some institutions are too big
to fail. But your predecessor, one of your predecessors, Dr. Volcker,
who is a well respected economist, he testified before this same
Committee several weeks ago that he thought some institutions,
some banks were too big to exist, you know, too big.
Now, having said that, I think you can fool the market a little
bit every now and then, but not for long. The market basically has
looked at a lot of these banks and they know they are in deep trou-
49
ble. They know that some of them, or at least the market thinks
some of them are basically gone, or should be gone. So this begs
the question of nationalization. You know, this has been brought
up.
I think you can take over a bank by converting the preferred, as
you are talking about CitiCorp or some of them are talking about
doing, and if you had 40 percent working control of CitiCorp, you
basically would—you wouldn't own it all, but you would own working control, probably, and you would be the big power in the boardroom, so to speak. Or you could take over a bank by taking it over,
do away with stockholders and it becomes totally owned by the government, so to speak. Neither one of those options, to me, is very
desirable.
I guess, where are you going? Can you say that today? Where are
we going?
Mr. BERNANKE. Well, what we are doing is trying to assess how
much capital these banks need in order to fulfill their function even
in the stress scenario. So we are going to do an honest evaluation.
We are going to do a tough evaluation, try to figure out how much
hole there is, if there is a hole. In many cases, there is not a hole.
Senator SHELBY. DO you believe that most of those banks can
withstand the stress test, a real stress test?
Mr. BERNANKE. The outcome of the stress test is not going to be
fail or pass. The outcome of the stress test is, how much capital
does this bank need in order to meet the needs of the credit—the
credit needs of borrowers in our economy.
You mentioned having majority ownership and so on. We don't
need majority ownership to work with the banks. We have very
strong supervisory oversight. We can work with them now to get
them to do whatever is necessary to restructure, take whatever
steps are needed to become profitable again, to get rid of bad assets. We don't have to take them over to do that. We have always
worked with banks to make sure that they are healthy and stable,
and we are going to work with them. I don't see any reason to destroy the franchise value or to create the huge legal uncertainties
of trying to formally nationalize a bank when it just isn't necessary.
I think what we can do is make sure they have enough capital
to fulfill their function and at the same time exert adequate control
to make sure that they are doing what is necessary to become
healthy and viable in the longer term.
With respect to your question about too big to exist, as I have
said before, there is a too big to fail problem which is very severe.
We need to think hard going forward how we are going to address
that problem, but right now, we are in the middle of the crisis.
Senator SHELBY. Have you thought about ways to deal with it?
We understand that some banks pose, or some institutions like
AIG, systemic risk to the whole financial system
Mr. BERNANKE. Well, we are working right now on some proposals on resolution. One of the big problems is that if we wanted
to close down a major institution, we don't have the legal authorities and the framework to do it. So the Congress needs, in my opinion, to set forward a much more elaborate version of FDICIA, if you
like, that would apply to large financial institutions of various
50
types that would give guidance to regulators, under appropriate
checks and balances, about under what circumstances the regulators could shut down that firm in a safe way that doesn't disrupt
the financial markets. But absent those kinds of powers and that
kind of framework, we really are having to play it by ear.
Senator SHELBY. I know a lot of people have got different proposals for the economy and how do you rectify the economy. I was
told the other day there are about 155 million people gainfully employed. We would like for it to be six or seven or eight million
more. I understand that. But do you believe that the biggest challenge to our economic system today is rectifying and bringing competence and capital from the private sector, trust to the banking
system?
Mr. BERNANKE. Absolutely, Senator. Somebody asked me before,
how would we know when things were starting to turn around?
When some major banks start going out and raising significant private capital
Senator SHELBY. In the private sector?
Mr. BERNANKE. In the private sector, that will be a major indicator that we are moving in the right direction.
Senator SHELBY. And how do you do that with transparency,
with closing some banks, consolidating some banks, letting the
market know or believe in the banking system?
Mr. BERNANKE. Well, the various steps that I have described, including making sure they have enough capital to give themselves
some breathing space to do restructuring as needed, to have a program to buy assets off the balance sheets. Some of those steps that
I have talked about will, if properly executed and forcefully executed, lead to a situation where it will be safe to come back in the
water and private investors will be more confident about the futures of the banks.
Senator SHELBY. YOU are the Chairman of the Federal Reserve,
which is the central bank, but you are also the regulator of our
largest banks, is that correct?
Mr. BERNANKE. Of the holding companies, yes.
Senator SHELBY. DO you believe, and I know you haven't been in
the Fed that long, but do you believe that the Fed has adequately
supervised our banks as a regulator, or do you believe there were
problems there that were not known or uncovered?
Mr. BERNANKE. Well, I think the Fed was a very active and conscientious regulator. It did identify a lot of the problems. Along
with our other fellow regulators, we identified issues with non-traditional mortgages, with commercial real estate, with leveraged
lending and other things. But what nobody did was understand
how big and powerful this credit boom and the ensuing credit collapse was going to be, and routine supervision was just insufficient
to deal with the size of this crisis. So clearly, going forward, we
need to think much more broadly, more macroprudentially, about
the whole system and think about what we need to do to make
sure that the system as a whole doesn't get subjected to this kind
of broad-based crisis in the future.
Senator SHELBY. Does that include insurance, too, because insurance has been regulated under the McCarran-Ferguson Act by the
States, but then you had AIG, which caused systemic stress, to say
51
the least, to our banking system, and they were regulated primarily by the New York State Insurance Commission.
Mr. BERNANKE. AIG had a Financial Products Division which
was very lightly regulated and was the source of a great deal of
systemic trouble. So I think that we do need to have broader-based
coverage, more even coverage, more even playing field, to make
sure that there aren't—as our system evolves, that there aren't
markets and products and approaches that get out of the line of vision of the regulators, and that was a problem we had in the last
few years.
Senator SHELBY. Thank you, Mr. Chairman.
Chairman DODD. Senator Corker.
Senator CORKER. Thank you, Mr. Chairman, and thank you for
the second round of questioning.
How many major banks, I mean, is the definition 19 or 20, is
that what we determine to be major banks in this country?
Mr. BERNANKE. There are about 20 banks or so that are $100 billion in assets or bigger.
Senator CORKER. OK.
Mr. BERNANKE. Those are basically the ones that we are going
to be looking at in the next few
Senator CORKER. SO I want to spend just a minute on the stress
test and then move to a bigger issue. You mentioned that on the
accrual loans, we were going to use existing accounting, which is
GAAP accounting. My understanding is the banks actually take
losses on those loans as they occur.
Mr. BERNANKE. Well, there is some provisioning for future losses
and we will be looking at a 2-year horizon and asking the question,
what are the expected losses over that whole horizon.
Senator CORKER. SO what you really will be doing, then, is going
in and ensuring that they are actually provisioning properly, and
the fact is that I think most—a lot of smart people in the country
believe that that is where the huge losses exist that have not been
taken, obviously because of GAAP accounting, and what you are
going to do is actually get them to increase those reserves substantially. At that point, they will be insolvent, and so, therefore, then
you would be providing public funding to make up that capital deficiency, is that correct?
Mr. BERNANKE. I don't agree necessarily that they will be insolvent, but clearly
Senator CORKER. Well, some of them obviously will.
Mr. BERNANKE. Clearly, we have to look at their provisioning.
The rules are that you can account for those expected losses either
through provision or through more capital, but essentially it is the
same point.
Senator CORKER. And the reason for additional—their capital
will be too low, so they might not be insolvent, but the fact is they
would need in some cases substantial public investment to get their
capital ratios where they need to be so they would be considered
solvent, let me put it that way.
Mr. BERNANKE. SO they would be considered well capitalized.
Senator CORKER. OK. So I guess as I hear that, there seems to
be sort of two schools of thought. One is that we need to take our
medicine and that there needs to be some failures or maybe we
52
need to have a bad bank scenario under these major banks, because in some cases, they could actually support their own bad
bank. And then there is another that says we are just sort of going
to meter out losses over time and continue sort of what we have
been doing, and I am not criticizing, I am just making the observation that I think what I heard you say is, in essence, we are sort
of going to continue doing what we are doing. We are going to go
in and create this mechanism, these convertible preferred shares,
and as the banks actually take these losses which we know are
coming, they will convert that into common equity. But in essence,
we are sort of continuing what we have been doing with TARP
funding. We are just calling it something a little different to get the
tangible common equity up where it needs to be, is that correct?
Mr. BERNANKE. And to make the banks well capitalized so there
will be some public ownership in terms of the shares of the common equity, but we want them to have enough capital.
Senator CORKER. Mr. Chairman, just for what it is worth, I think
that is incredibly enlightening, probably the most enlightening
thing that has been said in the last 5 weeks as far as where we
are going, which again I don't criticize. I think we need to get it
right.
But it seems to me that this has been creating this sort of dead
man walking, this sort of zombie-like banking scenario, and while
I have been not using these words out and around, it seems to me
that what you have explained is a creeping nationalism of our
banks. I mean, in essence, many of them don't have appropriate
capital. You are going to stress test them, which means you are
going to make them reserve up properly, which they should do and
I applaud that. And then you are going to provide the public funding to meet that capital requirement. I don't like saying things like
this and squirmed a little bit when I was asked about Chairman
Dodd's comments about nationalization, but in essence, this is a
form of sort of creeping nationalism, right?
Mr. BERNANKE. Senator, there are two sides to this. One side is
providing the capital they need to provide credit to the economy,
which is essential. But we are not just handing them this capital
and saying, go do your thing. We also have on the other side the
supervisory oversight, the TARP oversight, to make sure that they
are not just sitting around but that they are taking the steps necessary to clean themselves up so that they will be profitable in the
future. At that point, private capital will come in and public capital
can go out. And as I was saying before, the best sign of success will
be when the government can start taking its capital out, or the
banks can start replacing the public capital with private sector capital. That is what we are aiming for.
Senator CORKER. I just took your comment earlier, you know,
there are a lot of assumptions about what our public policy is and
I think people understand about the condition that Senator Shelby
mentioned about too big to fail. But when you stated earlier, we
are committed to ensuring the viability of all major U.S. financial
institutions, that is a statement that I guess I have never heard
said that clearly before and I think that some of us have expected
that there is at least a possibility if a financial institution is not
performing properly they might be seized, which is certainly a form
53
of nationalization, for a period of time, but it is different. It is
under different circumstances.
But what I hear you saying today—again, I am not being critical,
I might be later, but I am just observing right now—is that we are
going to get them to sort of take their medicine. We are going to
go in and make them reserve up for these accrual loans that we
know is where the next huge hole is, but we are going to give them
public dollars. I mean, that, to me, and I certainly haven't been
around that long here, but that, to me, is nationalization. I mean,
that—I would like for you to give me a term to use as I leave here
as to what we would call that.
Mr. BERNANKE. Call it public-private partnership. It is not nationalization because the banks will not be wholly owned or probably not even majority owned by the government. The government
will be a shareholder, along with private shareholders
Senator CORKER. But you are putting in a mechanism to where
our common equity holdings will be large by virtue of creating this
convertible preferred situation and you know that the losses are
coming because you are going to do this stress test. I mean, that
is why you are putting this vehicle in place. And I do wonder how
we ever get to the end game where in essence there are, in fact,
people willing to buy common shares. I mean, I can't imagine in
these 19 or 20 institutions anybody, after hearing this statement
today, which maybe you have said it before and I hadn't heard it,
but why would anybody go buy common shares in banks today in
those 19 or 20? Why would anybody do it?
Mr. BERNANKE. Well, they wouldn't today, but I think eventually
they will. It is all the elements of the program working together
to take off the bad assets, to recapitalize them, to get them restructured. I think part of this is that, remember, we do have a legal
procedure. We do have the FDICIA laws and prompt corrective action. If a bank does become insolvent, then the FDIC will, of
course, intervene. But we are not close to that. All the banks are
above their regulatory
Senator CORKER. Well, they are only there because we are continuing—I mean, the statement has been made that we are going
to keep putting public dollars in to keep that occurring, so they are
never going to get to a point, these 19 or 20 banks will never get
to a point where the seizure occurs because you are putting in
place a mechanism to keep that from happening, and I am just saying that is a really bold statement and something that I guess I
haven't deciphered until today. Have you heard this, Mr. Chairman?
Chairman DODD. Well, I just say, look, I mean, we are in—as the
Senator from Connecticut learned a few days ago, a full statement
saying that I thought this was a bad choice to go to. The administration, in my view, is opposed to it. But when pressed, could something like this happen, I should have been more careful in my selection of words. We need to be careful here in the language we are
using at this very hearing.
And as I hear my colleague, he is raising some very good questions. But I think I heard the Chairman also describing this is not
a desirable result we are looking at here. The desirable result is
these institutions to be run and managed in private hands. That
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is the goal we are trying to achieve here. I think we need to be
careful to make sure we are not going to contribute to the very outcome we are trying to avoid.
Senator CORKER. But I think the mechanism that is being put in
place is a mechanism that absolutely means that none of the 20
major—19, 20 major banks in our country ever have the chance of
being seized, and, in essence, that we are going to put whatever
public capital in place once they do the appropriate amount of reserving that needs to take place, and I applaud you for doing that,
to make sure that that doesn't occur, that they have proper capital
ratios. That is what I am hearing
Mr. BERNANKE. Senator, it is not a statement of principle or forever. Based on our knowledge of those banks and where they are
and where we think they are going to come out, we believe this is
the best way forward.
Senator CORKER. Isn't that tantamount to saying that for a period of time while all of this is occurring, in essence, the—and
again, it is not a criticism, it is an observation—there is no need
for private investment in these institutions, that we are going to
go through a period of time where, in essence, the public sector, as
it has been, but we are making now this sort of a statement now
that for a period of time, the only viable avenue for these institutions is going to be the public sector, and we are just acknowledging that that is the case.
Mr. BERNANKE. It has been the case. If we hadn't had the TARP
money in October, we would have had a global banking crisis.
Many, many banks would have failed and the results would have
been extremely bad.
Senator CORKER. And it seems to me that what we are throwing
out is that notion that some folks have put forth—again, I am just
observing—of creating some mechanism for these banks to actually
be healthy now that is not going to happen, that in essence this
good bank/bad bank scenario where someone actually proposed for
the four largest banks they just create their own, where in essence
the assets are separated from these institutions and people might
actually invest in them. That idea is definitely not one of pursuit
today.
Mr. BERNANKE. Senator, let me be clear. If there is a private sector solution, including private capital raised, that is great
Senator CORKER. NO, no, no, no.
Mr. BERNANKE. That is great.
Senator CORKER. This will be a public—I mean, the public sector
would have to be involved, it seems, in helping create a good bank/
bad bank, where they are separated. But the point is you are making a statement today that things of that nature, where we are actually going to try to separate these bad assets in that mechanism
and actually calls people to invest in the good side of the bank, that
thought process is not the pursuit of today.
Mr. BERNANKE. Senator, I don't want to speak for the Treasury
about what might happen in terms of individual cases, but there
is one issue with that bad bank that you are describing, which is
that it is very difficult to value the assets that you put into the bad
bank. One of the advantages of the private-public partnership
asset purchase program is that we would hope to get market-based
55
prices so the taxpayer wouldn't be overpaying for the assets which
are, one way or another, made the responsibility of the government.
Senator CORKER. And I will stop. I know you have been very generous with the time, Mr. Chairman
Chairman DODD. Let me ask this, if I can
Senator CORKER. Let me just follow up with this last—I am stopping with this. It seems to me that all of us have talked about the
need for the credit markets to function, and you have stated that
on the front end and all the way through, and I know Chairman
Dodd and Ranking Member Shelby have said the same thing. I see
no event, based on what you just said, I see no event that changes
the mix in any way to really cause that to occur. I mean, what I
see is this sort of continuation of this sort of dead man walking,
zombie bank, whatever you want, just sort of this going on for a
period of time and there is nothing, no jolt of any kind that offers
any kind of different scenario with our major institutions as I listen to what you are saying.
Mr. BERNANKE. I must not be very clear. I apologize. First of all,
I think "zombie" was not an appropriate description for any of the
banks. I think they all have substantial franchise value. They are
all lending. They are all active. They have substantial international
franchises. So I don't think that is an accurate description.
But the point I want to make is that even as we put capital into
these banks, we are not standing by and letting them do what they
want, to take risks or to continue to operate in an inefficient manner. We are going to be very tough on them to make sure, along
with the private shareholders who still have an interest, that they
take whatever drastic steps are necessary to restore themselves to
profitability, and that is what is going to make them eventually interesting to private investors.
Chairman DODD. You know, I just want to—in picking up on the
point, first of all—and this is, I think, a very important exchange
because it is a critical question. The announcement of the stress
itself has, I think, created stress in a sense in terms of how the
private sector looks at the institutions, in terms of their willingness
to provide the additional private capital, which is critical—ultimately what we are seeking here. So you might address that question.
And the public-private partnership idea is one that I think has
some value, because if we are only talking about people coming and
investing in entities that have Government guarantees to them one
way or the other, whether it is treasuries or commercial paper,
whatever the laundry list is of investments you can make and you
are making them because there is a Government guarantee. Then
it seems to me we are missing what ultimately needs to be done,
and that is, getting capital to invest in those riskier investments
that do not have the guarantees. Ultimately, that is the answer.
And so the question is: How do we get closer to that model that
attracts that private investment in the non-Government guaranteed instruments that are out there?
There are some ideas kicking around about creating a fund in a
sense in the public-private partnership idea that would take qualified investors from hedge funds and money markets and others to
56
begin to use their capital and public capital as a way of creating
markets—a buyer and a seller. I mean, what we are missing here
is the buyer and the seller. That is what creates a market. You do
not create a market by Government action or Government regulation. You create a market when you have a buyer and a seller
showing up and they decide to engage in a negotiation over the
purchase of an instrument. And until that moment begins to happen, obviously we are buying the time to get to that point and trying to urge this along.
My colleague from Tennessee, who I have great admiration for
and have immensely enjoyed my working relationship with, raises
a very, very important question. I think we agree on where we are
trying to get to, and I think you very cautiously raise the issues
of which path are we sort of following here. What I hear you saying
is, one, to try and make sure we have institutions around where
we can actually perform, and simultaneously then create the opportunities through these public-private partnerships that have been
suggested by some as a way of inducing that private capital to
come in and that buyer and that seller to show up. And when the
buyer and the seller show up, they start creating the markets, and
these assets, then we can determine their value, these toxic assets,
and credit begins to flow. And that to me is the heart of it all on
how we get there.
Anyone who suggests that one path or the other guarantees us
an outcome, but in the absence of providing the institutional framework by which you then can move seems to be a dangerous one if
we do not be careful.
So I do not know if you want to comment on that at all or not,
but I would give you a chance to respond to that.
Mr. BERNANKE. NO, I think that is well put. I think we want to
get as much certainty about the policy going forward so people understand the rules. There have been complaints about that, and it
is well justified. We want to do what we can to both get the banks
back on a profitable path, to get the bad assets off their books, and
to make them attractive again. And I think you are absolutely
right that that is the end game, when private money will start
coming back in. And I am sure it will happen. The sooner, the better.
Chairman DODD. Let me ask you just one question I wanted to
raise. And I appreciate, by the way, your point on the TARP, and
I thank my colleague from Tennessee. He was critically helpful in
that critical moment, those 14 days of trying to put something together that made some sense, and your point that had we not
acted, we would be having a very different conversation in this
room today, I think is what you are telling us. And we would be
talking about not whether or not these institutions are going to be
around. They would be gone, many of them. Is that correct?
Mr. BERNANKE. Yes.
Chairman DODD. Yes.
The role of the Community Reinvestment
Act, this item keeps on popping back up again. We had some
lengthy debates in this Committee, as I was a junior Member of it
when we went through with it. My good friend Phil Gramm of
Texas was the Chair, and Phil and I did a lot of work together on
a number of issues. But Phil the other day wrote another piece
57
about the CRA is a fundamental issue, and yet I see in a February
12 study by the boss in the San Francisco Fed cited evidence showing that 60 percent of the higher-priced loans in that period of time
we are talking about went to middle- and higher-income borrowers
or neighborhoods not covered by the Community Reinvestment Act,
that loans originated by the CRA-covered lenders were significantly
less likely to be in foreclosure than those originated by lenders not
covered by the CRA.
An October 14 study from the University of North Carolina and
the Center for Community Capital showed that home loan borrowers with similar risk characteristics defaulted at much higher
rates when they borrowed subprime mortgages than when they received community reinvestment loans.
Do you agree with that?
Mr. BERNANKE. Yes, that is what the Fed research shows. I think
the number is that only 6 percent of the subprime delinquencies
were based on mortgages made by CRA-covered institutions into
CRA neighborhoods.
Chairman DODD. Yes.
Mr. BERNANKE. SO, we know that mortgage brokers and others
were very much involved in making those loans, and they are not
covered by CRA.
Chairman DODD. But the underwriting standards in institutions
dealing with community reinvestment are very tough. Do you agree
with that? Well, not tough
Mr. BERNANKE. I would not want to make a complete blanket
statement, but certainly the banks which are more directly regulated, and Federal regulators, did a better job on average of underwriting mortgages than did the non-federally regulated lenders.
Chairman DODD. My colleague Senator Shelby has some comments.
Senator SHELBY. Mr. Chairman, a lot of people believe—and you
have seen a lot of the writings—that the Fed and Treasury and
others basically have exacerbated, compounded the problem for the
banks by propping them up. In other words, I am going to back to
the market. The market obviously believes that some of those
banks—not all—maybe are insolvent, you know, have been insolvent basically by standard accounting stuff.
Wouldn't we be better off to close some of those banks rather
than continue to prop them up and let the American people continue to believe—no confidence in them? In other words, they are
not buying stock. They are not investing in the private banks because they do not trust them, you know, because they do not know
what is in those portfolios. And when the Government, which is the
Fed and others, get involved in that—I know you are the lender of
last resort, and you are also a bank regulator. I understand all
that. But aren't you sending a message out, like Senator Corker—
that we are going to keep these banks open no matter what? How
are you ever going to track private capital? And there is a lot of
private capital, as you know, Mr. Chairman, on the sidelines now
looking for an investment. But they are not investing in the banks
because they do not trust the banks.
Mr. BERNANKE. The first step, Senator Shelby, I think is to get
the clarity. Get the clarity.
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Senator SHELBY. Transparency?
Mr. BERNANKE. Transparency. And there are two parts of this
program that are going to do that. The first is the assessment that
we are undertaking, and the second is what happens after the
asset purchase program goes into place and takes assets off their
balance sheets.
But, you know, Senator, we are following the law. The law has
a very explicit set of rules under which we can go in and shut down
a bank.
Senator SHELBY. We know that.
Mr. BERNANKE. We cannot just go shut down a bank that is well
capitalized or meets capital standards.
Senator SHELBY. YOU should not ever do that. But we are talking
about the banks that are insolvent or have no pulse, so to speak.
Mr. BERNANKE. I think there are a couple of issues, practical
issues, that people need to pay attention to. One is just the great
technical difficulty of shutting down an enormous holding company
with many components, an international presence.
Senator SHELBY. We understand that.
Mr. BERNANKE. And the implications that would have for market
function and market confidence. I think that would be enormous.
And we saw some of that with Lehman Brothers, frankly.
The other is I think
Senator SHELBY. We have seen some of that with AIG, haven't
we?
Mr. BERNANKE. And with AIG. If I thought the banks were, you
know, irrevocably damaged, I would have a different view. But I do
believe that our major banks have significant franchise values. And
one of the things that we have learned is that when the Government takes over a company, one of the things that happens immediately is that the counterparties start pulling away the franchise
value, the brand name starts to erode very quickly.
And so I think, if through our regulatory process we can get the
banks to perform better and to improve, then the time may come
when, if they do not succeed in doing that, it will be appropriate
to shut them down and so on. But for the moment, I think the right
strategy is transparency, find out what we can about their true status, and to try to find the minimally disruptive way to get them
into an improved condition. And I think those things are feasible
right now.
Now, we certainly, as I said to Senator Corker, there is no commitment by any means to never shut down a big bank. Absolutely
not. But I do believe that the major banks we have now can be stabilized, and in the near term, it is important to do so.
Senator SHELBY. Are we going down the road that Japan went
down in a sense? Some people say we are. Some say we are not.
In other words, they never confronted their banking problems in
the 1990s. Have they
Mr. BERNANKE. We have been very
Senator SHELBY. Sir?
Mr. BERNANKE. I am sorry.
Senator SHELBY. Are we going down the same road in a sense?
Mr. BERNANKE. NO, Senator. We
Senator SHELBY. Propping up banks that are dead, so to speak?
59
Mr. BERNANKE. NO, Senator. As I said, we are going to transparency. We want to find out what their true positions really are,
and if we, the regulators, the Treasury, were to determine that a
bank were really not viable, that would be a different question. But
right now the view is that these assessments will determine how
much capital they need to continue to lend and support the economy.
Senator SHELBY. Last, how do you get the market to believe that
what you are doing is the right thing? Obviously, most of them do
not. Most of the participants in the market that are keen observers
do not believe in what you are doing with the banks, because look
at the bank stocks.
Mr. BERNANKE. Well, there are a lot of factors affecting bank
stocks, including uncertainty about what the Government might
do.
Senator SHELBY. Sure.
Mr. BERNANKE. SO I am not sure you can make that judgment.
I think we have to go forward. We have to try to ascertain the state
of the banks. We have to see what the situation really is. But my
belief is that what we will come out with is capital that will allow
these banks to continue and to provide the credit that we need and
do so in a way that is not as disruptive to the markets as would
be the alternative at this point.
Senator SHELBY. Thank you.
Chairman DODD. The last point I would make I think is very important. I think obviously the markets are skittish, and obviously
there is a lot going on. And clarity is very important, the transparency you are talking about. I think the more people—Bob mentioned this earlier, and I wish I had said it myself at the outset.
So much of what is missing is getting that sense of the framework,
where are we. I think people understand how we got here. We can
talk about that. But where are we? What needs to be done to get
us moving in the right direction? And I think to the extent people
understand that—they may not like it, but they understand it—
then you do not get these kind of high volatility and jerking around
that we see so often where one statement from one individual can
have a significant impact on a market fluctuation. I think that is
in a sense what happens when there is this lack of certainty or
clarity, to the extent you can have certainty, obviously, in an environment like this.
I think these closing comments, while they have not involved a
lot of people here, I think they have been tremendously valuable
and important, and your responses to Senator Shelby I think have
been very helpful as well on all of that. And I do think sometimes
we—the markets are very important, obviously. We watch them
every day. But I think too many times we look at only that every
day as an indication of where things are going. And it is an important indication, but it is not the only indication of what is happening. And I think that is the point you were trying to make, and
I welcome that.
We thank you very, very much
Senator CORKER. Mr. Chairman, could I—this is not getting into
an ideology discussion. The statement was made earlier that the
Federal Reserve does not have the authority to close down a large
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institution. I think the Chairman may have been referring to AIG.
I am not sure. But I am wondering if it would be good for him to
clarify, and then since this Committee, I guess, would have something to do with that, if there is something that he is asking for,
because what I would hate to happen is 2 years from now we end
up in a situation, if it is AIG—he might have been talking about
Citigroup. I do not know who he is talking about. I would love the
clarification. But I would hate for us to wake up 2 years from now
and the Fed be saying, well, we would have done it, but we did not
have the authority to do it. And I am just wondering if he might
clarify since that is an important
Mr. BERNANKE. Senator, thank you. I have talked about this on
a number of occasions. I think what is missing is a comprehensive
resolution authority, a set of rules and guidelines which explains
how the Government in general would address the potential failure
of a systemically critical firm, like AIG, for instance.
Senator CORKER. SO it could be Citigroup. It could be any firm.
Mr. BERNANKE. Right. The existing rules do not cover a Citigroup
because that is a bank holding company with lots of different components. So we do not have a good framework for dealing with systemically critical firms. At the Fed we are working on some proposals. We would be happy to share them with you at some point.
But I do think that that is the first step. Until it is safe to close
down a big firm, you are going to be forced to take actions to avoid
it. And as I said, I would be very happy to get rid of the 5 percent
of my balance sheet which is tied up in these kinds of extraordinary rescue efforts.
So it is critical that we have a good resolution regime, and we
are working hard on it and would be happy to share with you, Senator Corker
Senator CORKER. SO you are not asking—you are not going to
come back in a year and say, well, we would have closed down X
or AIG, but we do not have that authority, we are working toward
that end?
Mr. BERNANKE. I am hoping this will be part of the broad reform
package that is going forward.
Chairman DODD. And I think you made that clear in the past.
The Lehman Brothers issue, I know there has been a highly controversial question, obviously. But there was a classic, where allowing that to default was certainly—that was within the authority.
Mr. BERNANKE. Well, we had no way to address it otherwise.
Chairman DODD. Yes. So there is, I think—it is a good question,
but I think it has been answered by actions already that have occurred, as well as the statements you have made today.
Well, Mr. Chairman, it has been a long 4 hours, and I know you
have got Budget Committee hearings later this week, so we hope
this has been helpful in preparation for those hearings.
I would like as well at some point—stabilizing the financial system is obviously the critical question, and I think the Committee
might be interested in the Fed's suggestions in terms of prioritizing
the kinds of steps that we should be taking in this Committee. I
would be very interested in your observations and those of your
staff as to what sort of batting order you would like to see this
Committee of jurisdiction over the financial institutions of the
61
country to bring up and what are the most important issues we
ought to address more quickly, and some will require probably
some longer thought. And I privately have chatted with the Chairman about tapping into the expertise of the Federal Reserve System to talk about the modernization issues that many—or I think
every Member of this Committee has an interest in, and how we
proceed along those lines.
So we would like to call on the Federal Reserve's fine staff to get
some sense of what you think we ought to be doing in what order
as to how we ought to proceed. It would be helpful.
This has been very helpful, a good hearing. Thank you for being
here.
[Whereupon, at 1:20 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and additional material supplied for the record follow:]
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PREPARED STATEMENT OF SENATOR TIM JOHNSON
Thank you, Chairman Bernanke for being here today. It is no exaggeration to say
that our economy is currently undergoing a period of extraordinary stress and volatility. Unfortunately, I suspect we are not yet at the end of the road in terms the
financial difficulties plaguing Americans.
I applaud the Federal Reserve for continuing to use its tools to lessen the impact
of the recession, to decrease the volatility in the markets, and to unfreeze credit
markets, but I have concerns that as the Federal Reserve expands its balance sheets
and interest rates remain near zero, that the Fed will have fewer options and less
flexibility than it has had over the past year. I am also concerned that some of these
actions may perpetuate the idea that the government is in the business of propping
up insolvent ventures when they go bad.
I am deeply interested in the Fed's economic forecast for 2009, and I look forward
to hearing how the Fed will continue to address the problems plaguing our economy.
The crisis in our economy is real, and there is no question that more must be done
to address the situation. I am committed to our Nation's economic recovery and to
ensuring the safety and soundness of the financial sector without placing unnecessary burdens on the taxpayer. As this Committee works to address the crisis in our
economy, we will continue to look to your expertise.
PREPARED STATEMENT OF BEN S. BERNANKE
CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FEBRUARY 24, 2009
Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate the
opportunity to discuss monetary policy and the economic situation and to present
the Federal Reserve's Monetary Policy Report to the Congress.
Recent Economic and Financial Developments and the Policy Responses
As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved
up to 7.6 percent. The deteriorating job market, considerable losses of equity and
housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit.
In contrast to the first half of last year, when robust foreign demand for U.S. goods
and services provided some offset to weakness in domestic spending, exports
slumped in the second half as our major trading partners fell into recession and
some measures of global growth turned negative for the first time in more than 25
years. In all, U.S. real gross domestic product (GDP) declined slightly in the third
quarter of 2008, and that decline steepened considerably in the fourth quarter. The
sharp contraction in economic activity appears to have continued into the first quarter of 2009.
The substantial declines in the prices of energy and other commodities last year
and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures. Indeed, overall consumer price inflation measured on
a 12-month basis was close to zero last month. Core inflation, which excludes the
direct effects of food and energy prices, also has declined significantly.
The principal cause of the economic slowdown was the collapse of the global credit
boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the
U.S. subprime mortgage market. Conditions in housing and mortgage markets have
proved a serious drag on the broader economy both directly, through their impact
on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue
to be very weak, house prices continue to fall, and foreclosure starts remain at very
high levels.
The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship,
and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several
other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances. Losses at a prominent money
63
market mutual fund prompted investors, who had traditionally considered money
market mutual funds to be virtually risk-free, to withdraw large amounts from such
funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases
in bank borrowing costs and a tightening of credit availability from banks.
Recognizing the critical importance of the provision of credit to businesses and
households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore
up their capital bases. During this period, the Federal Deposit Insurance Corporation (FDIC) introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury—in concert
with the Federal Reserve and the FDIC—provided packages of loans and guarantees
to ensure the continued stability of Citigroup and Bank of America, two of the
world's largest banks. Over this period, governments in many foreign countries also
announced plans to stabilize their financial institutions, including through largescale capital injections, expansions of deposit insurance, and guarantees of some
forms of bank debt.
Faced with the significant deterioration in financial market conditions and a substantial worsening of the economic outlook, the Federal Open Market Committee
(FOMC) continued to ease monetary policy aggressively in the final months of 2008,
including a rate cut coordinated with five other major central banks. In December
the FOMC brought its target for the federal funds rate to a historically low range
of 0 to Vi percent, where it remains today. The FOMC anticipates that economic
conditions are likely to warrant exceptionally low levels of the Federal funds rate
for some time.
With the Federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgagebacked securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point. The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to heightened
stress in bank funding markets, we increased the size of the Term Auction Facility
to help ensure that banks could obtain the funds they need to provide credit to their
customers, and we expanded our network of swap lines with foreign central banks
to ease conditions in interconnected dollar funding markets at home and abroad. We
also established new lending facilities to support the functioning of the commercial
paper market and to ease pressures on money market mutual funds. In an effort
to restart securitization markets to support the extension of credit to consumers and
small businesses, we joined with the Treasury to announce the Term Asset-Backed
Securities Loan Facility (TALF). The TALF is expected to begin extending loans
soon.
The measures taken by the Federal Reserve, other U.S. Government entities, and
foreign governments since September have helped to restore a degree of stability to
some financial markets. In particular, strains in short-term funding markets have
eased notably since the fall, and London interbank offered rates (Libor)—upon
which borrowing costs for many households and businesses are based—have decreased sharply. Conditions in the commercial paper market also have improved,
even for lower-rated borrowers, and the sharp outflows from money market mutual
funds seen in September have been replaced by modest inflows. Corporate risk
spreads have declined somewhat from extraordinarily high levels, although these
spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has
been strong, and speculative-grade issuance, which was near zero in the fourth
quarter, has picked up somewhat. As I mentioned earlier, conforming fixed mortgage rates for households have declined. Nevertheless, despite these favorable developments, significant stresses persist in many markets. Notably, most securitization
markets remain shut, other than that for conforming mortgages, and some financial
institutions remain under pressure.
In light of ongoing concerns over the health of financial institutions, the Secretary
of the Treasury recently announced a plan for further actions. This plan includes
four principal elements: First, a new capital assistance program will be established
to ensure that banks have adequate buffers of high-quality capital, based on the re-
64
suits of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public—private investment fund in which
private capital will be leveraged with public funds to purchase legacy assets from
financial institutions. Third, the Federal Reserve, using capital provided by the
Treasury, plans to expand the size and scope of the TALF to include securities
backed by commercial real estate loans and potentially other types of asset-backed
securities as well. Fourth, the plan includes a range of measures to help prevent
unnecessary foreclosures. Together, over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to
restore the flow of credit needed to promote economic recovery.
Federal Reserve Transparency
The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet. For example, we continue to
add to the information shown in the Fed's H.4.1 statistical release, which provides
weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve's lending facilities. Extensive additional information
about each of the
Federal Reserve's lending programs is available online. xThe Fed also provides bimonthly reports to the Congress on each of its programs that rely on the section
13(3) authorities. Generally, our disclosure policies reflect the current best practices
of major central banks around the world. In addition, the Federal Reserve's internal
controls and management practices are closely monitored by an independent inspector general, outside private-sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office.
All that said, we recognize that recent developments have led to a substantial increase in the public's interest in the Fed's programs and balance sheet. For this reason, we at the Fed have begun a thorough review of our disclosure policies and the
effectiveness of our communication. Today I would like to highlight two initiatives.
First, to improve public access to information concerning Fed policies and programs, we recently unveiled a new section of our Web site that brings together in
a systematic and comprehensive way the full range of information that the Federal
Reserve already
makes available, supplemented by explanations, discussions, and
analyses. 2 We will use that Web site as one means of keeping the public and the
Congress fully informed about Fed programs.
Second, at my request, Board Vice Chairman Donald Kohn is leading a committee
that will review our current publications and disclosure policies relating to the Fed's
balance sheet and lending policies. The presumption of the committee will be that
the public has a right to know, and that the nondisclosure of information must be
affirmatively justified by clearly articulated criteria for confidentiality, based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy.
The Economic Outlook and the FOMC's Quarterly Projections
In their economic projections for the January FOMC meeting, monetary policy
makers substantially marked down their forecasts for real GDP this year relative
to the forecasts they had prepared in October. The central tendency of their most
recent projections for real GDP implies a decline of Vz percent to IVi percent over
the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption
of growth in the second half. The central tendency for the unemployment rate in
the fourth quarter of 2009 was marked up to a range of 8V2 percent to 8% percent.
Federal Reserve policymakers continued to expect moderate expansion next year,
with a central tendency of 2V2 percent to 3Vi percent growth in real GDP and a
decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8Vt percent. FOMC participants marked down their projections for overall
inflation in 2009 to a central tendency of Vi percent to 1 percent, reflecting expected
weakness in commodity prices and the disinflationary effects of significant economic
slack. The projections for core inflation also were marked down, to a central tendency bracketing 1 percent. Both overall and core inflation are expected to remain
low over the next 2 years.
1
For links and references, see Ben S. Bernanke (2009), "Federal Reserve Programs to
Strengthen Credit Markets and the Economy," testimony before the Committee on Financial
Services, U.S. House of Representatives, February 10, http:11 www.federalreserve.gov I
newsevents
/ testimony / bernanke20090210a.htm
2
The Web site is located at http:/ Iwww.federalreserve.gov ImonetarypolicyI bst.htm
65
This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One
risk arises from the global nature of the slowdown, which could adversely affect U.S.
exports and financial conditions to an even greater degree than currently expected.
Another risk derives from the destructive power of the so-called adverse feedback
loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets. If actions taken by the Administration, the Congress,
and the Federal Reserve are successful in restoring some measure of financial stability—and only if that is the case, in my view—there is a reasonable prospect that
the current recession will end in 2009 and that 2010 will be a year of recovery. If
financial conditions improve, the economy will be increasingly supported by fiscal
and monetary stimulus, the salutary effects of the steep decline in energy prices
since last summer, and the better alignment of business inventories and final sales,
as well as the increased availability of credit.
To further increase the information conveyed by the quarterly projections, FOMC
participants agreed in January to begin publishing their estimates of the values to
which they expect key economic variables to converge over the longer run (say, at
a horizon of 5 or 6 years), under the assumption of appropriate monetary policy and
in the absence of new shocks to the economy. The central tendency for the participants' estimates of the longer-run growth rate of real GDP is 2V2 percent to 2% percent; the central tendency for the longer-run rate of unemployment is 4% percent
to 5 percent; and the central tendency for the longer-run rate of inflation is 1% percent to 2 percent, with the majority of participants looking for 2 percent inflation
in the long run. These values are all notably different from the central tendencies
of the projections for 2010 and 2011, reflecting the view of policymakers that a full
recovery of the economy from the current recession is likely to take more than 2
or 3 years.
The longer-run projections for output growth and unemployment may be interpreted as the Committee's estimates of the rate of growth of output and the unemployment rate that are sustainable in the long run in the United States, taking into
account important influences such as the trend growth rates of productivity and the
labor force, improvements in worker education and skills, the efficiency of the labor
market at matching workers and jobs, government policies affecting technological
development or the labor market, and other factors. The longer-run projections of
inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress—
that is, the rate of inflation that promotes maximum sustainable employment while
also delivering reasonable price stability. This further extension of the quarterly
projections should provide the public a clearer picture of the FOMC's policy strategy
for promoting maximum employment and price stability over time. Also, increased
clarity about the FOMC's views regarding longer-run inflation should help to better
stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.
At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of
these developments, the Federal Reserve is committed to using all available tools
to stimulate economic activity and to improve financial market functioning. Toward
that end, we have reduced the target for the Federal funds rate close to zero and
we have established a number of programs to increase the flow of credit to key sectors of the economy. We believe that these actions, combined with the broad range
of other fiscal and financial measures being put in place, will contribute to a gradual
resumption of economic growth and improvement in labor market conditions in a
context of low inflation. We will continue to work closely with the Congress and the
Administration to explore means of fulfilling our mission of promoting maximum
employment and price stability.
66
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM BEN S. BERNANKE
Q.I. The Federal Reserve announced the creation of a $200 billion
Term Asset-Backed Securities Loan Facility in November 2008.
Just 2 weeks ago, the Federal Reserve in conjunction with the
Treasury Department, announced the expansion of the program to
up to $1 trillion and the possible expansion of eligible collateral.
Given that we have not yet seen the first part of the program be
an operational success, why did the Federal Reserve feel that it
was necessary to announce an expansion of both volume and scope?
Why should we be convinced that this program is the most effective mechanism to unthaw securitization markets? Do we have a
true understanding of why investors have pulled away to the degree they have? And if we don't know the reason, then how can we
expect to design an appropriate remedy?
A.1. The Term Asset-Backed Securities Loan Facility (TALF) was
initially announced on November 25, 2008. In its initial stage, eligible collateral for TALF loans included AAA-rated newly issued
asset-backed securities (ABS) backed by student loans, auto loans,
credit card loans, and Small Business Administration (SBA) guaranteed loan.
The first TALF operation took place on March 17, 2009. The 4
months between announcement and operation reflected in part the
time necessary to design the operational infrastructure of the program, but during that period the Federal Reserve also consulted
with investors, issuers, and rating agencies about the asset classes
included as eligible collateral as we developed the specific terms
and conditions for the program.
The initial set of eligible collateral was chosen with a view toward increasing the availability of credit to small businesses and
households. The initial $200 billion ceiling for the program reflected our estimate of the likely activity with the approved collateral list over the announced period of operation—through December 31, 2009.
The dysfunction in the asset-backed securities markets has had
adverse effects on credit markets other than those for consumer
and small business credit. For example, secondary markets for securities backed by commercial and nonconforming residential mortgages have been experiencing severe strain, and the availability of
other certain types of business credit that has often been
securitized in the past has diminished greatly. The announced expansion of the program is intended to facilitate issuance of securities backed by loans to those other sectors. We recognized that in
order to accommodate the potential lending against the broader set
of collateral, an increase in the overall size of the facility could be
necessary.
The announcement of the expansion preceded the first initial operation because of the urgency of encouraging lending to these
other sectors. Our announcement that consideration was being
given to expanding the facility likely provided some additional support, at the margin, for the residential and commercial mortgagebacked securities markets. Also, given the considerable lead time
that it takes to develop terms and conditions for each asset class
that both encourage ABS issuance and protect the taxpayer, it was
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important to announce the possible expansions as quickly as possible.
The abrupt decline in new issuance of ABS reflected in large part
two developments. First, the availability of leverage to ABS investors has contracted significantly because of the balance-sheet constraints now being faced by many major banking firms. Second,
many traditional investors in AAA tranches of ABS have exited the
market because of concern about the possibility of a severe recession and a sharp rise in defaults on loans to business and households. The TALF provides leverage to encourage new investors to
purchase ABS. In addition, because the loans are provided on a
non-recourse basis, the facility limits the potential losses of the investors to the amount by which the value of the ABS financed by
the TALF loan exceeded the loan amount (the haircut). Although
those haircuts have been chosen to reduce to only negligible levels
the odds that the government will incur a loss on the facility overall, the program provides a degree of downside protection for investors on each asset financed.
Q.2. According to information already released, the Term AssetBacked Securities Lending Facility (TALF) will only accept newly
originated assets and would require the credit rating agencies to
rate the underlying securities. This system seems to attempt to
mirror the general structure of the securitization market. There is
concern, however, that the same credit rating agencies who were
responsible for placing a "AAA" rating on now toxic structured
products will be relied on once again to rate these securities.
What steps is the Federal Reserve taking to ensure that underlying assets are appropriately underwritten?
Is the Fed prepared to dictate the terms to ensure that these
loans, at minimum, comply with federal underwriting guidelines?
A.2. The Federal Reserve has discussed with the rating agencies
the methodologies that they follow to rate the ABS accepted as collateral at the program. In general, rating agencies have taken
steps that have led to tighter underwriting standards and stricter
ratings criteria. In addition, the Federal Reserve requires that each
ABS issuer hire an external auditor that must provide an opinion,
using examination standards, that management's assertions concerning key collateral eligibility requirements are fairly stated in
all material respect.
TALF investors also serve an important ongoing role in price discovery and assessing risk through their ability to demand greater
credit enhancements or price concessions. In particular, the sale of
securities through TALF in an arms-length transaction is an independent check not only on the underwriting practices of the issuer,
but also of the efficacy of rating agency methodologies.
There are no Federal underwriting standards for the loans backing the collateral accepted at the TALF. The TALF does not currently accept collateral backed by home mortgages. If residential
mortgage-backed securities were to become eligible collateral for
the TALF, we would require that the loans backing the securities
comply with Federal underwriting standards.
Q.3. Your testimony notes that the United States has no well-specified set of rules for dealing with the potential failure of a system-
68
ically critical non-depository financial institution. I would agree
that we need to address the too-big-to-fail issue, both for banks and
other financial institutions. You have suggested the need for a resolution regime that allows the government to have a pre-defined
process for resolving a non-bank financial firm that is systemically
critical.
Are you suggesting that non-bank financial firms must be dealt
with in a manner other than changes to the bankruptcy process;
that is, do we have to go to a receiver-like approach similar to
FDIC?
If so, how do we deal with the moral hazard implications?
If not, what are other tools we could look at to address the current lack of resolution regime?
A.3. Although the Bankruptcy Code works well in the vast majority
of situations, it is not designed to mitigate systemic consequences
and, in some cases, the bankruptcy process may exacerbate the
shocks to the financial system that may result from the failure of
a systemically important nonbank financial institution. For example, the delays in the bankruptcy process that are designed to give
the debtor "breathing room" to develop and propose a reorganization plan can be especially harmful to financial firms because uncertainty with respect to any large financial firm can have negative
consequences for financial markets which are compounded as the
uncertainty persists. In addition, the bankruptcy process does not
currently provide a clear mechanism for the government to ensure
that the institution is resolved in a way that achieves financial
market stability and limits costs to taxpayers. Congress has in the
past established alternative resolution regimes outside of the Bankruptcy Code for financial institutions where the public has a strong
interest in managing and ensuring an orderly resolution process,
such as in the Federal Deposit Insurance Act for insured depository
institutions and in the Housing and Economic Recovery Act for government-sponsored enterprises. As I have indicated, these frameworks can serve as a useful model for developing a framework for
the resolution of systemically important nonbank financial institutions.
The issue of moral hazard is an extremely important consideration in developing any such regime for resolving systemically important nonbank financial institutions. Any proposed regime must
carefully balance the need for swift and comprehensive government
action to avoid systemic risk against the need to avoid creating
moral hazard on the part of the large institutions that would be
subject to the regime. A proposed regime could require a very high
standard for invoking the resolution authority, because of the potential cost and to mitigate moral hazard. The process to invoke
the authority could also include appropriate checks and balances,
including input from multiple parts of the government, to ensure
that it is invoked only when necessary while still maintaining the
ability to act swiftly when needed to minimize systemic risk. The
systemic risk exception to the least-cost resolution requirements of
the Federal Deposit Insurance Act could provide a good example of
the embodiment of such a process in existing law. Importantly, the
establishment of a new resolution process for systemically important nonbank financial institutions may help reduce moral hazard
69
by providing the government with the tools needed to resolve even
the largest financial institutions in a way that both addresses systemic risks and allows the government to impose haircuts on creditors in appropriate circumstances. While a new framework for systemically important nonbank financial institutions is a critical component of any agenda to address systemic risk and the too-big-tofail problem, other steps also need to be taken to address these
issues. These include ensuring that all systemically important
nonbank financial institutions are subject to a robust framework
for consolidated supervision; strengthening the financial infrastructure; and providing the Federal Reserve explicit authority to oversee systemically important payment, clearing and settlement systems for prudential purposes.
Q.4. The Obama administration, along with several of my colleagues here in the Senate, have proposed allowing bankruptcy
judges to cramdown the value of mortgages to reflect declines in
home prices. The Federal Reserve, primarily through its purchases
of GSE MBS, is becoming one of the largest holders of residential
MBS.
Has the Federal Reserve estimated the size of potential losses to
the Fed's MBS holdings, if judges were allowed to cramdown mortgages?
What signal do you believe this sends to potential investors in
MBS, were Congress to re-write the contractual environment underlying these mortgages?
A.4. As noted by your question, the vast majority of mortgagebacked securities (MBS) held by the Federal Reserve are agency
MBS. The payment of principal and interest on agency MBS is
guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. Bankruptcy cram downs do not affect investors in MBS guaranteed by
Fannie Mae, Freddie Mac, or Ginnie Mae because the agency MBS
investors would be made whole by the government-sponsored enterprises. Thus, the Federal Reserve holdings of agency MBS would
not be affected by bankruptcy cramdowns for mortgages, although
such legislation might have negative consequences for Fannie Mae,
Freddie Mac, and the Federal Housing Administration (FHA). (The
FHA insures the mortgages securitized by Ginnie Mae.)
Private-label MBS are governed by trust agreements. Some private-label MBS contain so-called "bankruptcy carve-out" provisions
requiring that losses stemming from bankruptcies be shared across
the different tranches of the securities. The implication is that the
investors holding the AAA-rated tranches would bear some of the
losses from these principal write-downs, depending on the nature
of the trusts agreements. The Federal Reserve has made loans to
support its Maiden Lane Facilities, which were used to offset the
systemic risks associated with recent financial market disruptions.
Among the collateral for these loans are AAA-rated tranches of private-label securities, as well as some collateralized debt obligations
(CDOs) that are backed by AAA-rated tranches of private-label securities. At present, our assessment is that the possible loss associated with these MBS holdings from possible bankruptcy cramdown
legislation is relatively small.
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With respect to current mortgage borrowers, providing bankruptcy judges with the ability to adjust mortgage terms and reduce
outstanding principal could potentially result in more sustainable
mortgage obligations for some borrowers and thus help reduce preventable foreclosures. Such an approach has several advantages. In
particular, because of the costs and stigma of filing for bankruptcy,
mortgage borrowers who do not need help may be unlikely to turn
to the bankruptcy system for relief. In addition, bankruptcy judges
may also be able to assess the extent to which a borrower truly
needs assistance. Moreover, because the bankruptcy system is already in place, this approach could be implemented with little financial outlay from the taxpayer.
Whether mortgage cramdowns are advantageous in the long-run
is less clear. Such cramdowns could potentially restrict access to
mortgage credit for some borrowers, and might have implications
for investors in other types of loans because of the change in the
loan's relative status during the course of bankruptcy. Potential investors, either in private-label MBS investors or in other types of
loans, might view these changes in the bankruptcy code as raising
the costs associated with servicing defaulted borrowers in the future if investors perceived such changes as permanent and broadranging, or if these changes altered investors' expectations about
the government's willingness to make similar changes in the future. In this case, mortgage cramdowns might have longer-lasting
effects on credit availability, and possibly impose higher costs on
future borrowers through higher interest rates and more stringent
lending standards.
Q.5. In a recent speech, you stated that the Fed's new longer-term
projections of inflation should be interpreted as the rate of inflation
that FOMC participants believe will promote maximum sustainable
employment and reasonable price stability. Some commentators
have said that central banks using a long-term inflation target
should incorporate the adverse consequences of asset-price bubbles
in their deliberations.
Does the FOMC presently incorporate the possibility of asset
price bubbles during deliberations on the inflation target?
Did the FOMC include asset price bubbles in past deliberations?
A.5. Conditions in financial markets, including the possibility that
asset prices exceed fundamental values, are always discussed at
FOMC meetings. High asset values tend to put upward pressure on
economic activity and the broader price level. In order to achieve
its mandated objectives, the FOMC may need to tighten policy
when this pressure threatens to push inflation above desired levels.
However, it is exceedingly difficult to judge in real time whether
asset prices are deviating from their fundamental values. Indeed,
if such a judgment were easy, bubbles would never happen. However, regardless of whether a bubble exists or not, the FOMC does
factor in the effects of asset prices on the economy when it sets
monetary policy. Generally speaking, this means that interest rates
tend to rise when asset prices are increasing to offset the inflationary impact of high asset prices and that interest rates tend to
fall after bubbles burst to offset the contractionary effects of falling
asset prices on employment.
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Q.6. I have some concerns about the pro-cyclicality of our present
system of accounting and bank capital regulation. Some commentators have endorsed a concept requiring banks to hold more capital
when good conditions prevail, and then allow banks to temporarily
hold less capital in order to not restrict access to credit during a
downturn. Advocates of this system believe that counter cyclical
policies could reduce imbalances within financial markets and
smooth the credit cycle itself.
What do you see as the costs and benefits of adopting a more
counter cyclical system of regulation?
Do you see any circumstances under which the Federal Reserve
would take a position on the merits of counter cyclical regulatory
policy?
A.6. The Federal Reserve has long advocated the need for banks to
maintain sufficient levels of capital so they can weather unexpected
shocks without interrupting the provision of credit and other financial services to customers. Historically, the challenge has been
translating this broad principle into regulatory and supervisory
standards that are workable, balanced, and compatible with a
level, competitive playing field, both domestically and internationally. Capital is a relatively costly source of funding for banks, and
higher capital requirements for banks will tend to raise their costs
relative to those of competitors. Against this cost, there is a need
to balance the benefits of higher capital in terms of lower risk to
the safety net and enhanced financial and economic stability. However, these benefits are more uncertain and difficult to quantify.
Likewise, while most would agree that a bank should maintain
capital commensurate with its underlying risk taking, the quantification of risk is imprecise and inherently subjective. There is
also uncertainty regarding how financial markets would react to
changes in the capital framework and, in particular, whether higher capital buffers accumulated in good times would simply result
in higher de facto minimum standards during downturns. In the
past, it has been difficult reaching agreement on major changes to
the bank capital framework, reflecting different views on how best
to deal with these uncertainties (e.g., Pillar 1 versus Pillar 2 versus
Pillar 3; hardwired formulas versus discretion; simple rules-ofthumb versus sophisticated risk models).
Nevertheless, an international consensus appears to be emerging
that the bank regulatory capital framework needs to be made more
counter-cyclical, and such an initiative is currently being undertaken by the Basel Committee on Banking Supervision and Regulation. The Federal Reserve strongly supports and is actively involved in this initiative. While this effort faces many of the same
challenges noted above, there is now greater appreciation of both
the importance of promoting more counter-cyclical capital policies
at banks and, we believe, the need to find a workable way forward
on this issue.
The Federal Reserve also supports initiatives currently under
way at the Financial Accounting Standards Board and the International Accounting Standards Board (consistent with the recommendations of the Financial Stability Forum, now Financial Stability Board) to consider improvements to loan loss provisioning
standards. These improvements would consider a broader range of
72
credit quality information over the economic cycle to recognize
losses earlier in the cycle. Similar to the requirements for capital
buffers, the requirements for provisions would need to be set at a
practical level and calculated in a readily transparent manner.
Ideally, the requirement would need to be applied internationally
to have the desired effect. In addition, enhancements to the income
tax code to allow greater deductibility of provisions in line with the
accounting treatment would also aid in this effort.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
FROM BEN S. BERNANKE
Q.I. I am very concerned that the Fed's tools could become limited
and less flexible, and that the Fed's ability to stimulate the economy given an effective zero interest rate is hindered. What role will
the Fed play going forward in our economic recovery?
A.1. The Federal Reserve does not lose its ability to provide macroeconomic stimulus when short-term interest rates are at zero. However, when rates are this low, monetary stimulus takes nontraditional forms. The Federal Reserve has announced many new programs over the past year-and-a-half to support the availability of
credit and thus help buoy economic activity. These programs are
helping to restore the flow of credit to banks, businesses, and consumers. They are also helping to keep long-term interest rates and
mortgage rates at very low levels. The Federal Reserve will continue to use these tools as needed to help the economy recover and
prevent inflation from falling to undesirably low levels.
Q.2. As part of the White House's new housing plan, the administration suggests changes to the bankruptcy law to allow judicial
modification of home mortgages. Do you believe "cramdown" could
affect the value of mortgage backed securities and how they are
rated? Will bank capital be impacted if ratings on securities
change? Is it better for consumers to get a modification from their
servicer or through bankruptcy?
A.2. The Federal Reserve Board and other banking agencies have
encouraged federally regulated institutions to work constructively
with residential borrowers at risk of default and to consider loan
modifications and other prudent workout arrangements that avoid
unnecessary foreclosures. Loss mitigation techniques, including
loan modifications, that preserve homeownership are generally less
costly than foreclosure, particularly when applied before default.
Such arrangements that are consistent with safe and sound lending
practices are generally in the long-term best interest of both the financial institution and the borrower. (See Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages, released by
banking agencies on September 5, 2007.)
Modifications in these contexts would be voluntary on the part
of the servicer or holder of the loan. Although various proposals
have circulated regarding so-called "cramdown," the common theme
of the proposals would permit judicial modification of the mortgage
contract in circumstances where the borrower has filed for bankruptcy. These proposals present a number of challenging and potentially competing issues that should be carefully weighed. These
73
issues include whether borrower negotiation with the servicer or
loan holder is a precondition to judicial modification, the impact on
risk assessment of the underlying obligation by holders of mortgage
loans, and the appropriateness of permitting modification decisions
by parties other than the holders of the loan or their servicers.
Whether a borrower would be better off with a modification from
a servicer or through bankruptcy would depend on many factors including the circumstances of the individual borrower, the terms of
the modification, and the conditions governing any judicial modification in a bankruptcy proceeding.
In general, when a depository institution is a holder of a security,
the capital of the institution would likely be affected if the security
is downgraded. How bankruptcy would impact the servicer would
depend in part on the securitization documents treatment of the
mortgage loans affected by bankruptcies under the relevant pooling
and servicing agreements and the obligations of the servicer with
respect to those loans. In addition, because the terms that might
govern judicial modification in a bankruptcy proceeding have not
been established, it is not clear how the value of mortgage-backed
securities in general would be affected by changes to the bankruptcy laws that would permit judicial modification of mortgages.
Q.3. There is pressure to move quickly and reform our financial
regulatory structure. What areas should we address in the near future and which areas should we set aside until we realize the full
cost of the economic fallout we are currently experiencing?
A.3. The experience over the past 2 years highlights the dangers
that systemic risks may pose not only to financial institutions and
markets, but also for workers, households, and non-financial Businesses. Accordingly, addressing systemic risk and the related problem of financial institutions that are too big to fail should receive
priority attention from policymakers. In doing so, policymakers
must pursue a multifaceted strategy that involves oversight of the
financial system as a whole, and not just its individual components,
in order to improve the resiliency of the system to potential systemic shocks.
This strategy should, among other things, ensure a robust framework for consolidated supervision of all systemically important financial firms organized as holding companies. The current financial crisis has highlighted that risks to the financial system can
arise not only in the banking sector, but also from the activities of
financial firms, such as insurance firms and investment banks,
that traditionally have not been subject to the type of consolidated
supervision applied to bank holding companies. Broad-based application of the principle of consolidated supervision would also serve
to eliminate gaps in oversight that would otherwise allow risk-taking to migrate from more-regulated to less-regulated sectors.
In addition, a critical component of an agenda to address systemic risk and the too-big-to-fail problem is the development of a
framework that allows the orderly resolution of a systemically important nonbank financial firm and includes a mechanism to cover
the costs of such a resolution. In most cases, the Federal bankruptcy laws provide an appropriate framework for the resolution of
nonbank financial institutions. However, the bankruptcy laws do
74
not sufficiently protect the public's strong interest in ensuring the
orderly resolution of nondepository financial institutions when a
failure would pose substantial systemic risks. Besides reducing the
potential for systemic spillover effects in case of a failure, improved
resolution procedures for systemically important firms would help
reduce the too-big-to-fail problem by narrowing the range of circumstances that might be expected to prompt government intervention to keep a firm operating.
Policymakers and experts also should carefully review whether
improvements can be made to the existing bankruptcy framework
that would allow for a faster and more orderly resolution of financial firms generally. Such improvements could reduce the likelihood
that the new alternative regime would need to be invoked or government assistance provided in a particular instance to protect financial stability and, thereby, could promote market discipline.
Another component of an agenda to address systemic risks involves improvements in the financial infrastructure that supports
key financial markets. The Federal Reserve, working in conjunction
with the President's Working Group on Financial Markets, has
been pursuing several initiatives designed to improve the functioning of the infrastructure supporting credit default swaps, other
OTC derivatives, and tri-party repurchase agreements. Even with
these initiatives, the Board believes additional statutory authority
is needed to address the potential for systemic risk in payment and
settlement systems. Currently, the Federal Reserve relies on a
patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that critical payment and settlement systems have the necessary procedures and controls in place to manage their risks. By contrast,
many major central banks around the world have an explicit statutory basis for their oversight of these systems. Given how important robust payment and settlement systems are to financial stability, and the functional similarities between many such systems,
a good case can be made for granting the Federal Reserve explicit
oversight authority for systemically important payment and settlement systems.
The Federal Reserve has significant expertise regarding the risks
and appropriate risk-management practices at payment and settlement systems, substantial direct experience with the measures necessary for the safe and sound operation of such systems, and established working relationships with other central banks and regulators that we have used to promote the development of strong and
internationally accepted risk management standards for the full
range of these systems. Providing such authority would help ensure
that these critical systems are held to consistent and high prudential standards aimed at mitigating systemic risk.
Financial stability could be further enhanced by a more explicitly
macroprudential approach to financial regulation and supervision
in the United States. Macroprudential policies focus on risks to the
financial system as a whole. Such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated
in a few key areas. A macroprudential approach would complement
and build on the current regulatory and supervisory structure, in
which the primary focus is the safety and soundness of individual
75
institutions and markets. One way to integrate a more
macroprudential element into the U.S. supervisory and regulatory
structure would be for the Congress to direct and empower a governmental authority to monitor, assess, and, if necessary, address
potential systemic risks within the financial system.
Such a systemic risk authority could, for example, be charged
with (1) monitoring large or rapidly increasing exposures—such as
to subprime mortgages—across firms and markets; (2) assessing
the potential for deficiencies in evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products to increase systemic risks; (3) analyzing possible spillovers between financial firms or between firms
and markets, for example through the mutual exposures of highly
interconnected firms; (4) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that
pose risks for the system as a whole; and (5) issuing periodic reports on the stability of the U.S. financial system, in order both to
disseminate its own views and to elicit the considered views of others. A systemic risk authority likely would also need an appropriately calibrated ability to take measures to address identified
systemic risks—in coordination with other supervisors, when possible, or independently, if necessary. The role of a systemic risk authority in the setting of standards for capital, liquidity, and riskmanagement practices for the financial sector also would need to
be explored, given that these standards have both microprudential
and macroprudential implications.
Q.4. How should the government and regulators look to mitigate
the systemic risks posed by large interconnected financial companies? Do we risk distorting the market by identifying certain institutions as systemically important? Should the Federal Reserve step
into the role as a systemic regulator or should this task be given
to a different entity.
A.4. As discussed in response to Question 3, I believe there are several important steps that should be part of any agenda to mitigate
systemic risks and address the problem caused by institutions that
are viewed as being too big to fail. Some of these actions—such as
an improved resolution framework—would be focused on systemically important financial institutions, that is, institutions the failure of which would pose substantial risks to financial stability and
economic conditions. A primary—though not the sole focus—of a
systemic risk authority also likely would include such financial institutions.
Publicly identifying a small set of financial institutions as "systemically important" would pose certain risks and challenges. Explicitly and publicly identifying certain institutions as systemically
important likely would weaken market discipline for these firms
and could encourage them to take excessive risks—tendencies that
would have to be counter-acted by strong supervisory and regulatory policies. Similarly, absent countervailing policies, public designation of a small set of firms as systemically important could give
the designated firms a competitive advantage relative to other
firms because some potential customers might prefer to deal with
firms that seem more likely to benefit from government support in
76
times of stress. Of course, there also would be technical and policy
issues associated with establishing the relevant criteria for identifying systemically important financial institutions especially given
the broad range of activities, business models and structures of
banking organizations, securities firms, insurance companies, and
other financial institutions.
Some commentators have proposed that the Federal Reserve take
on the role of systemic risk authority; others have expressed concern that adding this responsibility might overburden the central
bank. The extent to which this new responsibility might be a good
match for the Federal Reserve depends a great deal on precisely
how the Congress defines the role and responsibilities of the authority, as well as on how the necessary resources and expertise
complement those employed by the Federal Reserve in the pursuit
of its long-established core missions. As a practical matter, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity,
even if not in the lead role. The Federal Reserve traditionally has
played a key role in the government's response to financial crises
because it serves as liquidity provider of last resort and has the
broad expertise derived from its wide range of activities, including
its role as umbrella supervisor for bank and financial holding companies and its active monitoring of capital markets in support of
its monetary policy and financial stability objectives.
Q.5. The largest individual corporate bailout to date has not been
a commercial bank, but an insurance company. What steps has the
Federal Reserve taken to make sure AIG is not perceived as being
guaranteed by the Federal government?
A.5. In light of the importance of the American International
Group, Inc (AIG) to the stability of financial markets in the recent
deterioration of financial markets and continued market turbulence
generally, the Treasury and the Federal Reserve have stated their
commitment to the orderly restructuring of the company and to
work with AIG to maintain its ability to meet its obligations as
they come due. In periodic reports to Congress submitted under
section 129 of the Emergency Economic Stabilization Act of 2008,
in public reports providing details on the Federal Reserve financial
statements, and in testimony before Congress and other public
statements, we have described in detail our relationship to AIG,
which is that of a secured lender to the company and to certain
special purpose vehicles related to the company. These disclosures
include the essential terms of the credit extension, the amount of
AIG's repayment obligation, and the fact that the Federal Reserve's
exposure to AIG will be repaid through the proceeds of the company's disposition of many of its subsidiaries. Neither the Federal
Reserve, nor the Treasury, which has purchased and committed to
purchase preferred stock issued by AIG, has guaranteed AIG's obligations to its customers and counterparties.
Moreover, the Government Accountability Office has inquired
into whether Federal financial assistance has allowed AIG to
charge prices for property and casualty insurance products that are
inadequate to cover the risk assumed. Although the GAO has not
drawn any final conclusions about how financial assistance to AIG
77
has impacted the overall competitiveness of the property and casualty insurance market, the GAO reported that the state insurance
regulators the GAO spoke with said they had seen no indications
of inadequate pricing by AIG's commercial property and casualty
insurers. The Pennsylvania Insurance Department separately reported that it had not seen any clear evidence of under-pricing of
insurance products by AIG to date.
Q.6. Given the critical role of insurers in enabling credit transactions and insuring against every kind of potential loss, and the
size and complexity of many insurance companies, do you believe
that we can undertake serious market reform without establishing
federal regulation of the insurance industry?
A.6. As noted above, ensuring that all systemically important financial institutions are subject to a robust framework—both in law
and practice—for consolidated supervision is an important component of an agenda to address systemic risks and the too-big-to-fail
problem. While the issue of a Federal charter for insurance is a
complex one, it could be useful to create a Federal option for insurance companies, particularly for large, systemically important insurance companies.
Q.7. What effect do you believe the new Fed rules for credit cards
will have on the consumer and on the credit card industry?
A.7. The final credit card rules are intended to allow consumers to
access credit on terms that are fair and more easily understood.
The rules seek to promote responsible use of credit cards through
greater transparency in credit card pricing, including the elimination of pricing practices that are deceptive or unfair. Greater
transparency will enhance competition in the marketplace and improve consumers' ability to find products that meet their needs
From the perspective of credit card issuers, reduced reliance on
penalty rate increases should spur efforts to improve upfront underwriting. While the Board cannot predict how issuers will respond, it is possible that some consumers will receive less credit
than they do today. However, these rules will benefit consumers
overall because they will be able to rely on the rates stated by the
issuer and can therefore make informed decisions regarding the
use of credit.
Q.8. The Fed's new credit card rules are not effective until July
2010. We have heard from some that this is too long and that legislation needs to be passed now to shorten this to a few months. Why
did the Fed give the industry 18 months put the rules in place?
A.8. The final rules represent the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts and
will apply to more than 1 billion accounts. Given the breadth of the
changes, which affect most aspects of credit card lending, card
issuers must be afforded ample time for implementation to allow
for an orderly transition that avoids unintended consequences,
compliance difficulties, and potential liabilities.
• To comply with the final rules, card issuers must adopt different business models and pricing strategies and then develop
new credit products. Depending on how business models
78
evolve, card issuers may need to restructure their funding
mechanisms.
• In addition to these operational changes, issuers must revise
their marketing materials, application and solicitation disclosures, credit agreements, and periodic statements so that the
documents reflect the new products and conform to the rules.
• Changes to the issuers' business practices and disclosures will
involve extensive reprogramming of automated systems which
subsequently must be tested for compliance, and personnel
must receive appropriate training.
Although the Board has encouraged card issuers to make the
necessary changes as soon as practicable, an 18-month compliance
period is consistent with the nature and scope of the required
changes.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT
FROM BEN S. BERNANKE
Q.I. Under the $700 billion TARP package and the recent $788 billion stimulus bill, the Federal government is spending hundreds of
billions of taxpayer dollars to support the financial institutions at
the center of the economic storm. Many of these same companies
are now targets of securities class action lawsuits seeking hundreds
of billions of dollars. In fact, the companies that, to date, have received the most governmental assistance have been deluged with a
wave of lawsuits—suits that typically duplicate ongoing enforcement investigations by Federal prosecutors and the SEC.
• I'm told that private securities class action filings in 2008
reached their highest levels in 6 years; the number of filings
increased almost 40 percent from the previous year.
• Also, financial institutions were named as defendants in half
of the new private class actions filed in 2008 (Cornerstone Research, Securities Class Action Filings, 2008: A Year in Review
2 (Jan. 6, 2009)) and nearly every single entity that has obtained more than $100 million in governmental assistance is
already a defendant in one or more securities class actions
based on allegations related to the current economic crisis.
• Almost 75 percent of the TARP funds expended have gone to
financial institutions named as defendants in recent securities
class actions.
The huge costs associated with these lawsuits mean that billions
of dollars in taxpayer funds will not be used to increase lending,
but rather will be paid out in legal fees—both plaintiff and defense—and lawsuit settlements. And taxpayers will be less likely to
recover their investments in companies weakened by large costs
imposed by these class actions.
I strongly support government enforcement actions against
wrongdoers, accompanied by stiff penalties. Federal prosecutors
and the SEC today have broad power to initiate such actions; to
the extent there are gaps in their authority, those gaps should be
filled.
79
But I wonder whether we should be doing something to guard
against the risk that taxpayer dollars intended to support increased lending will be drained from TARP recipients by the tremendous legal expenses—including the high costs of settlement—
caused by private securities class action lawsuits? Aren't these lawsuits effectively job destroyers by diverting the TARP funds from
their job creating purposes—won't taxpayers have to invest still
more money to reinvigorate lending to businesses and consumers?
And won't the diversion of these funds mean an increased risk that
taxpayers may not get their money back from some TARP-assisted
institutions, or at least that the time for repayment will be longer?
A.1. The financial institutions that receive funds from the Troubled
Asset Relief Program (TARP) continue to operate as private enterprises and continue to be subject to the same laws and regulations
that apply to institutions that do not receive funds from the TARP.
The institutions that have received TARP funds must bear any
costs associated with compliance with applicable laws. Concerns
about abusive practices in the filing of private lawsuits arising
under the securities laws prompted Congress to enact litigation reform legislation several years ago. We believe that any additional
legislative initiatives to consider securities litigation reform should
cover all institutions that are subject to those laws.
Q.2. Chairman Bernanke, I want to thank you and the dedicated
professionals at the Fed for all your hard work on the credit card
rules—UDAP, Reg AA, Reg Z—released on December 18, 2008. As
with several of my colleagues, we appreciate the delicate balance
the Fed is trying to reach in protecting consumers against unfair
practices while trying to make sure the regulations do not further
limit the availability of credit.
Along those lines, can you please provide for me background on
the UDAP rule's impact on the ability of retailers in my state to
offer "no interest" financing? I have heard from them that this financing option is very popular with consumers—especially now—
and helps them be able to afford large ticket items like appliances,
home repairs, computers, etc. Simply put, will retailers be able to
continue to offer this type of financing option to their customers
after the July 1, 2010, effective date? What about the millions of
accounts in place—some of which may expire after the effective
date? I would appreciate the Fed working with retailers and credit
providers to come up with a simple and fair way for them to offer
"no interest" financing going forward. Thank you.
A.2. In the final rule addressing unfair and deceptive credit card
practices, the Board, the Office of Thrift Supervision (OTS), and
the National Credit Union Administration (NCUA) (collectively, the
Agencies) expressed concern regarding deferred interest programs
that are marketed as "no interest" but charge the consumer interest if purchases made under the program are not paid in full by
a specified date or if the consumer violates the account terms prior
to that date (which could include a "hair trigger" violation such as
paying one day late). In particular, the Agencies noted that, although these programs provide substantial benefits to consumers
who pay the purchases in full prior to the specified date, the "no
interest" marketing claims may cause other consumers to be un-
80
fairly surprised by the increase in the cost of those purchases. Accordingly, the Agencies concluded that prohibiting deferred interest
programs as they are currently marketed and structured would improve transparency and enable consumers to make more informed
decisions regarding the cost of using credit.
The Agencies specifically stated, however, that the final rule permits institutions to offer promotional programs that provide similar
benefits to consumers but do not raise concerns about unfair surprise. For example, the Agencies noted that an institution could
offer a program where interest is assessed on purchases at a disclosed rate for a period of time but the interest charged is waived
or refunded if the principal is paid in full by the end of that period.
The Board understands that the distinction in the final rule between "deferred interest" and "waived or refunded interest" has
caused confusion regarding how institutions should structure these
types of promotional programs where the consumer will not be obligated to pay interest that accrues on purchases if those purchases
are paid in full by a specified date. For this reason, the Board is
consulting with the OTS and NCUA regarding the need to clarify
that the focus of the final rule is not on the technical aspects of
these promotional programs (such as whether interest is deferred
or waived) but instead on whether the programs are disclosed and
structured in a way that consumers will not be unfairly surprised
by the cost of using the programs. The Agencies are also considering whether clarification is needed regarding how existing deferred interest plans should be treated as of the final rule's July
1, 2010, effective date. If the Agencies determine that clarifications
to the final rule are necessary, those changes will assist institutions in understanding and complying with the new rules and
should not reduce protections for consumers.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM BEN S. BERNANKE
Q.I. Chairman Bernanke, as you may know, I strongly support
comprehensive credit card reform, including S. 414 introduced by
Chairman Dodd which would strengthen and expedite (up from
July 1, 2010) many of the provisions in the final UDAP-Reg AAReg Z rule published last December by the Federal Reserve such
as universal default, double-cycle billing, exorbitant overdraft fees,
etc. S. 414 does not address the issue of "deferred interest" or "no
interest" financing but I understand the final UDAP rule does attempt to address it and the complexity of the issue has some retailers concerned. Can you please clarify for me the impact of this proposal on consumers and businesses who use "no interest" financing? I understand the impact to be very large and I would appreciate the Fed working with retailers to clarify that "no interest" financing can be used in the future albeit with revised disclosures
and marketing.
A.1. In the final rule addressing unfair and deceptive credit card
practices, the Board, the Office of Thrift Supervision (OTS), and
the National Credit Union Administration (NCUA) (collectively, the
Agencies) expressed concern regarding deferred interest programs
that are marketed as "no interest" but charge the consumer inter-
81
est if purchases made under the program are not paid in full by
a specified date or if the consumer violates the account terms prior
to that date (which could include a "hair trigger" violation such as
paying one day late). In particular, the Agencies noted that, although these programs provide substantial benefits to consumers
who pay the purchases in fill prior to the specified date, the "no
interest" marketing claims may cause other consumers to be unfairly surprised by the increase in the cost of those purchases. Accordingly, the Agencies concluded that prohibiting deferred interest
programs as they are currently marketed and structured would improve transparency and enable consumers to make more informed
decisions regarding the cost of using credit.
The Agencies specifically stated, however, that the final rule permits institutions to offer promotional programs that provide similar
benefits to consumers but do not raise concerns about unfair surprise. For example, the Agencies noted that an institution could
offer a program where interest is assessed on purchases at a disclosed rate for a period of time but the interest charged is waived
or refunded if the principal is paid in full by the end of that period.
The Board understands that the distinction in the final rule between "deferred interest" and "waived or refunded interest" has
caused confusion regarding how institutions should structure these
types of promotional programs where the consumer will not be obligated to pay interest that accrues on purchases if those purchases
are paid in full by a specified date. For this reason, the Board is
consulting with the OTS and NCUA regarding the need to clarify
that the focus of the final rule is not on the technical aspects of
these promotional programs (such as whether interest is deferred
or waived) but instead on whether the programs are disclosed and
structured in a way that consumers will not be unfairly surprised
by the cost of using the programs. The Agencies are also considering whether clarification is needed regarding how existing deferred interest plans should be treated as of the final rule's July
1, 2010, effective date. If the Agencies determine that clarifications
to the final rule are necessary, those changes will assist institutions in understanding and complying with the new rules and
should not reduce protections for consumers.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM BEN S. BERNANKE
Q.I. What is it going to take to encourage private investment in
our banks and drawing private capital that is now on the sidelines
to ensuring that our financial institutions are stable and that our
capital markets can return to more normal and healthy functioning?
A.1. We believe that attracting private capital to recapitalize the
financial industry is very important and steps to encourage private
capital should be taken. Several factors have contributed to the reluctance of private capital providers from investing in financial institutions in recent months, including uncertainty about the health
of financial institutions, broader macroeconomic and financial market conditions, and how private capital claims might be treated
given existing or additional government support. The Federal Re-
82
serve has taken various actions to support financial market liquidity and economic activity, which are important steps to encourage
private capital flows to the financial sector. In recent weeks, indicators of market and firm risks have fallen and share prices of financial institutions have risen, suggesting some reduction in investor
uncertainty. In addition, a number of institutions have issued new
equity shares following the release of the results of the Supervisory
Capital Assessment Program in early May.
Q.2. To what extent do you believe that government and central
bank policies led to the credit bubble?
A.2. The fundamental causes of the ongoing financial turmoil remain in dispute. In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade
and capital flows that began in the latter half of the 1990s. In the
simplest terms, these imbalances reflected a chronic lack of saving
relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving
relative to investment in many emerging market nations. The increase in excess saving in the emerging world resulted in turn from
factors such as rapid economic growth in high-saving East Asian
economies accompanied, outside of China, by reduced investment
rates; large buildups in foreign exchange reserves in a number of
emerging markets; and substantial increases in revenues received
by exporters of oil and other commodities. Saving flowed from
where it was abundant to where it was deficient, with the result
that the United States and some other advanced countries experienced large capital inflows for more than a decade, even as real
long-term interest rates (both here and abroad) remained low.
These capital inflows and low global interest rates interacted
with the U.S. housing market and overall financial system in ways
that eventually proved to be dysfunctional. As outlined in a report
by the President's1 Working Group on Financial Markets (PWG) released last year, the most evident of those was clearly a breakdown in underwriting standards for subprime mortgages. But that
was symptomatic of a much broader erosion of market discipline:
Competition and the desire to maintain high returns created significant demand for structured credit product by investors, and all
market participants involved in the securitization process, including originators, underwriters, asset managers, credit rating agencies, and global investors, failed to obtain sufficient information or
to conduct comprehensive risk assessments on instruments that
were quite complex. Investors relied excessively on credit ratings,
and rating agencies relied on faulty assumptions to produce those
ratings. These developments revealed serious weaknesses in risk
management practices at several large U.S. and European financial
institutions (some of which were widely perceived to be "too big to
fail"), especially with respect to the concentration of risks, the valuation of illiquid instruments, the pricing of contingent liquidity facilities, and the management of liquidity risk.
In some cases, regulatory policies failed to mitigate those risk
management weaknesses. For example, existing capital require1
Policy Statement on Financial Market Developments by the President's Working Group on
Financial Markets, March 13, 2008.
83
ments encouraged the securitization of assets through facilities
with very low capital requirements and failed to provide adequate
incentives for firms to maintain capital and liquidity buffers sufficient to absorb extreme systemwide shocks. Further, supervisory
authorities did not insist on appropriate disclosures of firms' potential exposure to off-balance sheet vehicles.
To address these weaknesses, I believe reforms to the financial
architecture are needed to help prevent a similar crisis to develop
in the future. First, the problem of financial firms that are considered too big, or perhaps too interconnected, to fail must be addressed. This perception reduces market discipline, encourages excessive risk taking by the firms, and creates the incentive for any
firm to grow in order to be perceived as too big to fail.
Second, the financial infrastructure, including the systems, rules,
and conventions that govern trading, payment, clearing, and settlement in financial markets, needs to be strengthened. In this respect, the aim should be not only to make the financial system as
a whole better able to withstand future shocks, but also to mitigate
moral hazard and the problem of too big to fail by reducing the
range of circumstances in which systemic stability concerns might
prompt government intervention. Third, a review of regulatory policies and accounting rules is desirable to ensure that they do not
induce excessive procyclicality—that is, do not overly magnify the
ups and downs in the financial system and the economy. And finally, consideration should be given to the creation of an authority
specifically charged with monitoring and addressing systemic risk,
with the objective of helping to protect the system from financial
crises like the one we are currently experiencing.
Reforming the structure of the financial system would go a long
way towards mitigating the risk that other severe episodes of financial instability would arise in the future. Reducing this risk
would in turn allow the Federal Reserve to continue to direct monetary policy towards the pursuit of the goals for which it is best
suited—the legislated objectives of maximum employment, stable
prices, and moderate long-term interest rates. With hindsight, an
argument could be made, and has been made by some, that tighter
monetary policy earlier in the decade might have helped limit the
rise in house prices and checked the development of the subprime
mortgage market, thereby containing the damage to the economy
that later occurred when the housing market collapsed. However,
the rise in the Federal funds rate required to accomplish this task
would likely have had to be quite large, and thus would have significantly impaired economic growth, boosted unemployment, and
probably led to an undesirably low rate of core inflation. All those
would have been outcomes clearly at odds with the Federal Reserve's objectives. Rather than redirecting monetary policy in this
manner, a better approach going forward would be to have a
stronger supervisory system in place to greatly reduce the risk that
credit bubbles will merge in the first place, or at least to contain
their expansion and limit the fallout from their eventual collapse.
This would significantly help in the prevention of financial crises
like the current one while at the same time still allowing macroeconomic performance to be as strong as earlier in the decade.
84
Q.3. At what point does an institution or a product pose systemic
risk?
A.3. Identifying whether a given institution's failure is likely to impose systemic risks on the U.S. financial system and our overall
economy is a very complex task that inevitably depends on the specific circumstances of a given situation and requires substantial
judgment by policymakers. That being said, a number of key principles should guide policymaking in this area.
First, no firm should be considered too big to fail in the sense
that existing stockholders cannot be wiped out, existing senior
management and boards of directors cannot be replaced, and over
time the organization cannot be wound down or sold in whole or
in part. In addition, from the point of view of maintaining financial
stability, it is critical that such a wind down occur in an orderly
manner. Unfortunately, the current resolution process for systemically important nonbank financial institutions does not facilitate
such a wind down, and thus my testimony's recommendation for
improved resolution procedures for potentially systemic financial
firms. Still, even without improved procedures, it is important to
try to resolve the firm in an orderly manner without guaranteeing
the longer-term existence of any individual firm.
Second, and as I indicated in my statement, the core concern of
policymakers is whether the failure of the firm would be likely to
have contagion, or knock-on, effects on other key financial institutions and markets and ultimately on the real economy. Thus, in
making a systemic risk determination, we look as carefully as we
can at the interconnections, or interdependencies, between the failing firm and other participants in the financial system and the implications for these other participants of the troubled firm's failure.
Such interdependencies can be direct, such as through deposit and
loan relationships, or indirect, such as through concentrations in
similar types of assets. Interdependencies can extend to broader financial markets and can also be transmitted through payment and
settlement systems. In addition, we consider the extent to which
the failure of the firm and other interconnected firms would affect
the real economy through, for example, a sharp reduction in the
supply of credit, rapid declines in the prices of key financial and
nonfinancial assets, or a large drop in the sense of confidence that
financial market participants, households, and nonfinancial businesses bring to their activities. Of course, contagion effects are
typically more likely in the case of a very large institution than
with a smaller institution. However, I would emphasize that size
is far from the only criterion for determining whether a firm is potentially systemic. Moderate-sized, or even relatively small firms,
could be systemic if, in a given situation, a firm is critical to the
functioning of key markets or, for example, critical payment and
settlement systems. I would also reiterate that while traditionally
the concern was that a run on a troubled bank could inspire contagious runs on other banks, recent financial crises have shown us
that systemic risks can arise in other financial institutions and
markets. For example, we now understand that highly destabilizing runs can occur on investment banks and money market
funds.
85
Third, the nature of the overall financial and economic environment is a core factor in deciding whether a given institution's failure is likely to impose systemic risks. If the overall environment
is highly uncertain and troubled, as was clearly the case last fall,
then the likelihood of systemic effects is typically much greater
than if the economy is growing and market participants are generally optimistic and confident about the future. Indeed, and as I
indicated above, the potential effects of a firm's failure on the confidence of not only financial market participants, but a wide spectrum of households and businesses is a key decision variable in policymakers' assessment of whether a given firm's failure is likely to
pose systemic risks.
Q.4. In a statement Monday, AIG said it is continuing to work with
the government to evaluate potential new alternatives for addressing AIG's financial challenges. AIG's rescue package has already
been increased twice since September, from $85 billion to nearly
$123 billion in October and then to $150 billion in November. According to today's WSJ, AIG is seeking an overhaul of its $150 billion government bailout package that would substantially reduce
the insurer's financial burden, while further exposing U.S. taxpayers to its fortunes. Are you and Treasury considering changing
our approach to AIG from that of a creditor to one of a potential
owner?
A.4. As explained in the reports submitted to Congress under section 129 of the Emergency Economic Stabilization Act of 2008, the
Federal Reserve, in conjunction with the Treasury Department, has
taken a series of steps since September 2008, to address the liquidity and capital needs of the American International Group, Inc.
(AIG) and thereby to help stabilize the company, prevent a disorderly failure, and protect financial stability, which is a prerequisite to resumption of economic activity. In particular, in September and November 2008, the Federal Reserve established several credit facilities, including a Revolving Credit Facility, to further these objectives. As part of the November restructuring, the
Treasury purchased $40 billion in AIG preferred stock.
In light of the significant challenges faced by AIG in the last
months of 2008 and the continued risk it poses to the financial system, on March 2, 2009, the Federal Reserve and the Treasury announced a restructuring of the government's assistance to the company. The March actions announced by the Federal Reserve include
partial repayment of the Revolving Credit Facility with preferred
stock interests in two of AIG's life insurance subsidiaries and with
the proceeds of new loans that would be secured by net cash flows
from designated blocks of existing life insurance policies held by
other life insurance subsidiaries of AIG. These actions were undertaken in the context of the Federal Reserve's role as a creditor of
AIG. As part of the March restructuring, the Treasury established
a capital facility that allows AIG to draw down up to approximately
$30 billion as needed over time in exchange for additional preferred
stock. For more detail, please see Federal Reserve System Monthly
Report on Credit and Liquidity Programs and The Balance Sheet
(June
2009)
at
13-16,
http://www.federalreserve.gov/
monetarypolicy /files I monthlyclbsreport200906.pdf
86
Q.5. Recent events in the credit markets have highlighted the need
for greater attention to settling credit default swaps by creating a
central clearing system. While central counterparty clearing and
exchange trading of relatively standardized contracts have the potential to reduce risk and increase market efficiency, market participants must be permitted to continue to negotiate customized bilateral contracts in over-the-counter markets. Do you agree that
market participants should have the broadest possible range of
standardized and customized options for managing their financial
risk and is there a danger that a one-size-fits-all attitude will harm
liquidity and innovation?
A.5. The Federal Reserve supports central counterparty (CCP)
clearing of credit default swaps and other over-the-counter (OTC)
derivatives because, if properly designed and managed, CCPs can
reduce risks to market participants and to the financial system.
Counterparties to OTC derivatives trades sometimes seek to customize the terms of trades to meet very specific risk management
needs. These trades may not be amenable to clearing because, for
example, the CCP could have difficulty liquidating the positions in
the event a clearing member defaulted. A requirement to clear all
OTC derivative trades thus offers the uncomfortable alternatives of
asking CCPs to accept business lines with difficult-to-manage risks
or of asking customers to accept terms that do not meet their riskmanagement needs. A hybrid system in which standardized OTC
derivative contracts are centrally cleared and in which more customized contracts are executed and managed on a bilateral, decentralized basis is a means for allowing product innovation while
mitigating systemic risks. The Federal Reserve recognizes, however, that a key part of this strategy is improvements in the risk
management practices for OTC derivatives by the financial institutions that are the counterparties to bilateral trades.
Q.6. What is the impact of the final UDAP rule issued last December on consumers and businesses who use "no interest" financing?
I understand the impact to be very large and I would appreciate
the Federal Reserve Board working to clarify that "no interest" financing can be used in the future albeit perhaps with revised disclosures and marketing.
A.6. In the final rule addressing unfair and deceptive credit card
practices, the Board, the Office of Thrift Supervision (OTS), and
the National Credit Union Administration (NCUA) (collectively, the
Agencies) expressed concern regarding deferred interest programs
that are marketed as "no interest" but charge the consumer interest if purchases made under the program are not paid in full by
a specified date or if the consumer violates the account terms prior
to that date (which could include a "hair trigger" violation such as
paying one day late). In particular, the Agencies noted that, although these programs provide substantial benefits to consumers
who pay the purchases in full prior to the specified date, the "no
interest" marketing claims may cause other consumers to be unfairly surprised by the increase in the cost of those purchases. Accordingly, the Agencies concluded that prohibiting deferred interest
programs as they are currently marketed and structured would im-
87
prove transparency and enable consumers to make more informed
decisions regarding the cost of using credit.
The Agencies specifically stated, however, that the final rule permits institutions to offer promotional programs that provide similar
benefits to consumers but do not raise concerns about unfair surprise, For example, the Agencies noted that an institution could
offer a program where interest is assessed on purchases at a disclosed rate for a period of time but the interest charged is waived
or refunded if the principal is paid in full by the end of that period.
The Board understands that the distinction in the final rule between "deferred interest" and "waived or refunded interest" has
caused confusion regarding how institutions should structure these
types of promotional programs where the consumer will not be obligated to pay interest that accrues on purchases if those purchases
are paid in full by a specified date. For this reason, the Board is
consulting with the OTS and NCUA regarding the need to clarify
that the focus of the final rule is not on the technical aspects of
these promotional programs (such as whether interest is deferred
or waived) but instead on whether the programs are disclosed and
structured in a way that consumers will not be unfairly surprised
by the cost of using the programs. The Agencies are also considering whether clarification is needed regarding how existing deferred interest plans should be treated as of the final rule's July
1, 2010, effective date. If the Agencies determine that clarifications
to the final rule are necessary, those changes will assist institutions in understanding and complying with the new rules and
should not reduce protections for consumers.
88
89
Monetary Policy Report
to the Congress
Submitted pursuant to section 2B
of the Federal Reserve Act
February 24,2009
Board of Governors of the Federal Reserve System
90
Letter of Transmittal
Mm?.
BliAHl) 01 CiOVI.HWIHS (»• IIIL.
FfclURAL
Washington. L>.1\. Fi:braary24, 2MM
! HK E%BIBEM1 OF xw. StN \i F
T H L S H . A M . K <tr
in H i m s i - i)i R i i T i - . i M A i n - t s
The Board of Governors is pleased to submit its Monetary Pattey Kgport W IIK Ccwgrat
pursuanl laseLliun lit o\\ii<i Federal Reserve A d .
Siry-L'rd)
i Benwnkc, Chairnisn
91
Contents
Par! 1
I Overview: Munelan Policy ani) the Economic Oulluuk
Part 2
5 Recent Financial and Economic Developments
5 FIXA\CIAL .snaiLtrr am •nt.of VESTS
5 Evolution (if Nit I'JfumtiiU Turmoil
9 Policy Actions and the Market Response
] i Hun kin" Inslitiirluils mid the i\vuiluliilit\ nf t rcjil
13 nminim i»a/min/v
F2
Thcl.ahorMarkft
14 The Mousi'holcl Sector
14
16
Kesfifenthtl ttwi^iiitetit whl Housing
VntlXitWi!r Spt-'mtingami MmiM'tmitl Fii
IX Hi. Business.Strtni
1N
I'I.WII l>i\'e,*imenl
Is)
1V
htwntnty Itnv.slmtwt
i 'orpvrOie I'li'l'ils antl Husitiv si l-'itlumx
71 flip Government Suttitr
21
Feiterat Gown/netti
21
S'lufi' ami l.tK'til Gitvt'nmn'til
12 The Eitelnnl Scrti>f
23 \utional Sn^'ing
14
2_T
l f i ir.-vs iiritl l.ulitir TrochK-livilv
Pmdwlil'itv
tituf Ihiit iMbnr Ct}Mx
21' M4HHTlHry Policy K\pL-ctitlt(in<f ;iud tr^ttsur^ KuLcs
2d federal Burnnvtug
2b Stale and laical (>nvrrtttuenl Htirifmin^
92
27 I\TE*XArta\'Al
DHVEI.OPMK.Vrs
T! International Financial Markets
2<f The Hniincw! Amiunl
Mi Advanced rnrcipn Kcimitmicv
1 1 KniiT^in^ Murkel ktiimrmk'i
Part 3
33 Monetary Policy in 2008 and Early 2009
Part 4
37 Summary of Economic Projection*
?4 I hr nmlmik
4(1 RJjto t« ihc Oullnnk
4SI Divmity »f Views
Appendix
47 Fcderul Reserve Initiatives lo Address Financial Strains
47 Provision of liquidity to Hunks and
47
11
48
Mfiditkaiions M tk$ Priiiiuiy Civtlll Prt'grwit
I'hi! Turin AiiLliim l-'iiatily
Liquidity Simp linn with Fmvign i'nttml Ittmfo
45
4K
Tin- Term SewrM?> Lemtiug h'ocilin
The Prtmon • !}eufarCivttit Fut-liitr
;• I'ruvMiin i>f I ii|uiilily Iti Ollivr Murki'l 1'arlidpanls
<W
Tho A.wt-R/h*cit
Cnnmu-rt hi Paper Mtmev Vturki-i Mwmit Font! iiijtiiMn
41)
Tlw CunimeK-itii Paper i-muling i-actiiiy
4^
TIK Muney Market hiviator Film/in^ Facility
49
Thr Ti'rm Asset-Hmknl
Si-vtiniu-s I.mm i'urility
311 Dirttt I'tirtliuM's of Asselt
SQ Suppi>r1 til C r i ( k - u l ln«hMlu(i(ins
so
iI
51
Hair sitarm
Aitwrietiit huertiaiiaital Gmitp
CUittmip
51
Hank
nl'Americti
53 Abbreviations
Box
46
I'tu LI-K.1 ' iK-i-i m i n i j
Kir/tlir
93
Parti
Overview:
Monetary Policy and the Economic Outlook
Tin1 LI S economy ui-,iki'ricii markedly in die SMUBfl
halfof 2UOB .]>. Ik' urn mil in IIILIIIII.II inarkeli inieilsilird rrrllit rnmlilinitt lightened 6lfthB* -mil HIM
values cumhiunl IU vluin[). Cundiliuns in ihr labur
nimkel WHSancd SlgrSBcafttly slier early .lulllirai -mid
nearly .all major se-ciors of Iheer.unomy reglslpretl sleep
III-L lines in n-ifvtly lull' lasi vrai. Meanwhile, InllBliiin
pressureMliiiiiiiislieiJ appreciably PS p r i m of energy
ami mini niniiiKiilllii'S dropped sharply, lln' in.nMiu of
resource slack In the economy widened, and die foreign
l>»:lHII);i! value ol die dlilliu slretl)>llieutitl.
The second half uf 2G0H RtWTOhilpnsiMraliuii uf
dip liilannal ,im1 errpnonilc strains dint hail inillally
i" • >i ni./'ri -I hy iin -inI • i ' l i - housing Iraom In iinUnited Stales and oilier countries .mil die asiutinteil
problems in inortflajse u n i t e d The ensuing iiirmoil In
global credit nrarki'lsiirTcclcd i u r i vnlnra. crpdil rondllions and bujtoeij and consumer coniidrncn around thr
wotlit. Over I lie iui inner, s weakening U.S. ct-onuiuy
.mil iiiiimiui'ii linamial ILifbiilenr:i- Ifiitna InniiH \nm,
Bf (.uilriik'ncp in iln- liiiiiiu-ial SWIor, In SwWaJMt. die
Rnvcrnnir-in sponsored cnlerprlsra Fiiniiif Mae and
tri'ildic Mai wi'ii- |)lanil into Liiiiieiv.ituislii(j liy Ihfir
refjulame .-mil l.elinvni HmdKrs lloldlnf>s filed lor
liankmplcy. Ik'inMiranranmipanv Armrican InlernailraiFil fironp. Inc., or AtG, fdsorsrnc nndnr Senas
(ni'^nie .mi) iIn' I'edi'ijl Resera-. »iih rhe lull rappurt
of ihc 1'fimury. aprei'il in |iii]Vlii!'Nulisiaiilla liijnidliy
Iu die company. In addiiinn, .1 inuiib« DFUIIHT fmandal
liulitulldm failed fir were dii|itirprt hy roniprtltofS, te
3 r rail I uf tlic li'liinan Drolher. bankniplcy. a prainiDM1 money niarkri inimiii] fntirt suffered rapitnl \oats,
vvliich |iruniiili.tl investors Iu wilhilraw large aniuunh
ftnm sitrh funrts. The resulting mawivc run Mows nndi<rmini'il 1 In stability ol'slion lemi funding markels,
|iaitlnilailv Ihe cnimraTrliil |>.IIH-I market, upon which
cuijnirdtinin rely heavily iti meet iheir stort-tWW bar
mWlng neetk. Apainsl I his harkdrnp. iilVMInrs puljeil
hut k bruintly fruni risk-taking in bi'plemher and Uclnber, lir|uldiiy in slion-terra
lin..- maffcett vanished for
l
h l
l
Sd
Mllon markrts, wllh Ihc pxreiillon olttvose iff
Kiwcmmcnl supported rnonnaves, tsu^nllallv shul
rttHVll,
kelleiMiug in |>ail dit1 advetsi1 [levelopiiictus in
lioLjurijI [lizlrketv. etunuinic auivily (Jm^i|}ed %9lar[ily in
lain 21IIIR and h.n riinliniiiil In mm ran 10 fttfftl 'MWk
In die lalxir markel. ihc pace of job losses t|iiicki'nt'd
consWeraity hegiuninf> last iiimmiu die unearflcyiTKnl
rail1 hits risen to ils hlghcsl IPVP.1 since Ihe early IBiiOs.
amlullvi itirasuri". irl'Ulmr uwikH unttlitiunv—for
, ilir number of persons working part (irniI'ull-linir jobs are nol nvailadli'—have worscnfil mil iff a lily. Tht deleriuralinf; job ntjrkcl along
will! die •.i/iiMc losses tif uquiiy and housing weallh
and lliu lightening ofirL'dit eundiliints, lias cl,-1.1 ••.-.. ,i
cmisuoier senllnitnt <ind spending; these factors have
also rnmrihuni lo die ironllnued steep decliiH1 in ho in
ing aciit'ily. In aditiiiun. bustoases have juiiiiuivil
widespread cudwrks In rajilial \|Wiidlng in response la
(he wcaki'oing oullook n sites and priutuilion as well
as the. tlifrind! credit envimnnienl. And iu cunlra^l Iu
itie lirsi hull of die year - when toliust demand lor U S
expnrts |tf»vldi'il sume ofTvpl let Ihe softness in d o m w i r
dernaud—t'Npum vhiniiied in die set'unil half m ecouoniic arlivlly ahroul fell, in all, real gross domesllc
|IILMIIII:I (GDP) in tin1 Unilfd Stales declined hligfllly' ill
DM lliitri i|it,irter nl «1I!H anit is currently fstlmated hy
the l-iiiM-.i.1 of Ktonumic Analysis Iu lave drup|ie.d at
nu iuiminl rale of [1*i iiertenl In Ihe fourth (|U3rteri real
CD) 1 see lit* headed for ajtutlier i.ojisiiipialile dettease in
the iku ijuaneruf 2(11 111
Tin- itowiiium in s a i n and pruduaiun. along wiiti
sieeji dec Hum in the pices of energy and other Win'
modifies and a sircnglherring in die exchange value of
till' dolhr, hits cmilrihincd in a siiiisianila lessen ins ol
inriBliun pre»nrer. in Ihc paM several ini>nllu Indeed,
oven 11 io Hal ion, as nieiisureil by Ihe (iriri' Intluit for
personal consuniption exut'ndilures, lumiil negaltvK
in thi1 fnunli quanri «r 2(M8; OVIT die lirsi three qnar
ten of Ik'year, overall inflation had averaged nearly
WJ \vtrenl M an annual rate, largely lier ause of tharji
iiiciwiM'i in food and energy prices. Cure inflation—
wbkli em hides die dlreci effects of nioventents in food
and energy prices- -also slowed signifiranlly lale last
yenr anil e.riiemrl 2B09«l o sulnlued pare. MirmriiiR the
drop in headline inflation, survey measures uf near term
iollalton irxpr'i latkms lave falleo 10 very low levels io
94
2
Monetary Poliry Report to die Cnriprr.vi
FBtHUWJ iliKJO
Mm mils, whllS the bWU rollings mi Innjjer-leini
Inllnlinn cx|m taliuns arc similar tn those In 2(1117 and
early 2008
•flie federal RestTVB lias iMpuwted lorcelully lu Kir
iTisk SlUCe its einerjienee in the •.IIIDHIW fif ZUIlj llv
IIK: middle of bsl ye.ir the Federal ! I., i. Market ( uili
mltlM (RlMfJI tiad lowered the federal lunds rate
.Wi has* points,1 i\nd as Inrtiralions of economic weakness pmlifcraled and die financial (uilHitciite internl
tied lii the jeuontl liiilf, the IOMC continued lu ease
monetary policy aggn-ssively: ai Us Ueremher meeting,
Hie Cfmuntliee established a target range for I!K> federal
funds ran: of U In 'k jicirvnl and indicated Iliut eionomic
conditions ,uv likely lo warrant exceptionally low levels
of I lie federal finds rale for sonic time,
In addition, the federal Reserve look ,i number of
measures during Ihe second lialfof 2008 Eo shore up
financial uiiiikets anil support the flow of credit Eo husilicssti and households. (See dw apiwnnlv for descripMnns nflhtsp programs.) In response ro Inle.nsilie.d
SUeSSCS in dollar Litildiitg illarkels, Ille Ptotfettl EtefirVe
anuoonix^l extensions of Its'I'erni Auction t'arjlhv ^ud
si^uiliranrly expanded il:. network nf iiquidlly nvap
liin^ with foreign COHfid Ejanks. To su|]pu[l I he finwlionlngot Hit- lonuneiTiitl pit|H'i iiuukor in rliea^einiiirlp of Ihe I i hniiiri Brolhers IhinKniplcy, Ihe h-'k i.il
Rustrve tfsldtjiish^l die Assul f j j r k n l Cs>innierchil
f^jper Muni'V Market Muiitat hnntl l.itiuidity facitlly
In Seplem1>eras well as die Commercial Paper Ponding
I -M ilirv and Money Market Investor Funding Facility
in ^ I, i.-.lni In jin IMNLI to iMvknr iL'ri.iin si'Liiitli/Lilinn
tmskeaaai sajpffli ea&eUm itfcredii tu «Mimnieri. Ihf Kedenl Reserve In NoveraiwraiinniincKl ilie
lemi As%erBark«l Srrurilfi1^ I.nan Farililv. wllith
liu'litdidcil HI hpgin o[*'raliiin in lunilng wiwki, To
sujpiwrl I k inoriftiKPaoil hnostii|> matktts.•mil Ilie
errraorny nmrp hrradlj and Iti enroiim[;i' IB'IIIT funr
lioning in thr niarkrl fut ugi'ra.-y sL-ruritii's. Ilii' l-'«ilcnil
Kfser^e unnaunrri) pmgfBras in Novnnher to purrlasp
aRe.ncy-RiiiiraniMd niortgiRe-lurkiil Mriirilies and
agirncy dclil. 'IIKSC Initiatives have resulted in a nolahli'
expansion ul'Itw ledcrat Hesetie'bualaoreshoel, anil
the fXIMr has inillralwl tliat II eJtpens the Sim- nflhr
balanrp sheri ID remain at a high level Inr some n im- ,rs
a result otOpen rnarkei »pcnnlans and utrn't m«ai>ine.s
(o sopiiorl financial markets and lo provide additional
slioinlus In ilie eroiiotny lu au environment of very low
slidn-li'rni interest rales.
Oilier US goK-iiuiienl entitles ami foipigu garftnir
ini'ius also lni|]koienl«l a varlerv of pnlley mcasuirs
I .'Mist ul iihlinmliiikm* l« .inllnhli. n n> osiil d ihh r»[m
in rwponss to IN. IWsnsificaHoii of flfwrldal straim
over lire rnorw1 rtf (he fall add winlw.ThcTrrasurv
anuouiiseil a (eiii|iuniry guarantee of (lie share ptlees of
money uitirkel mutual fmiitstmd, iie^luninf> inOltiber.
USiDd ^lilhnriiv granted urlfler the Flhef^eniy BJCOASCHJC
S4;dnll/.!]Eiuu Acl lu giurrlMse preferred \ h j n ^ in a large
luimbei ol depusimrv insliiutloni. That sanu> month, itie
federal f>e|Ki^ri Insurance Corporal f>n (FDID inimdnre.tl A Tempnmry I.JEjntrlity ClMtanfW Program under
uhkh ii OIHTS guarantee for selected senior unsecured
ihligaiintis nfpaniri|iaiin£in*iir«l ilc|iiniinry Instlioliuns and many fit Ihelr parent linidirifi rnnljiauie* as
well U5 lor ill) Uakumes in noil interest liearing hansat
lion ileprnll jr. rmulls at |)artieipallng insured deposilory institutions. Tn Mnvendier, Citigroup C3M6 under
•.IL'II! I.':Li• r 1.11.i11.'liil pressure. In reiponse. (hi1 f DtC, the
Treasury, and the Federal Reserve provitiwl a \.... !••• ••
nf toil us and gifarantees to holster Citigroup'sfinRtMial
. i.iirNii.iM a similar jiarkaj>e was arranged for IHank n\'
America hi January. Since Oclufoer, govemmenls hi
many advajtL-ed e*.-ononil« have dutiouneed support
plans for tl>eir banking systems. These programs have
included Large-scale capital tinjecllnns, expanslnns nf
dejioriil insurance, and guaranlet'S ufstiiiK( forms of
hank debt.
The measure* trtken liy the federal Reserve., oiher
L',S. gijvenunetH ejilitiirf, a [ill forvign ^uvemmenl*
have iKl\ai[ HSSSK a decree of Mtbitily to some lirrauclal markets. In particular, strains in short-Eerni funding ntirkeis have r.i •....! noticeably si nee the fall, snmf
rnr|Hjnjte rj^k spreaiis Elave dtHliueil mmlesEtv. and
meiisiiiesuI'volatllKv have generally retrtalHl. fftVBf
lltelrss. slfinllicanl sirrss. |H'[slsts in nrnst markets, and
nnanrial inslilulinns nJm3in under rnrLsidemlili* pnJs
sine; as y result. \W* Clow of credh to lEutisehohKand
husii>psses eontlnnPA lo IK* jmpfliml,
! i runjunriinn wilt the Jrrau.ny 2(11)9 FOMC meet
ing. Ihe memberl nflhe Buard offJovcrnun »l the
l''edemf Reserve Svslem and presidents of Ihe federal
Reserve Ranks, ali of whom (ikinlrinaie in FOMC meet
ings. |iu>Mili'ti prnjcclions Ibr economic i;iuv. ill. unem
ploymum. and inllattun; tlieie projections are jiresenteit
in pith i flf this rennn. Given the strengili nf ihe forces
weighing r>n the eronmrry. K)MC p.irtiripanliv viewrti
tile, outlook ai having weakc-nei! signiricanilv in recent
months. Panicipants generally expecled economic
tsrllvity tn rnntraet sharply in the near term iind ilien
lo move onlij a pjlh ol"gradual rerovery, bohlenni by
monetaiy easing, governmenl elforts lo stabilise financial markeis, and fiscal sllniiilus. Participants expected
total and rare iuilalion lo lie lower In 2(109 than over
the I'uut ijiiailers of ZOOS, io largf oieasoif because
nf the recuol declines in commodity piices and rising
95
Jitntnl of Governors ttfthr Federal Reserve System
slack in resource Hiili/almn; inflation was lonvast tn
remain low in 2010 and £011. Panicipanls generally
judged ihat (he degree of uncertainly surrounding Hie
outlook for both economic activity ami in Hal ion was
^reater lhaii historical norms. Miuil participants vieufd
i In- risks lo J;MA', ili »s skc^wcfl in ihc downside1, ami
nearly all saw I he risks to the inflation ojllook as either
Eiahnml or litipil lo ifaedQWIBide, P.inici|ianis also
3
l ihp rales In which macroeconomic variables would In? expecled to converge over
the longer run under appropriate monetary policy and in
the absence of further shocks lo the economy. The central [endene; tcs nf llwst1 lon^sT-run prey Eft ions were
)>..:> \n-\i. i - n r Ici 'I l [lift L-ill l e u u - . i l < ? J > I ' g r O w t t l L J p a
cent lo 5.0 percent for the unemployment rateh and
1.7 pefUfil Ui 2.0 |]ercenl for iho inlliUkjn rate.
96
Part 2
Recent Financial and Economic Developments
The
I '••••••lilMi n m
;' •:i'\t arlivilV I li.u li.i^ ' n n i
1
< himti »ittdlLiri
H-LVpf jjiii P
iml.il.l
ing sinre lafe ?AW1 sEeejis'iied appriTialJly in ihr wfnwl
hall of 2008 a* I he .inline in Tuiaiicial mariu'h in ten
v . n l . After iJie. 3iii;ui^iHl tlitJK-HIIifv ^xppripncurl by
kuinie Mai1 nut! Fmldie Mai dining (lip snmim-i ami
the Iwnkniplrv nfl.ehmnn FirJilhfrs Holdings In mldSppHmiber, ilion-lecm Funding inarkeis were severely
djsrupled. risk H[iwads slwl up, equily prices plunged.
flnct market* for |H"lvate asset-backed smirltte* rpmalitrd
latgely shut down. As a nsull, prossums uti the already
siiauieit IjaljiKH tkteU uf SnaneSal uistiiuUoiiM iiu IVHSI.II,
thereby ilirmii'niii); (lip viability of sonm InstfluUtins and
iiii|)lni;mBoii (I"' l o w of rrerfil TO hmupholds .mil liu-u
n p « « . In |Mrl Irllwlilig till' cmalliilf! i-Hptu uf tln-se
develtipnieuls IIIIUIIJ>IHIUI I In1 wttl« enpiiotnv, • ontlil li.i s
In Ilir lahur marki'l ili'lrrluraii'H niark«lly. M o m w t .
imJtuli'iaL ]»mdin:llr>ti ctmb^CtBd sharply as lUiiLufiiLLur
ws r^iwinlHl agjjiwislvi'ly lu (to Iliiw in lioili U
ainl foreign ilciiiaml. Air railing in ilie aHvanri'
fitini ihr nuix'au ufliruilunul Analysis, ip.it giuss
tlumestk- proriuu {GOO tell ,II HII animal rate ufSH per
ii>nl in ihf founliquaitsr, ariil ti veim liradni Ihr<tnolliet si/slili- ieosase in flw i l ^ i .j
H of2068 (flgwe '!•
Mtiinwlilk1, inllaliun pressures IKIVC iliininuliiti as prices
of energy and oltiercommoilitips havp pliiirauoti'il. the
margin of resource slark tins widened, and I he foreign
c,\ehan)>e VLIIUC of ihr dollar ]HS strnifjllicnri! (ligun> 2).
ct 2052-08
x I'm p
• Tumi
•
I v luiahip In
ill
fttlural Kusvrvt1 nii|>knitint.'il a nuiiilxr of UTijjmrckHi
erj polity i*iiiia(lvt?s 10 vuppan Ilrmnclal siaWUiy Mini
iii Thesa tuiOaUyw tactoded
cl Fur ihr lrdf i r3! fuiiris rdti; K> .i \uu<:<ol 0 ty '.i [Jtrttin, tir^innliiH Jin-Li purcl^s^^ ul ayeiny
M
d gy
g^
Hfa
ing EiEjtiLcliiy |irmgrniiLs in liiuniisl MihTriH-df^rh's ;iiiit
uihor cLiiinil biinks. arid iniiidiiii^ pru^raThs in suppon
of systemiriiJIy iinporfrtni niarkrT w^mems, QOttf U»S
^nvprnnwm i^nlill^ Also unii(irior>k rxlranriUnary inilialivtb ly support iht1 fniJiiriDl s,wiyr by IIIJEK tingrnpilal
iiiEu IIM- banking system ami providing girardiiLot"5 mi
x ' k i IN-4| HabHltJ>5 of df posllairy inslJtuHons Mnnv ford$n fH-mrtil hiuik-i and ^ov^rjimrn^ tookslmllnr >U'|JV..
Althuii^li ilitst attians have lielpcd i^sluie a jneasiiic
ol'stillJJlily lu iotiie majkfJs, financial conditions r
qIIUP slTfcftod, anri a ^ r e ^
In hr i n i|ja irt^tl as a resiih.
FINANCIAL STABILITY
rji pfrincl nf prnnnaincril UiniErril in tiriitiiri.il
jf^Hii in \\w vimniyi ul' i!{M)7 ai'fiT a rapid
In flu* p*?rffln)iftiKr of ^nhprimr moriftrtj'Rs
97
fi
Monetary Polity It upon la ihv Congress
February 200E)
caused largely by a downium in liuusr prices in some*
part* Of tie county I i i v ^ l u n pulled bfldl Frum risktaking, anil liquidity diminished sharply in (hi1 rnaiktMs
I'm1 inii-ilMiili funding .mil slim inn-il i MMI ji prcwlutls
mure RrrukralTy- House prices conlinuwi to Rill rapidly
in IIK- lirsl pun ofZHUS* mortgage diiliiM.|ui-iii irs ;uid
dt'laulls cnrHmucd to t limb, and CQ0Q91& about •••••-•
mkmounted.The 1 inrriiiiy<J Nnniniidstrains led i• Ja
Ifcijiikltrfy crisis In March m The Rear Sk-nms CampaMtev 111L ., .a major itivestaifiil brink, iind En iis m:quisiliun by JPMoryd/i Cliast1 & Ccr. Subsequent dggrrasiyi*
monetary jiotlcy casing and mpastirro taken by the* Fnilo a l Reserve'« IHJIIUT di? Ik^id?^ [ifiiiiHmwl inMiiu
ttons conlribuk'd ID sonjp r«over\ r In lindiu ial markcl^
dmiMH lIn? spring.
N^verdiele^ vraiii^ irh tinauciul coiidiunn^ talortsflind ^oing into I lie spftmtl lialFofthf4 year. In partii ular,
amid worriei rliml the capjtuf OffftflDle Mae and L-udditMar would lie insiiHicicnt lu absorb mourning tonxn
QQ iujtc nianga^c (punlbtius. ihc stock firing ui I hi1
twn gyvflntowrt-spomw^O enlwvjisflfi (uSKs) b*^tn
to drclLnc sigiiificantly in June, and ijirir r I'-dii d'hmli
>w&p {CBS) spfffltl-S'^wliicji fotlcc! invpsin^' assp.wnn-iiis ui" [he likelihood of Ike CSTs deTuulttng un Ihfir
debt obligallons—rose sharply. Market anxiety easrcl
sumexvhttt in \Uw spLDlid half of July nlWt \lw Ir-fasuiy
[ji"(>|H)Mid blittuloPf' c h i k n ^ . subsequently approved by
thr CoiipirojaN, uncj£*r wlilrh El could l m d AIICJ provlrif
Cdfdtal to the G 5 & Ncverfliduss. pIBSStttfitOn llieif
cnter|}rises ronlinued ovsrr Ike course oflJie aunimcr: as
a iwaill, nplinti-ddjustrd sptiaits un jjgciH'v-^iLaraTiipptl
puort^ttmrljackvd si'turities tMHS) widened Jiml Imfrpsi rales nn rcsLdcnlial mnrtgngrs rose further (Hf>urr !i) r
Meaimblln. iivvesmc IUUMV HIHUH iheuutbok hsi ilii 1
broader l i n k i n g svefor reemer[jed. In July, [lie Failure a\
IndvMar F-Heral Flank, a large <liri.Tr iEisiilulinti, raised
Euntier conocnisabonJ tbe proflhitiBityandaaBa quality
ufmany Imaneiaf insilluEions, Over liie SUIUHRT. CDS
:in>-.-si-.
11<i
111,11111
E n v f s l n i e n t
,irn!
i. • H I I U M . - , \ • i l
oti jD^y«ar Fannt^ Miw debt and t3
f«n FaTinle Mai? mortgagfl- backed stcqritt« r
!
| in
>"
S'
• .
ftw
^^H'
Im'i
On
Hjdtwifefi
Inn
s '*
, MDITIH U | i , l | ,UICL il
l'
Hi*in.
lialictits) and tiid-ask^l sprratfcwUfrnwl in ihonsTkiiis
Ft>r n?|j«rt knse agreoueiKs {rt?|xjs} Iwt'hftl by ninny lypes
ofseturilies h including ageney securities thai previously
wert1 lonstitered very saFeaud liquid.
On S^plumbpf 7, tin1 Treaiury and \hv Federal H&wr
tnfT Finance Af^cnry anucunced thai Fannie Mar and
Krtddie Mat dad IHTII plitfeU ijilu t.uibervalorsliiip. I'o
niaintuin the CSiis ability lu purchase hunie uiort^a^es,
Ihc Treasury Jiiinnuiirctl plans lo csEahllsli a barksiop
k n i i i i ^ liii-itilY lur till? GSES, I f frt£rei«e up IE> SJCJO bil
4.
S|iiiniK-p|i EWfil (kfiiufl W N H r,...
ntwrJal ^oiii|Biik-i, 2007 (Ji»
Cd US,
I>-nik-.
rtfiift, SQTttKtf krge JEi^Jtulinns annouutrrf liharp il^cliiifs
in earning, and unu dmul rtparts su^^fsd'ii Ihuc llie
ahillly ifl niosJ iiJiam tal finns In lai^p ne^v t^pital was
lirihiliHil (figuTF.' 4). Wjlh (iHik.<s n.'[i)ciiin| Uy leiirl |ci nne
another, r.cmdttinns in stiorHerm funding niarkds enn[iiiiii-ij itf UP Mniiitfi! t l m i i t u l l a ' Mimnirf. Thf i
lri*^iiiP>Hl hiitik
eo?>l o l l n i i f i . i . 1 , i n n i n i ! n - i i ; E e r b » n k i t n i k r < — „ < • . t j ^ e n i -
plllird hy llir London Interbank nFfrrpd fait' (MborKa
refitfecce niie f&rawide variety ofcfflrtrads, inrindEn^
tloaling-rate mon^a^os - inrrunsud sharply Itigurf 5).'
In addition, rt^uirfd margins D| rollni^ral ikuhwn as
JiiHy
".
I. lrypirnlE>. il> tf]m\vv twi W r>n<a.MinMl h^ umiparh
1
i.iF!- H-IMI rhr' r-Uf no •rii|if>ir.il»l' niLHurirv JI\*-I>U|;IH m i i ^
.
i i. [Uj
i,|,ir,.K In.
.
tirl
m.li,
,m I. ml. I.m,In, .\Piipklt
Jafri
i\j*-
1B"¥ i " : l
....I . - . i . i . i ,l,,..,.|:l
-fslr
I , ' n - n „ l>!
.,>iiii i- .iii.| nl.i" ill-.L'Mik
.'IHVl
Link'.
98
Boanl oTCoYPFiujrs otih? Federal [faserve System
[>. Net Hcmi into i.iK.-ihlc U.S. £HQflQ$
L.]Lwr min
....
— MS
_
U
— Rt
—
I
:
'
;!
—
l\.1L .
tjnma
—j
—»
1 ,
tptl V"-
II
* r
(..•..VV^F
J
i
•••
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i si-:--1
a. li l l , .
6 < h , l M , | , l , •.
Ian.
<uv.
Ji •hr
(In
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1..',
I h
| ' | | . ; ' ,
-
|Hi
'in
la
HeS
Ih r-
Lin
\-»h
aMMd Ihr-iLi^h leUru,^ 1IJ. ZUW \ u
Uimut Mffl uhj||i ullfi ill* ULHIIJIIK f*U> HK|I
••>" i. H '!*• »ffp iKr M m l forth i
^H- an %v
.n oi |lw i p m d manm.-!
W W l W U W l M I MM- n t g l HHi'MI«r UlU'r*^
||q. til (PhicrH- raw l.abtM ]h ihu l.uiKhut
h
1
,
d
\ , n \ .
- A
•.•;'..
, i ' \ . i \
!
•
i:
i ;
-11
oTUhnttn!iirorhm .md llwcwiwrvaloitlUp
ntile M m 1 JFHJ E'I L-MI- MM LIUIKTLlUk'cl f r t f f l aVOrfti u1"UH|)M'C
• : •- ii • : 'i (Tie 4;r?s
ntn N"i.-vm iF(tk-H, M'Ult'iin'lilf UJ'IJK..ir.i.'i idlnft C D S f Lim l i w i i on ll»e;rfL piilirin pUHBlM siiMKtltilv uvcr
.Ml hwj'ucm w r v k s i-_ I.- i-.l'. due In pan i f ilk" JtiLroitft] nku^lw
.,i r r>s ini" E'I.EILNI In Ova EluPlfMl IwJlrij^ lip Eu
IL'UU'I
• |•
FVHIH' hi
— IlllHt
i , . 1
Hfnlhnrs JilnJ foi l>anttruj>E(y un Soi^rjntH'T 15.•' Ovet
tht.1 previous w e c l ^ d i Hank of Aiiirrird ainujvinnil Hi
inlc4iifion to drqulro Merrill Eyiirh, whirh had also roinf
•1 j
.Dtutt
B
S*-.• — MU
Amiil this ijrtHicI du-wniurn in invustor confiUefirc,
ami) dftpf large niortf*aj>[j-ri31alL'[i iusscs in iht* third
i|oar|(>r. Lfhumji UrollH1^ BUM uitdfr pip^stire HS LUUIIEtTpartU'M refused to provkli' sliort t m u funding to iht
llivf^lniL1!]! hank, cvrn on a ^trorod Itasls. rvniMinlly,
wtlli net odirr iMin sMl'liiiM i t ^ t (fuin j il Jiud v.-iih tl% hcjr. i j h i !
fa
'1
jll-
liun of prt-ffiTi«t Muck in t^th ol Ilif Itvti firnii, :m<: i:>
iniifuiv a program lu pun hust agfotff MBS. AJUT Hit1
annniiiLi'L-iTirnr intcr^^i Rtts^xoads i>EI CSF £itslj[ iiarru\V^ a i iiivf^urs lit'tariin HJiifidt'Ut lli;i[ tii*j I'n'Uhitrv
would support ilic oliU^aEloii^ tif (hr GSLM, Oplimi-ad
[iisttfi init-nvii ran1 NprcziiJii on MRS IS,MJLHJ hy iin' OSKJI
Tell. UJIII n t a iiinl spreads on rniw cuntunning Bxed-tlte
murr^n^rs iJiiclinrfL Nt'xvrdifkrss, oilier liriBin: j;il iiisli
fttttMfi t unlJnutd to fftC£ difliuiilics in ulilaiiiin^ tirjiiiility and capital its invc^lcn n^muint^l un\ioi^ .ifimbi [heir
salvunry ami, maw tiroadly. ahuut the Im^llralioiu ul
WDisrnin^ lirmtit'ial igrnlitUins fur lilt1 tLV4il;i.T)i1)lY of
i R-tlii i'j lii'UVJi'.'Uh inn.] tiusim.-SMi-N ;uid so for I lie ucunrjmii oMclrink-
i
**\
11
^~
.II. i liii I | j . . v HiiH-Ji
F O W i n ^
-
IIW
—
^
m M n >ti flan} uwrtaH
iMntijr. iw> i.uittt", I.-K«
llM F|*< HUIrifHiri' QmwgB
uiti In nVTMumji Uh' n
on
— )(»
rn
ir
1
Jnlv tin.
HOT
«
undLT 'severe iumliny pressure!, (u lai^f \mrt becmae
i>l lu^st's on Lehman Brolhers' ilfhi. (In1 nfl ris.si'i viiJm
of a nuijor mout^v markiu iiiuioal fuiul ft'lt h t l i m SI per
•^liun- alw Eustmii ;is "lin^king (in- bin. k." an i-vi-mi
I liar had nol tHxurrt'd in many years— ihcrubv (iratupl
iMH xapiEJ HIHI widfsprtjsid iuvi^stiir vviihdia^v^U hum
piiim 1 fumls {Ihm b. muTii'v nmrkef iiiuiua] funds fhiii
hold firhnarlly [irivatr-ft^cisl (LiguretiL Prime lunch
rij5i|HJTnit"(i tu Iht1 iiifjie in rLMjt'injjIim^ Ly r^ltning llit'ii
purt hmcM of short [cms DSM?IS. ipidudmp {-onuiuTi'tiil
l>auer—wkitdi *naoy hiiiiriL^st'S i^t1 la otUHLo woikinq
rupilul diul by shortening I lie in.iiJTify of lho« i
incntM Iliut Incv did purthiisi-. leading lo a [JrErrlai
of tlit LuiiiiiLi/icidl p j ^ r m a r k f l figure 7). M
invr^torb intrmiingly dcTiiantk-d saft1 a^si'ls, and funds
I hat hold unJy Treasury srt uriiira cxpff tciii-t^J a ^harp
Enoreuf tu inffuwi, wiuih caittvd yields on treasni)
liith to [iliciiunct. Iritrnsc dtinand^ iinion^ investors to
hold TroaSUn v.'cuijlios, coupled wilh I." •:- .• .-.I OOBjrvnKt alnjiit ^oimlrqiarly rretliJ ri-iik. rejjurkjdly leJ lu
a stibstanlial scaling back of activity atnong iradiliunal
M-I i i i i i i i •- h - [ « l r - i \ t i t i U r | M, - i v i i t \ i i i . i l h r ( T h t 1 [ h ^ - r v a s f i l
iitilviiy coniilbuLctl, in luni. lu di^TiiuUuiis in |IKL Trra
snrv IT|)O and cash markets rfiai WBtt eviitenr^d hy a
vt?rv high v^hmiy Of I*tiIs-lu-deliver, RedtfinpliOTiSi Inmi
prirnt1 funds slnwcd atier die Treasury and [In? Tedund
i^^i^.Tvc totik {irMojih in Septetnlk'i Mud Cl( lobvi U) sun
|KJll illt'il 1 fuiHli falT ihl1 .i-'|" ' •'"•• •
Aroontl Ihf same limp thai the diflkullies at Lehman
HIUIIIL-ISen^iRvd- llie liiitimiul Lxitditiuilof Aiiwrlcfirt
Intfrniitional Croup, Inc., or A1G a U\w- complex
iusuraniT (un^lompfair—drn-iloraled lajiEdly, and rhr
i;(HTi|iHiiy iijtmrt shun-lfcm linHiin^, «|jnn which il wui
hoiivily rdiHiir iiKTcaiin^ly diffu ull lo obtain. In view
1
99
8
Mwielary Polity Report tu Ihc CgiiKress
7.
Qllllltii'ii-lal |IB]«T. 211(17-1)!)
Intaiary 2009
h.
Hs Hi'*i »r Bw^ajaHiiidpd CHHJV nil itilei-iwl (J.,S
llrmiK-i.il -r
'i in: ill)
b
Will
1»'
Nttn jinMUi* m rMQ nd
U,
.\1ra |..h. • )..•
LJIKI7
...,
!'•!•.
'
"
•••'
lux Am •"• •*••«*• aid crowd Hmtfi Nbwo1 "• SOW.
till I«I*-I hli-Jil ^mW* up Iui mi nviiikij,lii tiMMi'lit MHI .in
4>*|IH<Wil iHrflH.
hi' VH
ta
uf tire likely spillover r l t o s iu Otfco Jiimmial inslilulinns of H (tisciflltfly folhnv fif AKi jind thth |HitrnEtal Tor
hi^MiJir.nrii pass ihnni^h rffctis in ihr hmaiter wnnniny,
l\w PfliteHd .BejCive Buaril un Stpiembtr l(i, triUl Ihtfull Nippon niihr lirasnry. sntliort/H Ihr l : i^)rml
•RttWVA Rank &fNeW Yurk to hind up iu $R5 lullton
in the rirm la assist it in meeting iis ohligiiiions and
iu ladlilBE^ (he urdvrly sale ofsome ul'iis business,
[AIO, Ihr TrraHiirv, and Ihr Federal Reserve lnlrr rntidi
lird du> |{*rms ol this arningrnicnj. a* rtcsrrilK^d in ihe
3ppumltx.) Mi'iinwhlk. CDS spreads Tor olher insurmvi' cotnp-mics nisp, and ihrirequily pricrs fell, amid
f onrrrns ir^rtrfliu^ their pmlllabillly and declines i
v,itiu-\ of iheir mvE&Lnient porlfoilas i SiL-.m »• ft].
Imrclfir anxirly ^boul inve^lme.nl Ihinks. which
dad cMMliipti-ij mpldly in ihr ^ake of I ohnirm
aitlri^'ii1. abalcd ^onicwlial alitT Mdr^Jin Slajiluy and
(joEdjnan Sachs weii? granEed bank holding company
cliflntts by thv Federal Rcscrvt*. Htiwuvcr. on Septan^
bcr^S Ihc resolution of anniher failing linandai InslllutiuEUit]. inipused sigiilljranl lushes
on spnioi a
IHII(1L*FS a i wull as on
S •« h- b. KMAL, BfWi
muftta IH.IHU.VV I » 2M9: ihuv
N Wuw* 'HUWI u'
w l i k h W W utiiiiiLLlt*ly atCjiiired \y\ \VfMs For^u in rarly
Octotw,
AfialnM ihl.s harkdrop, UlvcSMB pilllMl Iwrk fcom
i is-, p i".ii"> e v e n I'lifilifM-, i i , i u i i i '
n i • - I - , f » r ci'niis
licyunri pvt'niighi Isttgdy ceased tt> fUnfllon, anil a
hSAt variciy Of rtnanrlal linii^ riqwriftirnt &KKaSing
diffindiy in nhinininfi funds .ind raising npiial, Mbnr
raifi ruw ai till nirtlnriUfs whik* rcunpambli'uvernight IndflS SUffp «JIS) ralps fell, l l g p
a[ rrrnrd tevtli Straits WDfe4l£OB9fftanl in thr f
lunik niarkd. in which ov^miyhi luiub Iradwl ovirr
an mmMialty widi' rangi* anc3 srliviiy In (emi luntb
dropped sharply, Condi I ions in Mpfi markers wnrsrnn]
litnhc'r. as bairculs and bid-flsked spr^ds nn nnnTri'^uiry collalpral iiHTi-us^d, ant! the Dvpmighl rail1 on
general Trrasury coiladiJil iradnJ nertr Sfeft I'h^pirr
5iibstanlia) JKW ivsiiflnrr, yiritis f>n shon -diitrrl Trra
sury bills also (radtfij near zuro, Fail^-Lo-defliver in tlii?
Treasury ni-nkct and (»v4?rnighl lending ol'spcurilles
I'nHn ihr portfolio of Ihf SysTrni Oprn. Msrkrl Arcaunl
soaj"L"[l l{] record, liighv, Spreads on OSHCL tiackcxl com
im-icia] jiapyj tAbCP) ami on lo\vi3F-<aled LISWI'L lived
ronunrrrEal \rA\n-t Issued bv noiTiinancUd linns widened
^ij^tijikanlly.
CojidiliuELS ui "l<in jifi.ii.r mi ii;,i.kp'K .iiv, ilfhirio-
t^i-ii ^liarply in Sepl^uitier m\6 Otiolirr CDS spreads
an rorporalf debt surged, and IIH- rales on invftjitnwnl•• a ' H I v. -= |M• • 11-: •. Hi1-.. M m - minki i] down
LSi":nii! :in*l hi^lt vii'M honds rose ilmniiisn-ilh.' rchi
llieir i'-.\| •:••-'.111•:ri••. regarding likely goveninienl sup
live louotnjjaj^blr-mHlmily Irifa^uiy yi^ldi (figure
ptul (or Ihe unsei'urecl notitlt'pusil liatiililits of rumucial
3|. Sixomiafy-nirtrkel bid firi(.^ Far levs'ra^et! loans
lil^tilutl^ns, wlitdi iutthtt inhibited ehe ability ol somr
dropped lo rerord b w levels as insNtuNooal inveslors
hanking organizations TO obtain funding. Anion^ ihi 1 ^
i.i:ii.r k.. i.froftl'I'- insirket, and Hit- implied :\n •••••»:
liarfiH ooflipany
tin an index oi faqn <njdil skdauh swapi jlln LCDXl
S. buiih hy asHjt sbo ar ihe lime.
100
Hoanl vl Cmt i nun til the /•« k i nl Resi-n f Syiwu
!l.
Spreads oi i w p t n a u ' bmut yfeitls aver
iifT'lfii'-ilm lVi'iUny ylplik, liy stn-urirl
; . | | S -:• •• • J
Fj
t of selctled montage- and assul t
i
\r,|L .-,(r..iL h H.MH
[fen riw tint* nri> <Mv *a w m l <hn™iii MJMMY I«. HIW fto
«|jnctdiiu druMi OT rth ^ h h On U)#W> hnmJj. lew U» Ifl-ww TflWHiiy
l<
Widened to rcron! levels (flgjtfo JO), hld-^krd tprmds
nn high vicld rnijinmrc bonds find Tpvpragprl losus
• in ri^KHlsigmfo nully, ..in] UrjiiJillly .mrl jirii c iSiwiivory in (ho CDS Eiiiirkn miuiiit'd snipaircd. ™|ii'i la liy
far luiHracls InvuEvIn^ rmanciiit firms. Spreads an
l mortgage1-harked secwhfes (CMnS) and
eitoides (ARS) n\*n widened
p
tO a sfeUKfetB] ( G g W t LI), Tin* lur
moil iHU'Ciuit iven theTreasuiy m;mkoi. in whk'ti lincrt^i
||I.WHAI4NI> 'A\Vt
li
Pill' M'MLlkriklitl jCinntfu51-ls1lHF.nl
I liuiMIT M N I : H
H •'..
I Wm
l f c |
m^ i uinunki I—in. ftd
I H I'M I(S wri AI >S
TfE&htfy -i€"rurilii3s jiitH yields iin t«Miparaljkj muiuriiy
oil t]tf rLEiistr iirilks (IIIHI iii. IbflSP ^rurilies rltiir Wtstt
jm-viousty ISSMHIJ—an imiiiiilur ufdiu lk|Uidily til lliis
itiHjkii - surpi-t! from already tlwati'd levels. J orcign
tir^iU'kU iiiurhfis fxptritntt^ many nl\\w saiii* dislui\m\vi& as dinittsiic marker (*« t^seciion "liMena
Uoiuil DtvrlupuifiiLs'). Price unjvi.*inttn(ii Inftfl «f Btese
luaiki-li WWB likely i?xaci.-rb3lii<J l>v sales of wcurflljftS
hv hi-clgc JLHLCIA ^nd othei teveragosl niaiket parik i
t
I ••• I-.I1 I n' 11 Ii j I itlVt^Eun? .ili'l UllkT JLIfll.lill.U Ill^ils.
ht ihc suKk nwifce*. pflas tun third aitd volarilky
H^fld to rpforrl Itveh during rhe autumn as Investors
grew BWft fontt i rn«l ahom (he (Jr-osjietis of linancial
Firms aiwl alium Mie likelihtHiit i>l H det^j anr] |jrijk»iii^uil
ifcpsitom (Ifguivs V£ and IS) Lquity-[nhv decHiKis
wore |iai'M(.'olflilv |irnrnE)iMiml aincnijj; Hnsiirml and
energy finitt- f)ul Ihisy wfrf geneffllly w][|ijspMfft(l ft^Nk
serInland wefeartonipani^l l)y ^uhitaiUjEil nel oul[lows Irom iNjiiih- mutual I'IUHL^ DHLIEI^ Ihl^ jht^timI_
die preiiiluin iii.m invcsiors deiiLHiitdnl for holding
ftjiiiiy ^tisres—gatigPd rnipghfy Uy v.,- ppbetWHJI Ifor
pflmirths-|>rirf i Hilo ,nnl ihr yipld cm Trpj^iirv SK'lirtii"'s •iiurr tip. n-ilf'rtinj* ilu1 l«'if;im?nei] rKk aversion
dim prevailed Ln • iu:>- ;.•! • •.=i- -:--
W). I (.UXlliiirh*. MM!
' i i >>.
-. M i f f nt rflu iBigfc u
IpWhljffrfJ Ilkub. StltBS •« "-'u
r.iHnij
(h uhM >. /fflfl. 4iint>ifH-A IITrtl April H. k f t i
>ih .1
MtQ 3 1 2fHST
Policy A c t i o n s a n d the M a r k e t Rf5pfinsf
To Mresipdien confidence in llie U.S. rutancial syslem,
d u r i n g i h o a u t u m n •!:• 1 ' c d r m l
:•;.••.•.
at i ! .'
acl-
101
10
Monetary Policy Uuport ID UIU Longrfis
leliruarv 2CMJ9
iiL Mahilijrjtion Art Usin^rnmK Iroui llir T
(Itf Treasu^ PAiatiliiJusI A vulimUlJ CSpiU] purrlwsi;1
|iLin under vvhtrh thf US. RtivfrnniPUt wuuM huy pir
frriciJ sfiait1^ hum eligible insLUutions AJditioiiiilH'.
uiifltr the Temporary Llqukilly Cuaranlw Pmgram
C fCCPJi (lit* I'^El^nil iJrjHwii IIIMII^IHC (.^r|«j)iitinn
(MHC) piuvidrd A Ipinporflry gtiavanlw iot Sfltclwl
senlfti mssmirpfi ohEJ^slloiK ol' p,irlifipnilnph huurrfl
dt'pasilorvr iitsiinifluiiis nnt\ niptoy ml ihrir jiaffi^ linMin^
Ltnu|jaiiiHSds well «<s I'm <i|l Ij^ldHti'S To niMh-tnlerL-sl
hi'arin^ Jsan^mlioii dc^iosii atrotinli; in juirtli Ijtailrs^
hi^Mrcd (Ic^o^iTory mMkiiUoiK
Si.w.\ |vi
\ U-1 111 - - -. i = aCflOAS •• i" i the :;iHi"ii'ipi- iii'iii'. n| '••nni !.n
|tKigi3ni5 3ltB D H ^ b a r o f ofhrr ETiunrrii:^*, Klrr?i!5Csin
: - I I i n : i.'l i i ! , ! : - i l •- • . . A I - I I v . « r i ! - v h.*l ( i i i i i ] ' . . l i . -i > i • > I i I.: • i LX
J, i • L i j - -J 11L • • • I M l i l H i r i l . I l l ISM1 n i r i i ! >. • I • K I • • I I-E = 11L- -. IM;II.!,--I
V I..
:„« |,.,.~, I,.!-,,-,
I(IK In BttSfiHI with inrfiRn mitral Itanks. pypanileri" I K
exiting liqiildily larililirs find announced "iFvt'ral scldilim.al iuiliallvus, including urograntt lo support •.:i».: i
term lieiiEJiu^ rmukt'[>i M\il In film hasp a^piuy dr]>.
obligations ami MMS. (J In-se iiljllalivvs tire discussed
In niorr dolaW In the appendix.) [ircansc- ol Ijif sharply
lliminN.ptf Hvn.lrthiniv nl' mttkrl funding srvt'ral PMf*
m l Reserve facilities ww used tiuavily (Jiroughoul (he
Id iiiliiilimi die rrrasnry miiiiiiini cil .i lr>nt|Kif<iry
pit^rdnttf program for money markeI mutual luitds dud
jittijmsi d ilic Troubled Assal NBIIPI 1 Pr«)>niin fTARI1) ID
IIV ^uv-Tjnuvni lurids (u help Mabili/.t? (li^ lin^uviitl ^ystcm; on Oclcbcr 3. (h^ Con^r^s ap]irt]\'rd anil providcfl
liiniliu:: in Ills imiyiTimasiMi-rofttii' I'jucigciicy Kcu[in|.li>-rl S&P SOD volaillUv. I'J'JH ,-
Hi!
— 7(
m
I8M
Ml
•'•.••!
' I '
•!!'.•. i n ! "
--|lll
. •« j —
- M |
'|-
iij.
-;l
•
:
|1|1!
j
cnmnicrt ial pa\Kf nw\ Afit!TJ unrrnwrii iilirr lhfh rcdrriil
Rpscrvn aiuiouucpd ttuLaiiun% In &ujipnrf aftWis markei.
7»\t\taMMFKr rriiMiinrliHl Minu^wlut Imin iK hvfiiK In
HI^JII-IHI^I ,HII] Oclobur. Concfitioiis IjigJubHl iiiuit I^SJD
diilbr fiifuliitfj. inrtfkft*i also Imprnvofl sLgnlhmnily aftor
liii' l-iiifr.il Kf-icnT sit1^]rinii>ilfv fxpiiiwlfd ii^ |]ragi'fini
• a-1 li^n 11 Ill's *.\v; 151 *.. w l l j l IHII JLiM 1 1 nii.il batik*;, ^ ] m \\
ivei k i i ILL|. i o f I h e \ i p .ir
13.
l.lhr>r i\x\ts#>fltmnst niafrurlripi t l « MnnM rtoiicfat^y
<in(1 i|)feart& uver coiiipambU'-inaldtiiy O1S faies 1141
H<fl
^
M
Hd.
'-. ' i ' I v- <LKM We KWWi Mid AMEWl ilhUHfill (W Wl-A PffllHW
FritlilMFV ?<>, lilVM 1l«? fl»Ml >rhVJWIINM» BdM islimrfl 1 NtWil UK lliKt I1hiiitjj,ll
I, I-, IS, iOW I ' U ' J J I , - . •,|«mi,
IV. VIS
h ll.'IFH|
i )
•;
IMI L^SSI'II mn1 rhit.ii mill nl'kilJ-ir Iniiriini. ^HHIMMM-II in
Foreign 111,1 rktis, and a number ot fort'lRi) ^ovpmmeitls
|[Kik uifiiSnns?i lu strvuytli^n -irnt ^tahiki/j1 llit'ir IMIJKLII^
Despite ltit.se ii)ipir>v(jini?ji(s, iiivnslnti%. Fi.'nialiiHl
ftHii'^rncil alitiul rhe wunditL1^^ uf HnatiL'lal iiuliiu
lions. Spreads OIT CDS for UN hai>k^ wiitrncri tunin 1
in NuvewbiTn wltidl raistil ike |jfui|n?a yf signUicant
lucri^sos In banks' rosis nf raKlnp rhe lunch thoy
inbtrt1i?d fiir li'ndin^. Ctri^rnup, Lu jiailirular, saw ils
CDS ?sjjrrad wid^u draxiUilJLdlly afltr ll aiUkiiuiLi-d HIM
il WtHiIri take lar^c f^wrs nn Us JsernritlM prnifniiik
To sii|>|KJH niai^cl liability, the ii.H. goVfrmiK*ni on
November 22 enlpred Into an agree]iit'iu willli CitiproLip
in prnvidc* .1 padt^flfoflpttaf,guarantee*, .11 id litjuiriilv access. SiLb^exjuenlly, CDS uploads I'cn linaiitial
nr-sji ii IIUCI^ rpvwwd ;i partiun of ihelr i 1 ^ ! ^ widening,
rind w m r nnnfinatirta! risk^pTP^ri^ aKn narrnwwl.
Cunitiliun* iti drbl i^idikLis 1 u/iliimed lu trdsedher
i!n-|M-.--iu-, nl M.VI "ii'l idrtKMipJ) most i>l rti^einnr
ki'ls lentaiti nuirh lrv% liquid lhan normal Virlds rtntl
spreads on corporafE* honds and commerttal paper havi1
dKOQVei iinlitt^hly in ffrriit w u l % bui prilvily En
il"- leveraged loan market coniijuu's eo \tv very weak.
r-i|inry prlrth for tln-inrlal lirni^ IIFIVV continued lo
Irrnd dnwmvRrd. nmi CPS !ifirrad% lor sit^b llmifi h-ive
Hu( toalpiJ aruiind fX(sfmely elevated levels. Luveslcrc
102
IliMTd of Gv terrain vfltie Federal Rassne System
exnwssed reircvwd conctra over linamiai institutions in
January alk'r anunttier uf limis, muii uuiatily Hank uf
America Cnijicimtinu, rrjmrtcd large npl losses for thn
I'iiunh quarter. Tin.1 lit'asuiy. die I-DIC, and HIP federal
Reserve iininjiniced un January 10 IIKII IlK'V hnlJ enlUed
lulu an agreement wilh Hank of America In prnvide. a
|;.iLkago of capita!. guarantees, and liquidity actess (sti>
the appenrti*]. Mlhongh markets ronamtal favorably
In rtlis acliutl, Ihr uncertain (imspects nl I he financial
sit lot anil in nt in wtMjdi heavily un market sentiment.
Banking Institutions and tile
Availsfoility uf '. m l it
Commercial bank credit gn>w ntodL'raiely over 2008
. a whole as iiulli •••
• ••• • and :
'•< .,' Qmes
drew heavily ail .•. i«rin:.: lending loimnilinenls, lull it
fontracicd notlreahly toward tlw cud of I hi' yenr ami In
railv 3O0B. I n Ulp la I T citllic wverr financial matkcl
dtsnipUiiii.s same ctiiiipaiik's lurnnd (a already coinpiiiluil llrlrs »] i inrlil vvilh h i n t s , u h k h <anw<d Ihr
growth o f t o n i n u ' i r l a ] mil indiislrlal ((.'•& I) loam lo
;|ilkc In Sc|)H'ni!]cr and October. However, C * l landing
dfcliiwri n v f i Ihr fHsl lew month* as SOdtt husintsies
rt'portHdlv paid duvvn ouiManrliiig loans and stepped up
thl'ir i'.Mi.Mli-r in till' i rir]i[tF.II( hiiiii inarkrl. In iiilililian
hank* tnniinn«i IO xfM decreased demand for rredit
lair la1,! year in n>i|innsp lo blowing hiisinpss InveM
in.HI ami ri'dnrtvl nuTRiT and .irquiilltfin nrilvify, \W,\
liiinhs continued ID lighten st;iii(l;irih and [finis on C & l
leans Hi lii ins uf all sizes. Issuance, of leveraged loans
tiy bankv whirh hftd already l i m i ver>' Invv thrnnj^li ihc
llrsi hall of last year, was essentially nil In I he second
half, largely hfcaiiw of a drop In morgMrs and leveraged
Imyanlv which Ihew loans arc nlten uspd lo finance
CotnniLTciHl real estate l U t i ' i loans on banks' liooks
pxjnnitnl ovw ZdllK S3 a ivhnlr- Hiwevar, will: tJte
(OiniiH'nial i i i u n ^ g r snir/lli/aiiunniarkei iSHenlially
c lostd by mid year, the rale of grow 111 of I his loan cal
f^nrv SIPJII^LJ [town *ii^niliranilv in ihr spcnnil hall—H
ili'rn-3511 L'Dnsislt'nl willi the reported lightening »r standards and fl rim(i olf In di-ni,uid for I hose loans.
Hiink Irwn'i in iniil^i'linliK Bfea derllneil nvs»r Ihn
sa»ad hair of 20US aiul early 2(»W. led by ,i sharp con
tmi linn in residential mortgage loans on hanks' books,
as demand Hi'akriKil further and liankssuld such luani
to tlie CSEs. However, loans drawn under CXJSIJDL:
revolving tinnie ei|iiUy Mill's (if itertii runiiTiunl nuiMbriskly during the second lialf of Hie year, an increase
likely inHueiif ed by a drop In (be nrlme rale, on vililrh
the rales on such [irrfiis are ufli'n hitseil. (.luivdj ul runsinner loans originated by banki expanded at a solid
11
pace through Ocloiler bul weakened (.onsiderably in
\uviniliiTpud Drcmibn, HuWfVer, Itir arouunl uf
such lonns held on banks' boats fleucnilly ronliniiMl l<i
expand late in ilu- yeat. as luuks liad ilifficulty wiling
these loans bNU5C uf undoing illsni|)tiuns in stxvti
ll^iliim markets. Recently, rnli^llnier Innn grnwlll hat
also reportedly been buoyed by bads' decisions to
build Inventory in anticipation nflHuanre Into the T « m
Assrt-Harked Smtrltics l.nan i'acilily (TAI1).
In the Smiai Loan Officer Opinion Survey un Bank
I endingPrailkMronrlurlfd in both October20011 anil
l.inoary 200(1, very latRe net frac lions ot hanks reptrtteti
11. i - - a i -i.: - lighleilfd lending standards lor all eiiajor ln.in
lypps, SiBnlliranl mil Ibciinn* nl 'respondents also
K'|n.iiii'il a widi'Sjiirad weakrniiip oI loan demand In
Hue with the nearly 33 uerccnl drop (annual raie) in
total unused loan coinuiiiinenls reporter! in fourth
quarter Cill Reports, many hanks iiiilicaled in Ihe Janu
;irs .Mirvey rli.n they hail cut lli&stK of existing credit
lines to bustnt'sscs and hoiiM'hnlds (ligitrc N ) ,
rarnlngs growth at de|]nsltury hisiitulloas slowed
ni^rkerily in 2NflX, anil jiifilil^hEHly ,is uira^urcd hy
a l i i i i i un assets and return on equity cituupt'd droiiiad
rally (lignre 15): Indeed, contmerrlal hanks pnsted an
FiggrfEiite loss in the Iburlh qiiarTfr, Theve developmen Is in part rellHIed wrile downs on securities hold
ings ami Increases in luan loss jmivWinning In .,••..,,ir.,,
lo deteriorating asset quality In Ihe fourth quarter. Ihe
overall loan delinquency rale at commercial banks
iili-n'asni In iHiin l,.,i|.r |H-criTI1. i l \ hi t j]i",l h'vrl
since the early IBSfls. and the total chaige-off rale rasv
In un in than I N |iercenl, sur|iasslng ILs peaks In the
II
L liHiiff in iiiniMpi.l Ijmik Ja;ni * i iiiiiiiiiiLn u rtK 1n
sand hffljw-hotris 1090:02-2008:04
i
i
i
i
i
Hum inn; iuii'1 iwifi r m will Tin; mu itmr am
rtM
I,.': M i l
' I N k n i l I I M'
Ml,|kJlK 111 i NIHJLHUIIrflntI
103
12
IS,
Mnni'iary Policy Kppuri ID the Congress
Fehruary MHI!)
t:»iniwiT-tal tank |ininialii]!l>'.
l'mr«i
ri
Hmnnr ..HJI*'*K
14
1!
HI
1
" " ^
\\
_
ui
6
V
4
I
i
:
I — I
I\ - I'
—
—
II
1 i 1 1 1- 1 i i 1 -1 « 1 ' 1 i 1 1 1 1 1 1
1
xx
am
ram turn trail iaa;i ••• :
IIH..Iti..I... >imti>iHHsqontifcw i.pk HO)
I ..1 . .' 1 1.",... I..I t i i ' .
1
I M
IIIINUH4I1I. t'limtii II l . u k i ^ k L i l ^ l
n
S'l'
••..I"
'
economy recorded si/slilf declines in activity i» late
,-:IIIM. and I in- weakness lias L-\ti>ndt»il into early 2(109.
Cundiu'un; in the labor maitii'l lave ivunened subsmmialiv slnrc parly aiiimini as <>iii|)lnynvnt lias Inlltrn
rapiitly. ihc- iinemplnyoii'nl n l r li^ss riinilicd, >inii fimh
conlionr ID annoiincc BOM InyoMv I loosing ii'mains on
a Mfi'p downward irend. and both coommcr spending
and business investment have cooltarlnl signitlcaiillvIn addllian, detiiand Tor US- rapons has slmiifinl in
ifi|MjtLsi' tn I lie di'i.'litiif in Fweigii itiuioniiL activity.
Meauwhilf. nvi-rall consumer price iutlaUou lunied
nr'^ilivf in ltlkJ WW a^ I.'IH.T^\- |nir'rs lunililnl innl t a «
inllslton slowed rtDiicrably.
n>
,1 t . L , , , , l l l l , i F ,
'Ml ! , „ , „ , . .
Hull
1.
•(-..
Tlie Labor Markel
III
[in-1. J'III1. I'.M' ivei^sloiis. lilt' ralio Of it
In nrl rhbiQ^r-t]fT%- sn imlinilm orn^ci
[Irupfseil Iwlmv \\\ \HF\\in\s nHiUr fP3[:litfI in iliu early
I99&.
I JI'[IO^I1NIV iii^iiinciuiis Lin t's^ Id I'unding lias
imjiruvod <IK d nhsutl of lhr vdrldiu l-'pdt'ral
liquidity [iiI'J.IL.IHI1. .L]nl Ihr TI.GF, innIIT 'AII
/innshevn luufii jinnhiiik™ol H i
fiiiinK In LI• • si• In .iililimni ilir 1 i ii[iiJiil u l
izalions lias ljerit IKKJSILII by IIKMP (IISII S200 billion
ofpr^fprrpd stock |>nrrlinw^ imdcr the TARP 5UIK Ilir
ii'ii'in tluwilwdnl trviid tit dti^ M^iiily jiritfri ufnujst
liHiikv ami (hi1 drvainl IfVn! iilldi-ii CDS SJMWh saggi*M ihM [HFtikcl p&riiripnnl.^ n'ni.iio rnnrpmftl almul
llliJ loog-lemi pmilinliililv anil pnieillial insolvfilry I'f
si mu1 drpusiiurv inMlluIloiu.
Tlie liiiaucial mtititiil \a\ Inl lu sigiiilitan tlmngcs
In ilu' 'nirniurn' til i In- Imiiid banking industry1, wllli iwn
Idl'^e uivrcliuftil banks mid uilf Ijfge tiii^iLLLt' conijhHiv
ri'renlly m i l I'IIJHJ'. to kink Imltilllg CPTOpaiSM to
ubtaiii k'ttt'i tfxesa lu (juvrnuni'iit ruiiiiinjj |)i'<q;iaiie;
s lisiliHiil of fargp inEUntnct lirms. iiirjlivaied pamly by
IKoir desire to apply forTARP rundin|>, have likewise
i-uiivi'rti'il (>i lnii fiulding i uni)j,ii[i.'b In jiWiliuii, hfvfral fsllurM and ms^en alhagt linanclal ttaOiWas
icMild'il in intreiiwd roiifI'lilmlipni of i iiilmii •• aiwts
and ilr|»hin in ?MW.
t ondiliuns in the labor niarkel delerinralnl Ilininghntil
;HI1H. lint they tvurseiifd niHik^lly in Ilir autumn as [ob
Irsses arfplfralod and tilt1 unemiiliiymrni tint' |nni|)pd,
In Inlttl. jjrivalf nflSTolls fi^ll S^ niilfirtn Iji^tvvt't'n dn*
onwl ol fhe fer^i^ton in DecemlK't '^007 and January 200!). with rougiily half of the reduction IK t urrtitu
•. IL • • MIL1 lln 1 | <-1"-. I l l j l l ' l fllUllllr. I .L'lll' i C • I I I L I I ' I I I -. 11 I L ! "
NnvemrH-t, privsli1 payroll cnipltiynii-ni has fallen
6WJ.000 per iniinlli, i.oiup^ied with avwage innudily
ill i.nM •, of 311 I.I!!Id in Si'jiimiliiT and Goober anil
11)0,000 w r Ide first cigltl nmtillis of 2008. The d v i l
iau uneeiployjnwi rate, which smoii ai -in perctn In
Dc_t ember *i0IJ7, has marc:hcd steadily upward wver Ike
|IASI year, and il nsdted 7,fi |H.'LT^III in Jantiary Z009. its
highest level since 1902 (li^ure 17). Moreover, private
surveys and tievvs Tepurls intlicajf tltal iirms pltui ntl
In lav off workers in (he Star lemi.
16.
Km rhmijii- io pnvait payroll «nip!oyni«n,
Kh/\A
pJyY
1
—
rt
V»V1 • AI
„...
s\\ - m
\\
V
-
In part [("Hi-oiog Ihc inlf iisHyni)J drteMuiaiiun in I man
[in I cotiililtons. nearly all tiiajur sectors ol the VS.
3UKI
VN.
— .mu
—
DOMESTIC DEVELOPMENTS
— ™
_
l«l
pirn;
?nm
Ponl
Nun.. NQtilulTtL LIJM.M^^
m>
P n * nnri7
Putin JD Wl
m Mi. 1 IH- J.IUI ,III, IMUMIIHV - m l t ^ l "
Sum i BWUIWI "1 1 Jlt'r. llnnwh ril 1 Jtlnr tthfljlfl
104
Buanf uf Cowman ufllw federal Reserve Svstcm 13
IT
Ift. l^hflF Ifirre fifiTIH-ifwUniL nilt,
t-Ivllinn inifTH[iliivni«<! ralr Tli?S-;i«l(l
-
H I M
I I
J.I
ill
11 i i : i.i •:
' i M •!.
HWft
lli|»|<li J..r,i .i
.l
I .1,1.,- 'pl.Ji-.
Virtually all niajnr Industries have mpeiieiKfti rnn
sidnahlc job l o w s rnonlly Mrtoidafforin£ cmiploympiil has lallpn nearly 50(1,00(1 aver UIL> \wil ihri-e
mmillis ,tiid h;is c1r(ip|icrl innn* than I mlJIhau shirr
IJ
n'i'i- 2007. Layofls in lurck 1i,iN\|iniiLHi<m and
whnip.ialp trade, whlrh nrp closely relaicd |o activity • ii
il-i- ir. MiiLii lining suTltjr. \hw.'. a tfoiilnr |j,iiiL-in. I Inde< Eiitf in i/omirmiiuii etnpluytHfiii, wlkicl] btgau In
Mrly 2ti\)lr has aiin sped up. iai pari IMS-aUSE1 thih utigtj
ii>y. *''iiii'n ii'-HI In ]f>> I<IMI
iimrr i:• i i'H11 •• liy vsriikriHU in nunri^hlt j iilinl
In IhcMfrtirp fiiculm iiins«-njr. job ILKSI-JI hnvr IIIIUJMI
(id al lelail i]sla!>lijitmiciili, piovidpii ol lii^ncidl services, and j>n)fr',slt)n^l IUILJ bn^in^s ^prxirc?; firms, .ill t>f
whicb hsvi' bi'pn advecsety affected *ay the dwntum in
ttoiiuniicsfiiviiy, Anutit^Ult? i-xteplion lias bflttl Ettt
H v H ,
l I^
I I ..inn I'.in-,,,i ni I fan
In Jrivotunliiry pnfidmt 1 work h»!s bi'pri widesprrad
BCfOss itidn.slik's
Thn? labor foite parti (i|Mliun talt1, whitli ty pit idly
frll* during periods o l labor m a r M WCftfclJWS. \VAS
decreased! u f b l e (figure ISJ,
|jL'ijn damped !toiuf\v!iaL by (he a
niirihploviTirnl in^nrmKT bpiwlilv whirb nuiy have
.••IH-(HII,LMPCI some WfftkeR wliu wuuhl fiave qthiTWisf
• MM. '.»jniiniLi| iJi'.ii pvh si-MM. h i.'JluHs to cun(3nu(L liuHik
iiif> for work.1 In rttklitioiu the reduction in liuiispholil wtsiltti O>IT dif past fo[ipt! j nf yi'anj fnav haw
pminpifd s»mf Individuals wht* would havp olhi'rwisc
iliufijj^d mil tjf the laljtir Forte In reiiMiiit In. JOKI il may
k m 1 caused some who uusdd nu4 liavi1 cnlercd (lit1
labor forcf ii> do so.
cowlnuefl brhfc hiring by jirovidrrs of hpatih strvices.
I'he inrrra^r in j
ac:ru?is deitirj^rapbji. rduimliutiiil,
^rniijiv hljawmy ZIHMI. ihc*
Mifjii iiged Z0 y>pai^ anri older was 'A perc^niage \yomts
above iis ^vpragp Ipvet In die \'m\r\\\ quarl^i oF ?007.
WWIfi (he rait* fi>r WQBJiTl a(*n1 JtS JfflSCS and nhlr;r WSS
slnnsr uaiemplayrnemrare.vTur leeoitgLT!; and yuung
chills sliowfd PV™ larfii'r ilHTfflws. Amnug (hn inrijnr
rittJij! cunt '•ikiiii :.'.i"ii|^. untiii^Io^itii1]!) rales Fur lilacLs
add I IfciMiifra havf rison s<invcLwh.it moro ilian ihisp
lor whiter, a dillerpnlial iiKu lypicafc ot jmrriods WIICH
labor NiatkH condhtoiu weake^L Mor<>over. (he number
nt'wLiifccrN whrt ;irc working p.trl limr fni piniux^iLi
MaHMfr-^ -i'"i|i I hat includes iiuEividitals whust1 bOllfS
hij1.?- lii'i'ii I'ut hark h\ llnHr i>tihpli I-VH-IS ;r, wo 11 ;^ iliir.'.WtlQ w>iiil lidl-iirnc |ob% tuif :o*e tmnhie In Ibid IkVoi—
tiiis suaiL-d to nearly 8 iiiiilitni, mate linn 3 mHliuti
whirh intrludtrst both wa^eis and brntMHs. po!t(pd moder
p
p
p
hour in thr nunfanh blHtftcsssectW a mriisurt derivrd
himi IIK' DotnjKfHaU&n <ia^ in thr I B G O M I htcante and
proditd miuuiilb (NIPAI—luyo 3Vif {Jerieiil in in.tnuntil
(t1 nns oi 2008. isiniilnr io thr iocream OVC^F thi j pfpeed
tug few years {llgorc Tii).
, U'lHJrr ir^tsluliMi INUCICI] Hi June ^WJS. the truwgency CJiK'4ii
ilnikil J.'S Wfflfe uf bt'iit-liLs IQ W*rit«94 W3HJ L-Kluniil iku-lr rt^'.uluii Ih-ii
L< I Ns (IvpioiMy 21 j MM'1'fciJ. ]TI NUVI< niber, ltu> prug.ni m u;»i> 1 [uiwlnJ
to pioMtlt1 itddllliiitiii bwi-liMi EO wiHhcni wli« tisJuiar lilt- pre viuii!J\
•Vtflpbll l 3 w w l w i i r H 0 C ItriWllii Ijn utldLLiLniitt Znvvi'In f i r j l l
rflllta iiulivlilLuKaiulii FIITIIUT Liw.irtsTiH I[I<HV-1[IUJL> hi I M B S
Wftn hi.'li uiHiTiipNiviiiPfil ml^—ik-liripcl JS a lOM ii[wiit|iJr)ynn'n[ m|«>
uf 6 jjtu'eitf or abuvcK 'tliis exfunslnn. £ Wfl.1 as (lit uri^inal ELC
limgranr. U J I .u-hfiiuhi] lu fxpin- In Man Ii ^ K f l , but ihr Aiih-in .111
fciNun'rv anil lfL>[n^>Mnii<iil An Eif Mtii <UnmLil Fr (ImiLgli l^n-m
lirr .JI KM: Lhf • nil -il wi I nr-nawil pvmcnlt in n<r [plnmv <if unpmplny
rsieni tranEwii&arLrjnhy i i l i | * J wwk
105
14
Mnnt'larv Polity Report la I ho Congress
IB.
rilHM^<- In luilirly rump,tvalbin Bad wages. 19HB-?O(]B
\
••'
,n,', I
ill,
,J,I.,
r,..l|.l-,
.is
llKWhllll
,1-1
, > i ,1.1 ii
Ijll^llH-M. •.! • I
February ZUOB
-ns-i v r-aH-i_i.i
I, Jlnh". I
M "nil'
, . .
20, Private iKUUMlg '.lam. I905-J0OH
, :..,tlM .«..i|iL.riVin- -'-I . . . I . .
..
nil.
"^
I i-i -
f ! l j l - l l | l l l l " > l l i|* I LllMlhh !| i'
.JIH 1,11
I _ 1111' • 1 J • .i I • III' 4 I • • L"* L! V.
l\l-l\ Hi.Liit.il* Mil HtVIH
rf LI>
r i AIM*
The waj>e component of hourly rnnipensntinn also
luse iMoiltTiilely i« iiuTiiiniil tennii in [>()(}H. and IH'L^ILS*1
rrinsumer |)ilrc inllnlinn nvi'r the ye.ir ss ,i wiwlc was
low, nihrli ciflhegain in nominal wages wa.s i L- i. i -- u • I
in higlu'i mill wag{»s. Pen example, o w i tin- Urn qiidFIf rs ol' last year, 3\'tira^e hourly ^rnlngs h a measure ol
iini.i;-. •.•..IL'.I-S l o i |
• i• •- linn iind tiuiisupteivisijiv w d r k -
i>n;, iiir ri'.sM1!! n f a r i y 4 ]MT( '•!!! In nunmi.il IflitAS- -and
rest' Z |X*n.TtU afltf HCioililtlug I or ihc A S i m h f price
(PCE). However, Uet'ause of shir\i CUIIKICR.'I in houri
worked, rpal «virdg<? wpekl} Mrnings were up jnM
I potceW. Mormver, fnrnwny worki'rs. rpj| weekly
iHniiiigsarliially derlim'ri: hi jiiamilarliirmK n.il average «L'i-klv ('.irniriRs M l l pccoBi IHM year, while in
retail -.!-uli ihi- ni'-.iMiii' ol teal v.--i-klv enmings Cell
niofp Ihan 1 percenl.
The Household Sector
Rutitlai/tillmrsiiiiriK mill Housing Finance
IkniNuigiii'iiviiy rt:nii^inrrl rm n iitt-fi tlcAviuviirti irr-ml
in i he w-i .mil half of 2008. Home yrtn ami prkes
slumped furlher, and Imnii'biiilili'ts nindnued la cui*
•ail new conslrucliun in rcspouso lo vmik denvand and
I'k'vaielt I•:i• l.li'i;--. ill iin--.i:lii lliw lloliles ill iln- illlj-lrfamily w i d f . nt'iv unin v/vrc ilanoii al an average
annual talgefjiW 'I6I).I)OO DflilS tn Hie I mirth quarter
Hi' MiiriK iniiijhtv ?S |n'reeni below [he ([BBiWrly high
reached In mid -201)5 (ligure 20}. .Sta^t^ In I lie null M
family want avemKeii jusi iiKI.HIMi units m i ..• lounh
quarlct; for 2008 as a whole, niuUNaniiEv Marls M a M
2H5.0IIU. the Inwpsl k'vel in mcie Ilian a diratk'. In all,
Ihe decline in residential triveslmenl. a^ measured in the
NIFA. subtracted ^ p^reutilagt point from [In? annual
rate . i :;
In GOT in lite -ji-rouJ lialf of 2I1IIH, ahnut
i^ niui'li a i in Iln* first half. The fmlliiT ilrup in IIDIKIIIJH
stare and fi'«dfntisl bulfiling jiermlis in .faniiiiry >;iiggcsli tliiil housing will continue lo exW a suhslantial
drag on I In- rliange in "--i 1 CDC in early 2U0ft
The furlhc-r conirtir.iion tn hou^lnR demand In tin'
Weillld Inll'ul' 2IIDH imrlly reOwleil tin' lilraker |iii-|[iri'
fur 111 i !!•,.'he,1.1 iiirnnie <1i!d wenllli. l'uti'iili.il llon^tiuv
m may aho havr lieen •Jclem'd liv concerns alraul (\w
likelihood of additional decline in Iicitise prices and
fears of buying into a falling market. And whIEe tndivld
itals who t|ijalillLT] lor lixed-j-al? i.oidExtniii^ iitort^agts
m n Jlili' in lake advantage n! hktnrtt-allv low tuWBi
rates, many jiuic'iiUfll hoiiH'Iniyrn witli Lilnnishnl cn-rtii
lii-ynries m who were in.. position to make only small
down iravJiieiiii lbuntl II diflicull i« obtain loans, In lite
market foi new 5hi|>lc-fiui1lly llonwi, sales Tell nearly
;t() pewea (not i\ an annual rate) tieln'cen the w i n u t
iind I'.ninii qunrlers. which lumi^lic Ihe toltil ik^liin' in
'• ill-'. Mia •• Mi' '
()i-.ll
Slut .•'(ill... In 711 j i i - m i l l . 1 llr
!>li|i)»gf in salu.i has t-un(inunl lu hamjier IJiiildtTi'
cITorls to fpin ronlml of Ihelr inveniiMiei, Akhonf|li
lite Mock of unsold new homes fell considerably Eti die
second kill of :-'(.nK. it illd not fall its tmich gs saltui;
Ilius, the- iiKiniIK' «i[i|ily of unsold new hoints con
liniicll la MOVfi up, rpaLliitifi a level riL^ilv three Ilirle^
that iL-rorilnl during Hie first li.ilfr.r llu> ilrr.iiti' In ihr1
marki't for existing single-family homes, the dcdlne
In sales In recent quarters has been less pronouitrrd
than for new homes, hut this illualinn could reflect the
lad thai Ihtse safe lifiuies imliidf some HftrtSKJUOftS
106
tktanl uf Governors of the f'ctkmi fiesenr System IS
Hhi.l
Ni>n I I p den «w IINI'IFM', hiii<r MIPI^HI WtO BUSK tj-l.
j[
i
urn' vrm rnilui Tlr 1 V | n a HN^M ffll tain | i m tBS** iiflnwi ii*nrnpni'h I I
I W A i r * W ( t o o * * ^ I I I . I - I H I I * fa OfTh* nl P M M J HuwiriH
I nirriiil'-- Uvntl^liil dMi -.nrlmbu j M f i U i * ' k*inwnWrth rn<l-,
ft*
SMVfuw SliuMi uabrx n l l K B Nil iiiui'sh'FitjNt u i i n m r a w a w n IIH EIF
;FH•.iii|->hi.iil n m i i : lr...i.i,i Clk«KV' l"^i»i'i I-** V*»IM- I J U AUMHIW
hiytrnl Mr** Y i f k ^iriti Uli*j«i S*i.lTrtn.iiwn HIH>IV.Kliiwmii E)C
•' > ; ' ! i " I I 1 I uiiflfVrfijmiriMrf-, IF (itviaten •>[ I'lnr
Sim^Kiin
(.jiw\t^ius P W A J
ti^li-ral
rUcktqj
I H«HLL< AXXIK^V. JIK
S l t ^ l ,lM>-NM1tl'> ( IUI ."iHi* M»Tr«lflJl«' I k i l m i ^ .
involving Cweclosed homee ami utfoff ilsttwwd (jr«ti*
I'nilS, which ft'iwl in wll ;u Invivily {li^nuiiinfl jM'ir^.
t'xisuriK hoiuv wh'.s tutiJcil tht1 yuar ITHJI^ llun 3D ptTt^itl Iwlow iho hi^hs of a F*w >CHTS earlier.
lEcmse pritps M l sharply in ilu> sotund half uf 2008,
wilh llu- laieii 1^-inoitlli icailiiij^i in inajcu naliojiwide indexes showing prices oToxIsiIng hom^is tiown
|jt*!wmi!) prrcfni and 19 |it*rtufii tligiuri' 21)j Dm? Mirli
infiflsiirp, rlic I {kinPrrftirmann1 ri'itr-n salt* price indfx.
Ji'Ii 11 pijr«*n[ over (IK1 12 munEtts fniltr;g in Deccnibprnnd siotwi tU pf Kent IKMOW HS prak in early 2ttUfi
Dtiliiti's in homo prirra ]ia\'tj lxjen especially sleep In
Arizona, Cl^lifurnid. hlo3i{|Hrani;l Nevada. TIH*SE* stalt^,
which had PKjHM'Jpnml s.rmiii» nf I lie l.ir^rtti hictt'asfts \t\
Imriii* ffrict'i euriler in Ihp ttPLSde. liHve ^ihrtprally si'i'n
Ihr hfgcsi increases in ddincnU'itfy rates dmt forw lo
-.in*- ;n FLMJI1, iiiiii.in-ij fiv lenders.
The drop in liomu pric*?* ln:o[iifilnjrinfl la worsening jjayiwni prablnms among mnrrgngc borrowers.
iJJilit' lirtineowrtejs \w/e cofii-tl with )<JI>
lilt 1 cVfrils Ity ri^ftnsiu \\w IlioirhoiUPS
eqully or by selling, I hi.1 properties,
and extra
, tin* (cmsitl^HiblrdrflirH^ lo housing nifidty,
-iI• •• *'_-. wiih iiti'.i11•:• i- lifiilin;^ M;HH!.H(K meandiat wan
j>tht]C h.ians jir(j roan? dillit idi Lu rt'liiiiini e. dud wt-Hk
housing cj^iiiand kis tiwd(L ?.f 11 • i L- -. fhthii.il> As a tdti
scqu^nte, liorroweri have intredslnyly fa I fen l>eliiiriil
in ihnir moodily ohll^MoDt^ Indeefi. ii> Movpnihrr
2008. 25 percent of Etubprime inon^agt% were seriously
Mi i n - U M CIJIJ HH iiMiiriih m l WtMd HIimiflN N w n M l l SOCM i
Mil
h .T.I) IJrixai^t IMi'iUliCI liEHIR till |»|ini> *bhilcUF |UllllN> I ?rt|
|
•ntt tt foe i n run * if hwti> "M) d>) ••
n r^ ' • ' ' h "• * 1|n n w c t o w t
'.if Kiihprlti*'. I n n . <
' . i • i > ii. .in I m i i i h r i ' iiMrfii.>' i n ' pmih> .H
I ( l
I ' A ^ i m
I
delinqncnl Uhe laivsl available dala), • As of Decunibur
2008, ^Vi pcrrntl of [irime nrotigflgcs wfjn? seriously
d^llnquunl murh low^r lhan iin* lrvel iifM'Mtnr1, ih-iin
queuev Tor nonpiiine loans. Lutl still dltnosl (wicu Itnr
level tifa year i^rlh-r (fi^urt 1 22j,
KfjivclOSUiWt also have risen apprmallly ttllateEnrtiirc^ .ivittLifitn cliii^i suggr*! thai nmrr FII^IO 2 inilUnti
In • nii«-->- entered (he Fon.'i1tMiure prut'UB? in 2008, ctifliIKircd will) forrtlosurc ElflftS Of i t t million lo 'iW)l and
I niiliinn or h-%1. in Rich • • I" n31•_= prcrwiinR FOLir years. As
witJi delinquencies, decMriing huithf pttMS liave bren a
hoy rfinrrkhuior it> iln1 rise kit fDr^rloiiirps. Ai (he saov
limv. hving lorv^Euwrx^ have exacurhaicd the decline
in kousf prir^s hy mrrrastng ihr imoihrr of heavily
dJscminKHl propi'rtics on Llie market and dins ex^nlng
downward pii'ssutp on fxin.'S of udieiwist? conipatabh1
i|.'!'. 'I hatiJEL£. Ij-ndt'irJi and pnhlk policy makors
Iwve laktji vtupi io iinnJ Ilif nmnh^l oFavoitlahlf rnrerinsnres hv
511 \ i • i:; dKUUSBK Mid putting oi |.>l.!> ••
pio^ranti MH'U as I lopi- For H D I I K W I H ^ . established
by Ihe trrlrraf Hoitsin^ .AUn>inisuaN(>n (FHAV
In mi envJmnni[jni of generally weak housing
demand, Iklling bOme prtMS, lighter luinliug slacntanls,
aivcl ristDRforwIosurps. tola) liousnhold niort^f»f (jftlir
rippi'isrs [(j havi.1 ]Ki\i['tl ^n milii^ln fbditM in 2iK)8—tht
tirsi in (he hisidrv ol flu1 series, which stftfltilit hark to
mnn^-igr i-- rErflnnl as "•clmn.lv iktErmnrrn l|' llic loin-mntr is
or moit (tdiiml in payinc-iir-^ or Mi* prtfttfty ft FB1 B t D!>
ih|
U*
107
1G MQHHBIV Policy Kepnti m ilu? CoflgtteS
February fin I'P
die ltt.rattet In secondary mortgage markets. smiFiii/ii-
^5 well as dti Incrmsrd ^
ti by banks lo
lion nl' i n i i r i g ^ s l>y FatmM? M d t ' ^ u l I'rctlfLie Mar
Ims f41 Inn in rprertl mODlK^, and g r i m Kstmrkri' of
fiSI: IKK -krd MIlS has liJielyjusl dUijjatPil maturing
isHni.s M I 11i(ii tewtfi Mltfitaftdfrg liavr only inclird up
jsinrp- rin- ^iL
L'nnsumer Spending and llonsfllialff Finance
B-•- Issuance oJfGiRfllt M;io K P H V U Q
•"i.n.'ho'l by I HAUr;ii^hast'onlinutd lo be Mronji. EJLII
Consume sp^tisiin^ ticlJ up re^soiuljly \vt-11 iii J]KJ Lusl
(lie non-agrircy MHS market rental its closed. TIJP FH A
part •••I 1'OtlH-. MCPWCVIM, s|h?tidj|]^ slackened iKiiiLtahly
has offcreri an -AUPXWIWP. wwc? nf mortgage Financ-
toward [he omiL of (hn swund quarter de^fijlo lln ] lioosl
ing I p ii Mjiii'.' jn • ia|n~i iiii.- and near-prime bonuwery HMU
ta huuH-oold ltir»inr frum iJn? ^ax reiuiu-s auiltorjrtxl liy
SLti/li k'Nitiug fiiCi (licked H|J liHtJy: slill. it lifts replaced
JSI. I r mujhiir SSmulllS Arf n| i^HiS ,in,t CQRSQQlif out-
oniy parr of |hr rodurrlnn in crprilt from nthor SOIUTPS,
lays titicri'd Ihc st'Ltmd ha! f of I hi1 year on a downward
1
laigely liffjaiist of ihc l-'UA's ^laiivfEy strid ifiulio^
trajerlory. Agaiittt a iKickdrup of s3?abie jolt losw*.
\i.miL[iv. .mil higher tush.
drrreiisrs in hoiwchnlit nt*l wnrlJi. nml dfflirultlrs In
1
frm-n'M ralr-s on 30-ycsir i\xn\ mlt rrpnl'nmiiinR
murtgagfi have la Urn DIKIUI 1{KI t«isls puinls. un rwi.
1
Since llM NnvtrmhtT 2it ;nininiO( t'ltirni of fhp Fcvlrral
Ht'serve's program to purclmsf MBS issued by ihi?
hiiuftiiip f.iSts rind CJIUIIL1 Mae, diid Hiey cuiii'iillv sland
obtaining •: rwlii. real PCI: tint linwl i\ an JHIIII;II rate
of more than Sl-i p f i n j n l in OIL- secund IMIF uf'^JUS
(l^urt 1 24).
Tli<j ifccPIVJITIIiikTi til ruusi]iiifr ^pE'udin^ rclVi'lPtl !IE>[1I
a >\uwi piillbjick ifi pwxhiUtfv gf]E*joi|i ami a Himki-il
j*l J5 (ffrcrnl {('Ignrc Ti) However, hiTi?ifMratesfor
, O i f l l ^ s IV>r
rujncoiifnmung juEiibo lix<^d-mti' loans havi1 Eloi'ilm.^
n[?w light nuHcr Vtifk&des (rarsr sport ulililv vv.httlt1^.
by k*ss III.IEI fliu^r fm tunloiminjj; iiH3rij<Hjj;PV tit rs?t"t?Hf
^nii pickup [meIK) WBPP [*spriiatly h«iF(! hit. I n d m i , E*I
infih|liKr whirti tias r;iusrt( tlkt> rxlranniiiiiaiily uidc1
un iinmjipJ mM1 ufjusl EOU million uutLs, siili's of lij*ln
^prend brtween Iht- (wo rdlrs to wideti turllier/ Tlie
hlph ipvel of thtssprefld ifiierrs, in pan. tin?rf»OKfflof
vt?lii<:lt:i hi tin.' louiili E|U4iJ-lut WCIP IIUflj3v 4 itiilMon
fintE Moiling senihiL/Jirjoii m.irkrl-, rnrjumfii) BJO(tg3lgR5
nine moud>^ of dipvear: tliev li L ll fun her m January
units below ihe alivady rc^hieed jiart* during tin- Mrsi
^nJU despite nclalivi:lv low u,nsi>iiin.1 pilce^ and a SUIJ-
I.
I. iui|lill|||1ri[; l|li:r.-J'.iyli -. .if T l hi I^I- L-h >llilir | I I . injfi I..i".i- I rr • ."ill
Pili1 \S.iiH ,inrl ItrrWlr 1 Mrtr ilwy muM rv ^(NJv,! II<PI I In risk [h 11 »rl n
ipii'Fi^o^f wiiPr JPI HO (wffein hoan In ^Ttfur raiio. -aiii rh^^ • £f$i 1
PMtflJ BWC0*ftpffnBtel(WlHlliiE, Hif ft.Kif(iNiHhg lafliiljiiill for
a l i m inoiieug*: uii a ^ipylu-ramllv liymc In lk- iOMliymjtis Uriik'il
5 W n l^'fii'cully ^ijejal ffiThf jjrrjlpp r>fSJ|/.Ot>0fiF
m 11 sn• • M ' - . - i l
rl
yi'
Sl^'rlr"IL .111V I'.
• o l •i
n oiMcirmEriK
tiiuiH
tea Will i i/l-illvi'ly
sfanflai liirf[*asij in ^lr-s im I'liUvi-i in ft-ircnT mauth^,
Ri-h] cJLspUKdble perMiml Lui unit1 {DPI) - diat is,
aJLer-iax ituoitie ad]u^!t>d for inflation—rusu j u i i
H i jir-rn ill in '^KlS. SofflP uf llir wi.ikni-ss ih rral UPE
reflet led wAftes* In H^rpgatt wu^e aitd Kiliiry looomd.
whirh foil sii«inlv in m i l l o n u As noicd raffift linmlv
wiigii^ puiik'd ;i •toliiL jntrea^e in m d k'rnis liiil yiiar,
hut llip effeel o l l l i h increase on aggregate wages ;ind
HI
m*m n,,r,. mini
apta
CftftTBP in MM I P
11
llllh
•Vi.,
I-
Un i],ir,i rttikpi iFP»i«ikl> NIHI
in
IH niilff^M un ;•• PJ
"il i umnvrcp. Fiumu ot Fmnnmlr A IM
108
Banttf ofGovenutrs oftlir Federal ffa&tVP System 17
salaries was nutwpjfthe.d by ilw iwgativp nffpris or ihe
eoi]tnj{:[iuii jji firipluyriteiic iind ihf decrease in lujunj
,
Ci
woikad bv itosa whorctttorfjohs, Apart from trawlfe
payments, moil types ufnonwuge income perlonTtiL'd
p o o r l y
flS
' . - . '
•• : • • . . • • . i n .
1
. :
:
m R
.:<
i
•: , i |
i
1
i
i i =• . •
. - . : . : • • .
milafliF-liLX income wasfssenlially unchanged lasl
JfKHfi conipaiud with ail 4VL'i<ige iutrcasi1 ol ncaily
2 percpiil riuFlu^ fhe jiinreduig tivr voars^
In mhliiHiii 4c> Hn: VffialuieSS in hii'time. COBSUJiKJ
.|/i. miiii!1' tns bwB restrafned in Fpcenl QjBSttw hy a
?tzablc tlii'n.'[L5it in tiouiihliut(l n i i wurili {fi^tirc 25J,
Thh source ol' iptfraiul on sptMidii>g likely roll eels nol
onEy ilu- mri:.r rrronl clrups in rqnity unti hi HIM- prices
but also EIHJ laggL^J fftttfc of thf Appnjcial>kj ilt'i-lin^ in
WtallhrtuHoMHMR and ihe firsi balfof 2S0a Vho fffibs
!j| wt'iihhr a]t>ngwi(l] heighkLncHl conr^m^ alioul Hie
prosptTls Jbr jinhs ami inronir, hflppd (iii^h <:onsinui3r
hienlifwnt lo very low levels (fi^urr 26). Thrse lotlors
also ronnibuiiMJ \o a imricttiMi:1 upturn in ilu? pi'i^onal
'vivinj.^ n-Hr\ wliiiili msp in cirarly 3 prrnur in iln- foualli
(|uasi*T uFSOOS uflei lluctUttUng be£nreen tuntl I pw
n"iil Inr iiio>;j nl Mir jM'L'iml EfOCC i-H^.' (SifltJiL 21).
Ntulrhuflgdgr toiisumtT Jihl>l u-titsLanding appt'iiri
to have fallen, nn net in lh**5pcoiid half i>l' 20EW aflff
having jurrrtised ul »ti Hiiniml mtr of 4 percent in (he
first lull lh;ii< tjl' [lit1 iiin|i in Iiorruwirtg wai lik-'l1- "Inla weaker demand For toans, hui ilic available ividetKfi
111" Mi^gcsh ihiil lt;nrli'n (igliinu'tl die ripply &ignijiDiftily. btdeed, resiijis Etodi the Sanint loan OWcaf
•: • | _> 11
>• Survey rdcittud in October 2008 and Jajiuary
2GD!) levealetl iStai niany b^nks lighltMH.il slajidard^ HJUJ
KTIUS fur cnn^uitier Iniii^. arllotis lliat Inrluded lowrriujj tJrtiit liiijji.s mi fXisJUjgctLtlil cart! aixuiiuiv Ltrnlh io-ificunw ratio. 1SS5 2008
*i —
* —
i- * - t - i n i
I M S >IWf
i
I B W ,-IJJJI
i i-i i
i
'inj I .-|j|>!. *M17 XH3
iLiiJ suiiif miijur prtivulcrs tjf dlfsc \oiun '/Kited ttit-
I'HN ollhe lifj.liicitin^ <A kinjiup siuiKJiiids imd I-.THIS
im iluubl n-lUvls ]ei]dijrsr LuiiLCTiii Abatii tlie rrtdit
• in >lii\ oftWttSfthote, trtdewt ilw* ppfftirmanri1 QfflOniiimer tfr,jni Im^ tunlimiu'tl It) wurscri in n^uni munlhs.
o\\w\i Levvifiarkly ili.milwi ol ninrt&Hgcs Delfcrajwncy
rdtrs for most typia of conaunn'r lending trt'dii tards,
auln loam, and nonievolving luan^—rosp si^nifit ajtlly.
un lift, over dip rours^of^tHWi, ami mos) such r a l ^
now M.HHI ai ur ihan IIK- k r t l s seen during itn- / m i !
ri3) p.vtinri jjignrr j*H>. Hfiu^hnLrt hnnkni|iti y j-iii*-s also
J sharply In 'A\iQ&.
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109
IH
Mnni'lirv Pol'rry !•'• •,.!n • lu ilu> Congress
Ddlii[|u<°Eicy
Frtimary MHI9
199LI 2008
iJHftoIlin |wrvoi!l ul'luiim 11U (&t} J w |
fcinn p f^M.jl riiMin'l,*1 [itUiiiu.Nt. r'.h.i
"' ]•
" M I i ii"
it fe
The relreiulnnenl in invrsmiciii rcllerted Iwrh a 4lwp
(tro)i tn out lily h on ei|ui|inieat and saftWBm il-vi'M and
a sharp clLvt'itTitliuii in spending on itonn-sidtnlial
canSMcRaa afiet H'ft years nfmhinl fiains. Invminwtii
(Lt'iMiind Lj|i^iirs In h.ivf hiTn ih-prr.sMfl hy thf dnwn
Him in sales, pmducttnn. nnd prndtnhililv BS well m hy
(lie ralurrd Dvuilo!i(li(v and liiglm r i a l ulcn-ilii from
xtaaSS&t niitikeu. banks ami itrher lendeis
Real spcmlln^ liir CKS fell at annual i.iii••> ••!
Vh jii-itf in in lilt- iliird quarlei -«»l 2X pfitenl iit 11n•
fuuiih t|itann-. liuslness nullays on iiiomr vchlf Ira.
u h i i i i hait bDeo sharply in the fin! half of iln\Year.
i-oniiiiufd in [ilungi- in HH'-WTODII IBSII. Dinlays for
oilier major tuinuonwil:> Of I .(t S also recordeii stable
itedines. Real inwsinifiit in informatioii technology
equipment—^whlr h had risen ninderalely In I he lirsl
liulf uf lla* year I'd! JI a Wh pereea annualrale,un
ayt'riif;p, in iln' swnint hall'in business ilfraani) for
n , soflwEirc. and •. UII:ISILII:H IIEIOII1. equipment
Thf [HilHitirk in r[ju^iinit'rrriJ<tit alw likrly r
ill parl. (he Hi Hit1 nil If rs in MM' ru-iikfi lor a
srairillrs. Until [tip Sol half of 2ITO8. a substantial fraiLion orcomtmin nedil Iiad Ut5tn i'uiiiicd witli AJ1S. hoi
jplncc ihc ih]rd quarter, i.vsuannf olcrLiJit cartL aLJIonioIjilir. ^nJ SILliJfill luiiTl ADS lids slmvn] lt>it Iritklc;. As
nolrd earltPr. lu fat ihialp irupvvfil Issttaiwr uf t o
mid sniilll hiliin<.JK> ABS urrd llnh ^upp
anivlry, ihe Federal Reserve announrec) in Novemlwf
pluns lor Itk1 Term Ajst'l-ESacked Siturllles LOLIII I'ndl
ity, vi-lkjcik will ijrgin opnalioiii io I lie coining we'efcs,'
Sjirf.ids nn AAA-ratfil AF1S rnse through most of lasl
vtsr Inn havf rltcliiii.il hti/Iv, n'pwlnlly inaiilici|)Blian
of Ihp D|>piiioR at Ihr 1AI.K
V:_-,.in-.! (liib backdrop, IIHITI-M mil's on auto I
jipnerally niw SOIIICWIIBI during I hi- sreoiirt hull1 of
itIIB. and those un iniisl odipr types of rausutiK'r loam;
wen liiiii' deoBed, teptt?«syiisiamjai iteauase
in rates nn iniii|{aralili'-iiiaiuriiy ircuMiry scrnrilii-i,
Milnii^'ii SUMIK nmsmlHT Entered r'11'"' appp^r 10 Iliivo
liill™ MigWIy inearlv ZUIIU. their sp/eails In Treaiury
rates remain qullu elrvuk'd.
Tin- Btisini-ss Scrim-
d jipfinTiably. Real sprluting on t?quipn,L>nl oilier
Iliau information Itxhnulo^y and InuLsponalion, which
29,
Change in re.il KUnfMeB Mini Investrmmt,
...
-If
IJI
IJIJI Lli fl i
Fixed InwumeiH
ATltr having potted HMD gains in the tirsl halfuf 21)08.
nwi tnKfnfiSfi fiKod Invcstmoni erigcrl chiwn in Iht1 Ihird
quant'i' .mil fell sharply in il«> iuiinli (|uarti>r iiipuir i i i l .
7.
• i
;
8DZ
BOOT TOH
: : l . iwh tiijuigitii'Hl nriB,bvh uf CttnfpiErVn
lmU <HU>HHIIll
n..[ CHMmeti UtHMH erf liommur AmKitu
110
Board ofCtnvmors of tin- Feitenil Reserve System 19
had been moving essentially sideways slncr the ••nd
or ZOOS, held up iliniugli ih« Ihtrd quarter. However. II
( li^ngo In npai
li'll ;li iiti :IIIIUI,]I I J I I ' 4<l .IIHIIII ZO ]>i i'-eiii I n llui fount)
ijuantt. .in: I lip slow parr of orders lately, along with
ilif ilownlKiii lone in recent snfrejif of trclMK curitliliinH, | :•>. 111 furlhrr ili'di rips in lllis lim.icl category I if
spending in early 2009,
(hi ncl. real outlays lor noutesiilenlial raii'ilrm•ilon
pr-.iMi a small inciease in Ik*second liatl"of 3003
I Imvevcr, gains were conrenlrateri In energy-trlalr u
',1'ilots- t!tilling and mining Mtutluiw. uelmlmin
refineries, and iransmissinnand distribution I d i i l l l l f i —
iinil liktlv reflected liic a r i l a run u)i 111 RK p i t a i l l
rniife oil. Outside rhi. menycelMaJ SMWSi *|>c»rlii!F,
liitm-i! ikmn in the second hulf ofhisl year av cons true
I inn (il'uflki- Imikliup lofiened and -i|jiTiriiiig un nun
ofrirf r.ommrrrclal hullttlnRS (a category llinl Includes
retail, wliultsalc. .mil iunii' ivari'liuiisi' \fHHt) fell
starplv- Thr derlliw wn\ relawrl lo Ihr rise in ratSBcj
mil's over llw pasl few i|unrlcrs, which was driven,
in pan liy (hp woahening in a^rirgalr (iiilpul ami
nuploynicnl Inaddillon. icccnl reports from bank
Ifiidinn [iIIiti-is su^iesi dial financing Cor nsw
i-ai»inicilnn praji'm has ln-i-miir u r n muir dlfnrnlt In
III
- • ••• i i ••-,...- m e
>'u n
II1
i " ' . Lkn-.ui«(i Nuramtt AaiJ^itt.
Corporate Pipits awrf Business Finance
()|j(-ralmt> OrniOfft perabattB BjrSftP ?00 firms Ml an
Estimated u perceai in 2uu». QBseswfiBiBspBdidty
pronnuiirpd for firi3nrl.il Amis In ilw naDfljaodflJ sec
[inns oilier tlmii uli ailil R3^ i:umpHili»
w H over I In- rfmnr nl' ?(K1K .imL drrlinrd
n Lhe Immh qti»mr. In addition, in llghi ol'
Lhc drtorlurriifnn in ihc 4:cotinmy, analysT^ ^i•_;• ii.. n iimarkiMi down Us<?ir projpcllorw fur «imJtigfi tn rifiO^.
Imvnlory Investment
i
'ri;- ':\ i l I i r i . u !•. o f l i i u ^ { ' i n i u i t l L C I n i ' l - . ' .i[i>- O V Q f I I n r \ t e h l
ycjir has IHJTU IIIP |ironi|)i nasjwnsii of poSneDts to the
stowing in tinnl Dili's. \UT much of ^CHIH, IJK1 production
aEfjiislrm?nr^ irsnllpd in a rapttl p^cr of invi'iiluo,- liquiilalion and wt're suffirieni lo prevent the en^rprncc of
v. r<ts^pn';i![ sjqdt jniluL.tui i ^ jfijjuri.1 ^U>. In Hit1 UiuiIJi
t|uaii{Lr, however. Ilir preripitm^ ctmji in hn.i! <h.'ui;in.l
It'll many firms liulilfng invenlofies In cxnss of IUM 1
levels—a vlTO expressed by rmpniMti'nts In a varter>'
of lsusirRl5s surveyfi ill Ihe lum of Ihe ycur. Accordingly.
fivaitihlc rtala ^iiggc^i rhai lirodnrw^ conriiuied to paw
liiiik output In January 2iWX
The Invi'utory nverliaog at year-pud wns especially
aLuli.' in on1 NHinii vphii.le M^.NII. Aldiuuj^li iiuiuiiudki.1^
slusllpll pnlElilriicin liming dls' ftiiulh 4|lli)i1ei'. Illl' t'olljpstL in u l i ^ \~ii\i aulijinn pushed up dpaUbj\' Murlu, jurl
the 'layV-sufiply of cars ;nif[ [ij^ht irurfcs vi^ired to neiiF3y Iflts d;iys—well yhovt1 iurtiislry imriiv:- In respnihe,
motor viJ}liL:lf [ii.iii'ii.ifiiirr'is il isl i tut I'd I'Vfil Kn^i'i nils
In production In easly Z(3IJS. 'J'lieif toss shoulct help ease
(ht* pfpssnn1 on ilcah'n.' sdnks, ihnti^h furlhi!! pmgix^ss
\\MI ri'i]iiiir i iiiiliiiiii'il n--.li,:iiii i!ii prmliii liuh .I IEK'.IFI
in^ful ptckitp in sul^. or IHIIII.
llii' <;t3r|Hjrjtf Loud niarlu1!. (ttc
f i . ami Ijuntk loam—slowed
of :'<»UH {^lu« S|Jr The
( only a rtiluLi»(i d i ^ i r f u l
. (o borrow ami Urn-si In rrapoi&p (r> iho
worspniEig i^oiwiniir oiirtonk hui also a redurrd will
ijij>rieu ul fluential Itmlefe (i> piuvide Cumlii^j loi risky
proj*->r[s In llif rnqmralc1 bnndttftifc&L,ihsiLinrr of
inviiiMnitni-gradv se^uritits by i
solid rhrooglioitl I he fstf\ In rontrasi. s
isbiiaiicy has hppn sranl In Twain niDnihs. Al'ltr moving
up in iIn? llr\i half of ihp ypar, lliu unsi of toii^i'i-U'im
iiiisiitinj* Ttiit. fui lliL'i J% iiHrrcsl ran-s un I mid invi^t
ment- <<nd BpectdaOve^iratteCBi^KJCTW ijomd^ sooftil
in rli[ j E;ili. \V11i11*- c o q i o i a n 1 honrj laif.s \vv\<- i htuhin;;
Tri'itsitry yields drop|x j d, j x i s l i i n ^ i i r t o n ^ i raEP sprpad^t
on corporate bonds wef] above previous rer^Fff highs.
Thir iiLi"[ijiiM"i in %]mjtislv appfctnil to ikjrivc liunt btrlh
Iht autkipaJjuEi uf un i n c i t a ^ in tU IbulKMiul J fiuijiur
rc'dnrtion in invrsioR1 u'illfus'in'ss kh lake ri^lf. tn the*
Nl paptr i I.M !^L. short-Evrni Imrrou-inp by
i nonfmanrlnl linns hns inrn^i^ifl ^incf
p uiininier die rise rpfiVtls ini^oriartdy *he r«lt j ral
Ill
20
Monetary Policy Rcjxwl (O the Congress
Fdinrary 2003
31,
StlUf led EtifflKQtlAlK <>F »fi1 n i i i l i i r i i i ^ for n
32,
CofpwriB bulustMHt iOD:-!-03
Ni?i perero-wgu HI (fewiitwii1 iBots lighicn^ Bumunt
riml lru.*nw*lngapnHtis Bncfsmmerdai and tadmUrtdi
I a ID Mig^vnd nifdliiTii-sk'-1'! bvmtwr% HS3HJIW
1 1 ['onnlnft.il MINI
• 11..'.
• Itai* Ion
St."lpL f f l . rill HH-
linns. Indeed, rales on highly rated pa|>er will] matiirirtcMir U's^ iii.ni 3U ilsy* have avei t ^i-il aratmd 2fl basis
pohilsstitrt1 tate Nflvnniher, romprurd wlih nearly
200 baits |'-Miii-- in Seplembw and i Vkihi'i. I'IIU-V un
ln\vcr-gfci[lr uonfinanf tel |jappr towr also clmpasptl In
rccenl months, bul ^H'LJ sp? i'_i:Ls lu highly ralcd paper
irmaln eli?vak>d by lilMorkal MJtuJairHs.
iiank Icttding tn bujslni^se.sfxpiirirh'rl in Se|Hi]ntbct'
ailU OilOhtr as Jiriils rcporii-eTly Umv dfl fXistfir^ iiin's
ufr'n?dil. Marc* rwrnljy. hitwrvrr, Iriiir^ i« crnmncTt'inl
and industrial Iwrruw^n have regislcrwl si^nincdiu
doclSn^Sr InntddiUon, (he growth nfrrnnnir-Fiial rfal
K L U P loan^- which LircDfi^n usod lo finance ranilrnr[Lmi Ami \nm\ (IIVPIOJIUJLJII—sluVV^! Miltsljijliallv IJI
Ide *i&ronrf half nTih^year Given tht>rieierinratlngeco
nunur uullmik. TigliEcr tretlii siaittlanls. am\ Ini*slnesse!i"
dn'tsloii'i ID %rnli" hnrk new invrMmi'M, Imih C&l dnct
CRL lending scum [Lkuly lo fall fuftiwr tn (Jit Jirsl pan
ill
p
l
lhi - • . • f | ( i i l .
i : i H [ k M .
1. 11 • •• 11 • • 11 -1L^ S F: \
P1: 11LI. I i . 1111
III!
M l W R UW Bn-.i pdiwtvtfan It ftom Uic Iwiymy 201W M i j y p j ^ l i l t
a?(Ht:[J-l NPS pfn'pinn^' K l i t |xw rcrcBflP nt hurnlu K|iMiJnp! i 1 ^ n
fJaHfaih (H I*I h i n'i»*" IN wroi.1* 1[>n Dip p^cpftUgi' H^IHIMK mt ifi rl-nn'aw "iim'mi1. an B wun '
\m in w * i
rtifHls.
[ N > ilrNmiHU'i
irn
., ^ t i n i i K
IWHlh
Swim
Finn
i\a<
Myyy
riMi hrKL-
.HI!
rt-ni
f e n , .u
flitiUuiit
j
^
v
* 4 ^ « l I ] » I K hJiviH J M I I I U I
•••••
• '
iiii M.
ti
•
ilil Ljunlifyo I'nun financial lirrns dflmnraletl
wd hrtti ol \\w year I lipflRflrcgsKeralin ot
debl la as i-la climlipx! funhcr, anJ ilit1 afy^rtfiaif rallo
of liquid ^cib ru loial a&seii derliued tioiably. KjiEhigs
fi nit noiijiaancial curpuralr bonds \m kv.[
f^tHi uj^radt^. anil the share o] cwporato
d H-1 tir M n w by MIMHK-'S fQCfQflMd lo a^Q
1
i:{ii|KUdlioh(i \vrii J voiy scarce iJircmi^ti I flu second liult'
uf '£CHJS, itnfl SC^JJIUMI {jfTiTin^1. (rtu turfing Knns in
Itie eiiui^y sector) were also w«ak tfigurt^ 33). Kquily
s—wlitcii
I >-| •>.!!•• I I . I M - - . i|f.M .Eir rlS*iO( ill
mergers—anilijnn.il lo DLIII
^ rcsiHi nf-shinc
l WJlh i. \\^\\- MiMHU'i1-)!
C \hv u j n i i j i n n l eininn-ni
cifprivak* ami publir KitiiLii , J ilrvE'l^ifiTiH'nt clue, in
|jiiri r LU Uit- •;'imip^iiun IJI a -iv larpe [Ht?rK^rS. Uciwcvrr sharp rppurrhftNPS ^rr r ii-nalrni E"i hsvE- mntipralf1!!
l monlhs. and anncmnrcnmnls ol Innurt'
a I ML in r
ra^i-iiHiinird rncrg-i?is have slowed sl^ntEJ-rainly, H M v
heraasp c f rhp wpa kt?r PC01 lamir au Elook A nd Li« liter
BIDS
Ml
;I»I:>
20*
20W
awe
WiHJ.. Nil WP*B IMRMHH h <IK dUTbWDB IwiiVfnil vqnllV INUIHI^ lift'
'i',".
.lui.iui, H in ,niiiin i .i p. ii. HI' natM M ii|iui\ pxtitni iiuni^i
TifiHK irpunlwir. Junindtt tiiftJIuuiPrt
KIT1*, "r imvin ;..-... .i
!'*• 111 mi'. Kt|inn, Lifluiirp IrLimlc^ ILirab lnti^tiPlI liy |iriv*r vniiHy
fMruwnuipi iiiui mm *• ..(Kin., i MA
SI I. i riipinuili FilulM/ul, lfW«MmiM 'A'lt'l m»i M^-JH ir i M •. I " .•
foftm \>\ hraMWMMwCeepm; Nfliiinwi Vnuutf fniawf A»<jaKiioir.
...i VH'MMNK I u n
112
Btard olGmrrnan elthi' FedfsnU Kexinv fewra 21
:!•!
1: w Ifralr « p||ii% rtiirl I»V|>HIU lili 1 r
Delinquency raies, 4111 mmnierrtal tval Mian: loan*.
I9!!latffil
H
- 10
— II
.
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ii
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N m r 1<V (bl> SU
MCU] tuith4 AII^I UA IIIUIIM^., niihi
iHiiiiriEy Mai *»]Hul
.«ii]tl> ^1HIKCJE lilt, ilu.i tiff aum
M
1non^iipr<iuikJ<iW''ini
HM 1 ]twi nuiwnutiKY H fw ennjinwcmi BMtound G
p
ill* limit, :OI rtjus 141 Ra
I t r utili'N4iiii]i'cirv
1ilW Ilir IHr iBHIUUICgCBHI^IlltM 1* >lN' piltVffl (rf ln,nt>J[Jt ilflVh
|||0K |nW
^Ui^ unhrt *ii>»iiriK JninmL.
,\Mhhf (fp| [(imidrlNlll iMfct, flilrn^lt l'llkl<l> I,b1
llWlllllllKIA
iI r'^i«ili.l.ni-.l rti-|.iii. ill r.uHl n ,nifl I.
• i
ki^nii Ui Wf i.mjiH[iii<iLMi|uiikn. AitiMHKiiC^iiniJ iiH LN' limffimr PUI
C\IIC. I lii,;rrai|i
S^ p o d n t Dclljiqiicucy fairs on C&l loans increased
niiiicMhty in I he fourth quarter and delinquency' ;3lw
on CRIi loans mse fmiliei, mainly tjemmt uf contjnu«l
P[Hd wenkeiiliig in t!w pi-rfomiaiife niroldetiilal .ind
i HIIIJIM'II jiil cnn*anic:lit>n kmm (Hgurp 34).
t Sector
Federal Vmvrnmviii
Tile liefidl in ille leJeral nnili«l duilyel i i in llic [niilsi
of a msssivi1 widening Mainly [PlliYlinglnt'dwclcralion in prononiir activily and (he pinvisions ef Ibe t r o nnmir Stimulus A i l of 2DI1R. the flctVtr row in
vl.-.j UUIicn In Bwal year 2008. nearly S3!K) billion
liif^hor tlian ID fiscal 2UU7 ami equal to more dun
3 |KTLL'III of minimal CnP. So far in fiscal 201IU. ilndeni'h lias Increased saiatanlfety funlipi nnwly
ilerniLsenf unlhivN nndiT Ihe Vnjiihlnl \'.M'1 h'r-l II-I
Prugrdiil and Ihi- efl«ls of Ihe weak economy on re-venues and 'ijinnlinK. In [aniujy; I C
H III rhf MunlMy I rfitsury Slii
l A U t ' a i r t rhe u s l i ' i l
'ilt^. f*|i]Jly ]ilirrli;bwi iiimlii ilk'
mxtH on a cali-nnw tatn.
I :.II Ir.-i H > 1 -1.... estimated thai Ihe ilplirl! for Fiscal 2(10!)
n» ii wliuls- would luial muit' Itian %] Irilliim ginlei IhitfttnUtfatold MMtlnu |inllrir-> In plnre .11 ilml time, s
figure Ihat excludes Ihe budgetary inipacl uf [he Amuri*
ran Hecovcfy anil KeinvesfnicnJ Ac[ Qf2O90<
Pfderal n?ce.lpls M l nearly 2 |iercenl in nominal
ILTIIIS In HSL-al ZI1US anil sloixl al 17't |HH[:HIII i>f ridiiiinil) CDP: I hey ,ii •' | • | =-•' • I fun her during the fust four
niondis oriisciil 2(H)!J (figun- 3S), flic rlci lint' Ins
I K ™ mn5l iiromiupirrd in i iir|uinti> (erei|)ts, whirli
have Fallen 31 double-digit rales as corporAle prolits
ii.n •• 'IMI[I[.MII and as firms have presumably adjusted
payment* lo lake advanlage. of tlw ! ninr. depreciation
pruvi?<iun\ cuniained ni ike Hcununiic Stimulus Act.
l-.jfrlutling ihe rebalts pmvided In rrmsl linTiseholds
under die act, individual income lax recripis tone niud1'iaiHy in liwal 2IKJK, However, so far In fiscal 2U)y,
Iudividiiid n'ceipls liavp been running below yearearlier leveli, likely Iwrausi1 i)f the weakness In nominal
j>r-'FM)iiiiJ InCGTile ami rediifwl r'ijpil^l ^sins n^ili/iUEuru.
Kxdntling flpiHinial inniwriiuib. nuinnuil Witenl
outlays inrreasrrl X prrcrnl In lia-iil ittmi sfn>r huving
UStnJtBl 3 percent in faca! 2(M7. Defense oullays lose
12 peiceul In 1isc.il i'liliKas the rnpld run-up In butlgel
wlikli im;,uw Ihjt lilt collie arerecunbdas Ilicy occur, a thiv, of
rpf*,j|itt win I K rei'nnlpflin Funin1 yean 1"rpfliyi any ilLvirtmrisoii
IIM1 iJwre% uf ffjully and die nrocmb frhm die fvenuwt %alr of IIK1
rtar«. In ('Ultra, ilw l'«i|>Kuinial Butl«« OtBa (COO) man
dH-u- MiUisjahm?, ml ill I imiu.il Intsis unit Illlu »•( IMIK iilillay^ iLS rln• > |)ITM'IU v^llu* C'IKI • 'I.. i'i|iiilv QilllWWMitftfl dnill die • inn,
jiiMjiiniilml t\dfJjteaKli mnkr ihBOil'}iifnsrcjiHli. ilwn« KIHIutTMT
Illlg dnw ni r. i ,\\A\ In I linn, Wfll*l "V • - r; n 111 •;; n, llw 11, i i i n dh<
nnllwl IUIIIRPI tte.flrli lor ilhc lirM f m r ninnilB nl Iliral «m inliliil
J5I1S lillllui: umk'i till' t B O Jippi.jv.cl. I k . i.-.ii io ikui. dwirll would
I 3 E I I I I
113
22
MuiiL'laty l'ulicy Ro|irin lo die Qmgiess
February 2009
36. CtKUlRe In rual jyivmiinenl expend) mm.
Ti ami tnvestmyni. ?0*>? -08
Ilk
I
C
I
am
Jin
J
vm s») ans n
authority over the iiast three years runthiual ID holster
'*!!-!nEiI!LJ. inCVO&GS ill defense IUIKMII:.- ill ttCSXA years
have town ^ulisi.inii.il not only for ope.raiimrs in Iraq and
Aluhaiiiiijii bul aiso lui KtfvMes nu( itireclly ivlju-d
lo ihosr conflicts. Frdrial spending also rose sharply in
lineal 2IKIR fw I^IMI-HI^ ils.H pnividt? Mijipurl lu luwer.
ineraiiii hnnseho|[ls- Sn far in fora] 2II(I!1. lpdfr.il millays fur defense ami low-income support programs fmtl
foniiunod to rise rapidly. Also, suending for Medicare
has picked up lately, and outlays For Social Sm-urily
tevi I n Itfii'd tty IIIP larRi' rnsl-oMivin); ndjitsloirm
IIKH iotih place in January, As Im i In- j » n of H-CIIT.II
spending I ha 1 is a dirccl coiilpoiii'nl or GUP. real federal
I'^l^fniHun's Furcorisumplion and gloss invpslrnctn
rote KI an annual rait til II) pttci'iii. on avpragi.1. in MM1
m u n d hairuftdleiidiiryeiir 2003. nloslly tetBttK of
llu> siMhli' Increase In defense •.[wilding (lignre 3B).
State and Local Government
Huwever, JU far In fiscal 2009.revenuesliave ten
running significant^ M o w expttiefl tewll b«aUM i f
the -.• 'It
in ,n i • ;il anil corporate incomes and die
WakftcBi In • flab I sales Stales' inlllal IJI.IIIS to ,n!.l..v.
1
iIn widening budget giip> huvr incbuki! CUB in ipetul
ing on Hiiraliou and orlirr progmnti, liirine I'reews fini!
(urlnuglis. and some lapping or rainy day funds; in torninjiqnailers, Ititwever, the tlotninanl inlltienre on slate
budget will be the infusion uf grjuls in-uitl umlei dir
2lMm li'ilciiil siimiihis parkage. which will help enshirai
the eStCU o( the iiononiic clounluin on slates' bud
gels. Ai the local level, properly lax receipts continued
ID be prnppEKl up in 20118 by the lagged effects of the
ilraiiiritit increases in liuuse (KjCes uver the licsl lialf ul
Ilie decade,"' Nevcrthi^less, the sharp fnll in henise prices
nvpt Ihif pasl Iwo years is likely lo put sultslatilial dnwowani pressure on iucal revenues before long. Moreover,
manv stale and local giowniuieiils will n m l la si.'l aside
nuHiey iit ruining year* ID rebuild Ihi'ir einpluyee pen
ftou finnts aftei tlie losses expprlenrcrl in 21X18 and to
fund their ongoing nbllgallnns lo provide health rare to
then retired eniploytes.
The External Sector
in caUmsl to the firsi liulfiif ilKIS vfcea r»busl
exports jnoviiled some oltsel lo Ihe wtllrass in doiucslii:
demand the external sector provided Intln- -.iifipon lo
uTimiiiiic activity in Ihe ipeciuJ half of lite veai. After
[lEfT'lerLiliu^ III llie itiinl riujrli'i*. rtsd expurlsdeclined
sliar|ily In the found quaitet m ecOHOfllti aclivlly
abroad contracted. Real ini|K)rls. which luul been derliniiiftemHei in ZOIIS. .ilso dit>p{ied lunsIcieEablv in the
founli quarter, dragged down liy detehnming U.S.
demand (ligiiie 37). The dtellni-. in trade Hows in late
2008 were wides|>rcad across major types of products
and U.S. trading uartneis. In adriiiioii esouMs were
depn«rd liy prndtii-tinu disnipilnns at I luring.
j ^ f n--jl i'Y|jt*ndiInii-s ij;l t:urmmi|]1iml anil ^ I I I M
invi'slnifnl liy stair and local governments were mile
thanged.on ncl, in ilir second haifol 201)8alterpasiin^
D small incrpabp in ll«' liisl half. In pan ii'Hn'liiifi die
moontlng pressures on Ihc senor's budgets, snip and
lui>ii 1'inpiuvitii'iii (uu iM'fi)aboai nm \ i i u f mliiiOte,
wllile i • .ii construeliun .|:»TI.|III;:' lias i wnii;iih. muyed
Tile US, trade defkil rrarrowiil curisiclerilbly m the
end nf iilKIH. whirh largely relleelwl a sliarp dei/lliie in
die price uf iinuorled nil Tile iisile ilrfu il Vim S555 hi I
lion ill an aiinunl rale in die fourth i)iiiirtrr of 20118.
i>r alHiui 4 ilcrrem ill nominal GPP cora|Kired with
a dflfitlr of 5 |ierc.ent of nominal C HI5 a year earlier
[figure .IS).
The linancial posiliont ofniosl Malm with dip
ejtcepUtws c>r Arizona, CatUuinb, Mif liigan. ;iml a fen
Ol&ers wen' fairly Mil ill at lip end nf SkSI ye.ir 2008."
.|". : i\ ii'i ill:,' lik.'l1. naiirvl
11. S4au jciwi
rfflfiw,>ly«B) pnl (W lunr .10 In ill bot rnw
10. Tlw Ug iHii^een chjnwL^ In htmw \nkn jlul d i i u i ^ til Fop-
m ih.,rr. l..i ilnlvs in .I.IIIMII.I
tiMt limns n» Hut annual Inrrnw* 111 mod pnifwily tux pyn^nm
,mi1 r*np»nv V3lut ikHniMn«m. thus. 1iKwav& In"mjrkvlprfce*for
ftt.iiwv,iuy 1Krt iwr^lVirrii til [<<<'\ J 1 H 1.111 ^ Niilll wftl ATIM l l *
ha.
114
tiaant afGofemofS fifth? Feder&i Ratten? Svstom
real iinjNHTJi HHIMXPBH3 n l JiiH>i[> ,411(1
^fl.
2.1
Prir«nroil smJnonfiifIcnmimdlim. arml <I-I
*. 200Z-Q8
twin
n»
I I Imp*..
Illl
— II
1,11
— 10
II • II I J I
—
urn
5
an
a
it i
-
10
«
ai
Jr
"-
^ ilfllt .lE
TIN. ull ||n.ii frith '.|*M I'lili- ••! W M I
t
I
II
niii'nimll H. cmtif LI
aivj llw LLHF citturvrfjluip
h Ur
• . • • • !
I. 14 /I
MIKM) i nl
p
in wuriu nurkuis was extremeEy volatile in ^OftH. Afltr ruling 2CKP7 tf tlirmi SStt JKT
band, thi- £|HII pricv uf Wtai Teas iiiiiTiiii'ilJak1 (WTJ}
crude oil surged to intnc llwn SMS by mifi-JiiK •mi-i
holh surprisingly rtitniM oil demand, e.spt'ctally from
LTiLfimhift nirtikui etottofflios, ami coHUnaed rostfibfl
in nnar icrm supply (lifi'iff13&V Since tinid July the
liii.irH'i:!! itinrk• s lumiuil anil ihe r«:••«•.irIeinjj. >UM\I ihnvniurri lit fflEibiit rroroimir nclivJly l^vc drafyjee) down
oil ili'ticiin.I. Despiii1 »ltetsi|]ts by OPLiC u> reui in prottiiciidu, ilir ra|})d di(3p in demand si ltd itmcuriii aboul
fwEun1 j>m'i]h[i£:l% for ilnL glubaJ ("i"£}iif]iiiv ]IM! lo a rul
lapii- in nil prtws. Tlw *poi pfice ur w ri ftii UKJUI
75 pLiirjil frriiii I[«L |H*jk tn ntSkr S4H pn hsrri1! hi Jnnii
ur)r of thii yt?ar. i bir-tlJttjti i'utiiri^ \trkvb i'ur EBBtffi oil
38.
\'. l>. 11.1111 •. 111 .*
111... i'. i u 11
MJIIV fl^bra .uul ..Alt'l.K lUtiill^h l.lml.H* dMW
h i nil d*< L'EUiiinrnJllv FCcwmtli flmwiu.
i i hliqmQKMI MfHk-i-in11 IMITI
view Elml OJ^EC arlion5 will menliiiilly rediirc sinijily
.Ill'i Mi'l '.H'lli.il ijl I •Ii-Ml.llhl '•, ill ri'U'lllli'.l I n r} i • • JllpditlFII
mm,
lni|KM pririw rosf rapidly In the Jim I all* of 2008,
liii [ ihv int'iraw wai rthvei>cil in I he .WTOIKI luilfr Thai
pMIU'rn primarily rHlrrU'U llu 1 sharp s'win|3 in till pffcfiS,
1)111 ii WAS also JMlllirr.: i d bv 3 u::l;kc<l stoiMUL1. in nun
Oil ini|JH.iu piiirt: iiMlklllnii I'toill IIS ia|ilil \MCV in lln1 lilM
Jiiilhsi"Ilic ycjr. HvcinOMludint'.oiL pliersnf imparliHl
pKiik (li'iliMHl in ills fourth quariur ul'ZOOS, iliivi'ii by
bnlti ihc shnrp Hill 111 nun-oil rnliniiodiiy prirrc ni.l Mn. . • . . ; , • • . . . until' dollar I ha I ntuirri'il in Ilic •.••• -i hair
of Ihp yoar.
w
National Saving
— 2
— J
/ -
'
1 1
«JTJ
'
J-,
I..
gSSi
KB*
'
am,
i
—
<i
-
V
l_l
ana
HBsrai iln .1..'.. •
M r j l j i u flni qifiHinlv
I .'iiuKi.il.
k.,.
MI ,,..,-,,,MM
( ^ « | n ^
• I" I
'
t .IUJMIWII I*. ILlUUiUI 1.1 1.1 J1UIII.U, All.l
I
I 'i.i I nsl national saving llul K i !.• saving Iff homeii- •!• K. fi'isM/t-^ui, ami Huvi'iiiiiitni* txriiuling dej!^1rlailrin rhnrgn frll Turflicr ill 20DS (iifjiire 411). After
having l i c k t l up tu 3 pcrcunl ol nominal GUI' in 20(16.
ncl national wviriR ilro]ipcfl s t n d % nvti the Mihsrquem iwo yeatsas liie M c r a l lnidf>pi del'icil widened,
Ilio 1isc.il 11 . i i II.-.ill siaioand total jiovcitiiik-msilii[i<riiioii'd and [irlvale saving rftnaiticii low: in thtc- liiird
EjlinfiE'r til ifEHiH, ntt iiatimial ^ v i o ^ siouil ai nv^aiivi1
I*:, |ii>si'|.iii i i M . l l l ' Mallmral\ai'ing will likelyri-main
luw Ilils year in li^hl ol [hi1 vvi'Hk economy and Ilii'
rerenlly piiacfpd fcdtial ISscd slhrailiu \>M kjRp NonrIhflpss. if run ImoMcrl nvif Ihp Inngrr run. pccslSIelll
(gw ImJS tit iwiiiinal iavins will likely lit1 aisoiimnl
115
21
Monetary Polity Rppart lo llur Congress
to
February 2003
41.
lBg, mi
'
Clungr In t
nta lype price Indent lor p
;..i.i.n
lii
', •! I'll .Dili IIL' (pitrwrly iilKl•iHrtumll ivmi^i ZMfi'ltf Nwitokni
>..v.iii: it it.r u.
I |NUMI,I,,I ,uul i»i Urn,- M •-!•. mi: tfld i." M UMljg i<l
UHH H i bail iH^'TuriP'iil-,
ftMCJ Oc|t
Hum nftaHHiiPm! Uiiiwui frf RafttHCAlM&MI
with Iinlh low rales ol capital Inrinnlion ami heavy borrowing from nhroEnir which would limit [he me in (In1
siandaid DI' living of LI S residents ovi'i lime ami hamper Ltic alijiiiy of die nation lo men ihc rriirrment needs
Prices and Labor Productivity
Rntan
AIE] loii^l i htllalion ^i^uurus wore i?li?V3H?d rimitiy the
lirsT Ithll tif HiiiH and tniu flu- sunmirr. ihcy dEminishc'd
MpprfcijLly loward vt*ar Hid a^ prices Q f e M f ^ and
til her rciiiiinHHillir?; dni]>|Ji']d and Nit' dtL<jrt'f nl slark
in flu• 11 nrunny IJI[HT;IMHI. TIIL* cJtiJin tyjif firici1 indi'x
for loraF [irrsonnE ron^uin[)tioii expeiidilure^ IPII al tm
rtimimi riiit* of 5 ^ |Jwrt'ij| in itu1 fmmh (|uart(?r rtfEer
ri^in^ i;i|jidlv 0V*i lhi j fn^l (lirrt- quaileri ul' [lie year,
'flip rorp PCI1' piirp imlpx—wliit ii exdtnfes Eood itml
fiit'r^.v iiiMiiv- ;[>st' <il iui iiimiial rale id 'just ft |wiii'ri<
in ihi- fourih (juftfWtf aftertocreflSBififlW
pK&^t,M
avt'm^E1, ovpr Ihc firsl iK^'t1 qnarinrs nf Ihr ynnr, OVIT
^MJh as a wrmlr. rDii? I'Lt [urices increased I Vi jM^rct'nt
[figittfi4lj. ftaia FbrPCE prlrps in janitnry2nO53 arr
nut v<?1 availaljlt?. hni Lidoiiiialiuti I'rniri rfn.Miiih-.itimi1!
(Klri- iuiics, (CPI) Slid ollitrsoiiKPS sujy^psii fhal Ijr.Hrj
iln1 ((jjai aid LtirL1 PCIi [iric:^ iiuJpsw puisk'd liiodi'.si
iiKSPaaai En dial m W i
Sim P |jr;ikii!£r in July, i^nnvunin rniTgy jirte u-s \mvf.
falTni (IninmEiicilIv. wiili muvi uF Ehi* ^c<-li)i
niiiiL'
during flit' last thrw moiiffis of ZW.W. L.a^pJiy rcttuclj
inj^ rl« dnjp tn crmlf uil jtricfs. Mu* jirirt? uf ^iiMjIiitL"
t±-lI fi<nii uiiuiiitl $4 pur KELIIUII. on avvniHt. in July (o
Irss lhan£1! prrgnllon in FJerrnitior: in micj L •-!•• >null was in llit lici^liliorlmud of S3 [ti-r •JalEon. I'lit 65 Of
i^iiiral gas. which lyjiifally rtu*vp n>iif>hl.v In Iliw wlih
rnirtf nil piirt*.s (ivt*r ji^rifirK nFstfvi'nil ninnEfi^, alsn ft'll
•Sh^rplv in lilt1
l:l h.!ll nL -'i.iilh nUt-TH ••.ii.i:^ .i.iii il
n m tip jn ilu* Sr$l liFilf nfihc* y&r. f>»nsnmrr |jfir(*s TQF
pk'tu icily LEiiiliitn^ to mavn up liirough I In.' Lknd of die
vt'dr—ItkHy brrdusr uf h]f>lin p r k K oarlifr in dif yfar
for fossil lut i l inputs (u el*H.-|j-Sf hy ^eitfraLiuti - lliou^i
MI; I i.i'-i 's -i[i|]iMi :n ILJV*1 s!mV( d i;i i in I1- if I Hilt
In LUIHE^M. r fniMiiui'f Fuud |irifiiN LunlinL^d lu rj.su
i i! ! I CCQItUtncd rD 11 • 111 >
: acid fur [minhiiM'd IIUMK
itnd litvtragos. wliicli typically arc iislWm i l l more
Iky Inhur hfiul (KtBT bn-jliK^s CQSHs itmii by lami prtcos.
EihfT NuvenIIM-T, hwwt^vcr, irurfa.'jes in - • u•-,• i • < -1 ftiuii
pifefts iiaw tan) quite modfsr. Bam pricca, tvUkdi bad
stirirc'd liHwtt'n 2()(Ki ctml initl .?UfiH .is Ei ((JTiNequrnre
ul'MTun^ world drniand ant] Ihr incrfaMrri usi? f i f r o m
ffii i he preprint Ion nFrll^nol. fell ^liiirp]y in ihr st*rnnd
ItdJ'oClasL VIMI us pi us] ii-f .Is fin duiLifMu iind fureiuti
dciiiiiiTd f(n food vvir^koiHK.'l and die [Icmatttl For rlhatiol
('rJscd. i. •. I'M .il!:- i >\-in••.' •. iii I'M;iII priLus ^.=.n I lu shuw
Ilirou^u fairly f|iiJtkly m lOiftumiT fuud prtfi-s. mul Hit?
sniiill Enrrriisr^ in ihr CPI £nr ftwul in (!IL* pji\i ccnijilc
of months &ug^L^l thai it nuEicuiible niotitTdtiuu in conSUOKf food )iricr inllaflou Is uutlcr way.
The slou'rJnwo In core iniiatinn In late ^U0§ was
widespread, ^hhuu^h \i w u parlkoUriy sieeji b f DKMOi
vehicles, .lppiVL1!. and oiher MTO1BMTgoods lhai won?
Iwavijy disrciiisK'd !iy rpnik 1 ^ in an pnvirunrsn- n HJI'
weak dnuand and cxn^ss Invrntorlcs- hi adrJiTinn, die
cosl pressurps dial s^cnied lo be booslbig core inlbljon
116
} ufC'Ovenitits of lite l-edoml Ri»wn p System
pjulirr In I lip year pbljcd ah ( i . i v i I m •nu\i- ofihp previous lingi1 fniMlSffl III ilie priiTSi nlnk-rj'v nnil iiwiffials
rail ilieir rimtsp and ihf effpcli oi recpiil declines In
Him- prfeas stow) iu shun iluratpji m oonsumej prttes.
Tin' slreiiglJieniitg hi I lie exchange value of lilt* dollar
jiul Ihc-deceleration of import pricr* aba helped ewe
iiii? • i, • ii J pnsoure mi n u t iiiiidiiun
Survey-bawd mcasiim ul "near-iemi inflation expeelallons hiivr n n i W as actual inflation has comedown,
iviiilpiniiicawrsnl Ignger-tens iunatittnexDwSsSaw
Jiavc been steadier. According Lu Ilie Ki'Ulers/LIniversity
of Michigan Surveys of Consumers, nipdlitn onp-ypar
inllMiimi e.HpirtHliuiis. wliidi Jiad Fiiuved aUjve 5 pvrrcn! last spring and parly summer, fell ilvMH>huut (In1
si-ruiitl half nf iaslyear; sliirc DeiTiiiher, ilwy have
tlurlualcd aruuml 2 pocotUAS f«r lungrr-lrnn lillladou
(bxijcctiitiiins. Plic Ri'iilf n/lJnlmostly of Michigan survey Banurt nf [iiri[inII S- in 10-ytar iiiltaiinn KtplBfr
lions was almiil 3 |iercon[ in January and parly I-Hlimary
of fills year, similar lu I he ragtags during 2111)7 and rhi>
byfiiTH5in R'sptjnai! lo ihoir vyuricnin^ salti ii
Mdinn'ci, .iiiiujii^h esiinunes ptfthe twdertytog p^cc uf
jiriiilurlivily ^rnwili Hrt1 i|iti(p unt prFain, ilic: buuyaniT
of irrotluclivtiy In ji• _
• i ;n qiaan^rs -.I.IJ.J.IM-. ihat I|.I;= I MM.
liajH+'iiUi! lurtrt Mippoilin^ n solid Linilirilyji^ Irviitlfof I-XUTII|IIC- tht: rapiH pa« of U'tJinulowiCiiJ cimrigc unit
(lit* nn|^ohi}> olTt'irts Ity (inns (w use Lnfornmlioii ic.tr.UTiuki^y Iu itii|>n.»ve the elficitinry uldnfir u|H^lions—
remain in [ilacc.
Rt'llr'ittir^i IIM1 stjtltJ i^lu 3n ]a\hi\ |HtrilinHvlly, <ilfii>g
vvilli IIHJ suUchKfJ illCPHSa In iiouiiiMl Umn\y COnnWflWtiirjR JVJtcd ciirtlLLr UJIH lahnr casls in Ihp nonliirui h(Hliii-w BECUJI iiK^ fi[s,< V* jjt-KLiit in H)\V&. Hie i n a e a ^ lo
unit labor coats was JIIUJKI llu1 vamn ar« lJm( ^(.'corded in
Irea^ury Rates
ilif t unviu lHr£E?i laiij^t fur ili^ Jwifral (unds Taif?r Q lo
W |R-uviii, is substuruially bcbw tJie k'vt'l final ]nvt*3
lors expftfed al the; rmJ of I m r SilMIW; policy (Wpccfiifi«iii wurf Mfadily leviwtH) {|i?\vTi>vurd over tin? wi urn!
Produclirlly and Unit l^ibor Costs
IlirU ::(' \\i'. VrMi i•= ill', hnflni Ifll ,ISM| CCCmOlllk :• iL1 1:n•!.
I ibOS prniltirtivliy his hrfrt u|i Mir|irisin^!v vvnll in
Ilic1 pa^l year AlUiougli uroilutlivily yupwlli has iillon
sis I led dining prtvious rswsSlons. mil put jirr limit in
liir nmifiirin bii^inc.vti sector rose 2;W pn'*"poi DV€T (lie
cvrarse of ?()l)8. ihr saiiw rait- as in 2007 (Jiguie Vt),
Till" rnniiiiui'd rise In prmlnrtlvliy during •!•=- ---- --••-!
hall'ol'lasl year, al a limp whpn milpiil was cotilincling
likrJv reUwts i
n u i i l | i i u !-.•• • • tiuiir. I v W
2tM!i
JllLJJ:
'»•
'g j
m
•a1
™
•»
fUnii- MBstDBRl (N^PKQ W " M " O
f f*H ••»!! hm.lHVM« fifrlriH fr
»Mtail1Hi frt Ilk' f u l l III i |i.nri lull nl lU' Ltu.il p
rJ IIIKINHUKI Jiifui IrMi 4ni.lt III
I J W E ^ I ) ) ilii'M'.H JCNiinHdrU |IM.-* vrtkNjj \\m- p n . l
I .H'|mniimn Ol I nix*, Uurmu ul LIUKW [Milliwio
worxtwd. hnvcird iho i-nri uf llu 1 y^ar. i^adtiL^s fin
inlNHl rnir vKpci'tatiDns froirt nwney niarkti TuLum
v\\i(\ ()])lion% WCTC! romp Jim icd by prriisicni i
mj Itilerbi fnIUIS. M o ^ Hit lun^^l rale, whirli
i i •••: ! l I l C 1 ! s.. ' I I . :• .: •••' I n ' • • . ' ! • •
I . . : -i.-
•: .:•.-. • : - ! M ^ i l : .
inp; di[r f>i|W(islo[i of (he Fi'dfrfll Rrscrvc's HquldJty
i . •:•:.• •••
• • . • • i ' i : . j . -•-. M l V f i k O r i i K \ t ! f t r l y
•••-• •
\: '• - i
(IKJI (IULfrdcraJ1fund^ rail1 would rtfwabl low fur quite
,H • i H i p. -1 i II II- .i ibiiil inr rt'^slnfJ ions t*rns phoul I ho hv*a|lli
ul liriiirn idl uPsjikKiort?i, w^akJK1^^ in llw Pfal econunty.
EkticL D motkTahon in inilation pcfesatner. I1 inures quaira
j
curti'ndy s u ^ s i dtai i 11 vosdorv H.»Spo*P
the fedi'iui funds
rale lo remain tirumid its cnrrrin level lluuiighniil (he
HI -.1 hall of this yiiir .tn>l tln-n lo risr ^tiicLually iln •••.-- • •
tfafeflftdqf 3pUI. HEoVKCiVfifp timyilaiiHy ahuui QtCSiEC
of IITTU ^n i niiitnis and pcrlt.-nUiil thriitirtioni* cri'ak'd liy
hV ?mo lawt't hound KLIK thr l^dc-rdl funds tuli- niakp 11
diDit »JI( la rjf>iyin ttum fmuies prices * Ww^fve read
inj^ on die policy expectations uf nmrkcL punicipuni^,
Qpliuji^ |>rrCfi ^ U ^ L ^ L ^ I I lull invt^Lur nnf t?iEain(y rthoul
I he future paid for jjoliry wa& inrrmistng ruraitlerablv
duou^li Ociobn, as strains In financial mafhets iulru
sirifd. bu) itii'St1 itiea^uri'S ul ninjt'r^iuly Jiavf ^uUsi?• l'ii IMI\ ih'jM.li-ii dmviiwai\l.
As Ihr economy. iHUlrrKik woL^riird during \hf\
WK\itn\ Licill ul lint1 yvuv mil iullaJiois preMnrvi "i^n-ii.
yields on lon^er-nialufilv Tnrnsiu^' ^cctirUies declined
A'A). ID ttddllFun, Itiu ^'(inwiiv
117
2G Manolary Hoi lev Heaorl In I he Congress
February 2DHH
•I;i. tnleisMratesnnwlKied Tmssniy scwtlrle*.
!
'•« •
negative markei wuthnetii ami speculation thai the. 1-ederal Keserve unjoin iH'j-iii jinn liasiin; laij-e [|uanli<inur
hinder nisnirrry Treasury scruririf* rnnlrihuled M Mm!'".
Ki downward pressure on Treasury yields. Offsetting
Ihese factors In stnne degree WCTfi market ex liberations
lhat die Treasury'5 issuance (if long lernt debt, whirh
rose notably ovei Ihe course of 2U0S. would pick up
further In Z01B. On nci, yields on 2 a nit 10-yrair noles
I'vE] abend 200 and MO basis puinls. respectively, during
Ilie-second half of 2008.
In conlrasL to yields on their nantinal counterparls.
ypi'lcK OQ lri?asuiy InFl^tion-proh-tEcd sPLHihic^ {TIVS)
rase over Ilir seroud half of 2(K1B. whirl) resulted In
.'
=i-1= reduction in measured iniiaiiun cowpwt;alinn—the dilFnrciUf1 hrfwi^n roiispn^hle-mslurliv
nurninal ant! Tll 1 ^ yit'ldi, Sonic of this redudiun wa^
reversed In Ihe early |Htl nl ZlJ(l!i Inferences nliaul
in till ion i'\|H"rtaliDiiv liased (in TIPS yields tort Iwen
(liflicull lo iinike mvntly UMnuit Iliese yield* appear lu
hnvr ht'cn nlTrt led in ^ rlcgre.i1 liy movements in llqiu'd
ily nrrniiiinn and Iwcauw ifw'ai faclori have Irallcntl
yli'lris fin niiiiini.ii Ttcfl^iiry Issues.
Kederal Borrowing
Federal dull! soared in the second hall of 2008. The
more iliau $1 trillion of Timuiry bomWing slnci' lilt
summer leflcm Imnuclantly die iiMid to linanre die
I'feasury's iiurtliasts of agency MBS and «|uiiy: (tie
TMiP, under whirl] lllc Treasury Itts pilnlMsili ]i(t>li rn-il sham in a numher or financial institutions; and
Ihe 5ii|>[i[enieiit.-ir>-Financing Pi(]flrain, under wlurh the
Treasury has Increased de|iflslts al Ihe Feileral Reserve
lo k'lp fund the expansion of Ihe Federal k i v i v e \ hid.
ante sheet. Tile ratio of federal ilelH llrlil hy the [iiililii
to luuninal GDP surged In alninst 4h (leiccnl >n tile iml
nl i alenrlru vciiT ?(H]H and seems CCSTUbl tn mrrcase
agsin in thi' lirst imrl nfHIIIKi, as rHirrowing is enjiii^led
ID rt'iiisin slninfi wilh Ihe weak e< nnmny <inri hud^cliiry
initiatives.
Despilc ihi' heavy issuance of Treasury •sri'urltlps in
die serund half of Ille year, die rapid grnwdt of feJer,i(]ygiiardiilpiil dchi issiinl iiv lianklng inslltnlldiK
under (Iiv Tcmpurdiy Liipiittily Cuaranteu Progiam, and
ronlTiiued issii.nue of CSt' smirilips. demand at most
TjMsur>' luctiom was solid, as Investors sought the
safely of Treasury securities Demand for Treasury hill?
\m\ wmrnely ^IIOIJR. anil yields In secondary niarl«>is
sometimes felt clusi1 fq Itco fund t-vrn helnvv vvm al
limes), even as ihf iiipply nl'hilk int reused innritedly.
hirt'iRri cusliKly holding of Treasury si^curlhes al
the F'V'deral lie.seivr Hank til Pfe* York giew opiiily
4tt iH'rcenl over ittHiK. althouf-h tiie pr(j])ortiun of nominal ruiijion scturitfce pujdwed <il aiK-llom by fori'ign
inVetlOfG generally rpniflim'EJ in Hie II) perreii! tn
3t) pt'rcenlranjut'ohservctl over Llie [Hist several yean.
State and Local Government Bono wing
On net. liunuwtnj; liy Male and loral giiverniiti-iits in
die ni.irlii'l for r
•• i|..il srxuriliM was Milldueil in thr
second ludTol iJODS. The issuance of short temi ninnici
|ial delij was rohusl, boosted u\ jiart Fiy [he need lo fnod
^in'hionu. expenditures at a lime of mJak revenues.
Nowevei; issuance uE foiig.ierm delit, svhkh is generally NM;fl In fund i';][iiln] spending projects fir tn refund
iwiiuin;! lung Ictiti debt, sloweil sirjilllit'Sillly. InHTUSI
rare& mi long-tenn rteht rlimhed sharply 3£fO& the
milurity sneclrutn lu Ihe swoiid hall of 'ilH)8 in the fair
ol~ considerable strain on thi- budgets of many state and
local governments and sharp deierkiEilions in nmrkei
tunciioTiiiig. Mi>rerec^nilv. however. rnimUipal Lmnd
nrrs have dr«p|ieil mnrketlly, hi |i.id hs^cause rirai kei
psrtlcinams appeared (o view the federal stimulus pack3gf us likely lo improve ill.' lnlann.il condition ttf stale
ant! lucal govonunenls.
Monetary Aggregates
[lie Ml iniiiielaiy augi¥gate increased a! o 10 pcii.vnl
annual rale duriuj; [lie secunil hall nf iUHJH and
Blioerccnl fordieyearasa whole (fijjurf 111,"
11 vtf cmifaa nl u \ aam v ciiuilEhi IIK US 1 rvu
es»n* IJjnks. ,ind irw viulis oriitinsiiDry Imtltullnis:
118
Boanl nfCmvimrn ofthr Fctfeivl Havnv System £7
I'.il.iih -• lb£B) n f dtc Fwli j rnl K c s i j n t h \o r-xfj^ml TE>II-
M2 growth ra«>
stdrmhly DVEI UM CQUISfi ul ^IHJB. mid (firs growth W13
jRHy liy the iirqlinn nrrvscnr hnlrinrcv Thr
ih^ in Fi?srrvr hqlHnm alntoil f n l M y rrprrurMrd
an InqnflSc iti csrrss rcsi'rvcs rarbcr ihnn nn fnrrrasp In
required reserves In parly 2000,1J11? iLze of ihe balance
MJIIWI im dptit^pd suriKwiiMi. whlcli rodfcis a runoff
in cit<dll L-jtlHidL-d diruu^fi f}iL" CUIIIIULTLiiil Pdper Tund
Tifg f'ai'Ilify aiid a dm.i«H^ in JrdW^aEi lic|uiUlly swap
ILIJI^ with furi'igi! cemral !TJ»J«
LvmKHAIWNAL DEVELOPMENTS
International Financial Markets
MUTE
Th. d
^
vmii^ ^ p m t t o <iiirhnUrii4 rnnnrV HU|i.e*
nndJ-Jiiftfliaaaifewtttpwtifc art] M
Hn-ml ••.I.^.-.....I I.M..,.-- 9 U •
The rapid grfiMfflf) rvilftled in part a marked decrease
In .: I.I> coBfllitfl ni- I:-.: rates rclaiive to rhf rates .sii.-i" !
on Mi' .iwi-.-i.. .is u r l i asfttfWBSeddemand loi sale aud
IIipiEft assets during Ehc financial luniwfl. During thr
SKEttAlJ iull'uFdip year. (In.' si^itihr^nt sliiwiinwti i;i thi1
growth ofreiail intrnry ntnrkrJ mutual funds sv*i% f>flw(
by a rapid IMN n.-.iivii in Miiuit iiiiHL iir|Kisils4 as kuiks hid
aggrossivuly for litest* drpL&ih lu EHIMII^S tin-ir funrf\i\& Thp currrrify romponcni of iht* money slock nho
iin'Ei'itvd Lri^kly, an imhr.ilkm iPF solid di'iitiind Itir
IJ.S- tijinknnt^ from Imlh lipifiign and (btiti-Slic soarrps.
Mows inlu cLcnmndricpo^Hsvto& jii^nitirant afdrr ihu
inUotlurtJDM of the Tnniiofarv Liquidiiv G L«M *a n Lrr I'IOlfiam wtiicri ap|}iir(*rLlly dicw lunJs out ufulhcr niuncy
Ml.!' k' ' HI' I
Ti-.
I i l l ' JlHilLi-Liirv l / f i s c — r ^ f J l t l - i l l v l l l f SUI1I - i l • : i .
rwitv iti I}IL' Uanth uf (lie public ^iid bank rejerees \u\
iocreased rapidly in m-em mwilhs, primwllj' riwing fo
lica\7 me uf I he tedcmJ Reserve's {ii|Liiclity pru^rdtiis,
Civil it (.'MPiulvd through llifw programs rauscd die
R
|
Ilk' simnnoi and liinding EffltdldQnS lenifiiiitd siraitini.
l>loh»l hnanrlal inark^ls were rubtlvtlv calm In Inly
.mi I August <ilVlK18. This ^luaUrjii tlun^rtJ aliruplly
i i S^jHWtllWt ?& >\>:lr.t\ •!>:• s k..il. ,!'iM uUhT ! II ••:_n^sr^t'K sei/ctJ up ami lauding r ;inic ru a nr;ir %EjniUHll.
Tliey? [!^veIo|jTiieii[s vvt'n' Iblluwetl liy lln< toiMpw of
several pmrninpnl Fnn'ign diyuttlttl Insdnulons In latr
, I lii' Iwisks Bradford and Giiiglty, Itirliv ,ind
i WGCB |jarriaJlv Of fully ffltliOWllfMl. and • I • ,•••
nUiiTi^ A.C n*ivivrd .1 \m^v nijji|;d inji j rlinn In am Ih^ (it'nUflH g<ivt'rnnn.inr
Thcdfcpminj^ nfiht 1 rrjsl^ |<fl niFiny fnr^ijjn gdvtTn
nients hi ajitiouncp unpiccFdimlcd measures. ID IOSICHV
civdh mHrki-i fwin lotting, Inclitrjiii^ Irii^c-srfllr Era,|if'
lal iiijcLUuiLS iuki dk> banking iy^ifiti, fxpafi^iiuL'i «f
d^imsiJ insiuatiii1 [inij^s^iii.s, HUE] gmuSQtflBStiJ s.i ILIILfcjrius nf bunk dt'bL M D I I ntijur tt'iHr^i lMiik\ [ uE puljiy
rates vlirirpEy HS lite rnmiKiil crisis M ttifl dniTimiic
ih-iiTiiiirLiiiin iji tho nulFnok fnrernnmufr attivjty and
|JI ' .|i..|- in (1. ini-.-i 1 ui 111 ij !!.!'.->• ; 1:11 j 1 1. 1 He Ltll* Wftffc
111.nl"' by ihi- betivrril Resefvi?aiKl five OUKT tciKfjl
Ninik1. To inlihrss, ^Inli.il rEtilkn fnnriing jjffiHtrrs, t]ic
l:Hkjral H*"\ervt gFtrsily fspwrHliil ifs iir^gmni t>l litjiikliiV sways with I'orrtgn central tanks by inrrrnsmg
ilk? iJollai amounts kk*tarifktl m well as die uoiufier of
counTrli's with whirh it lias swaijaprrrfnpiits. iThcren.
r.il
I • - ' 11!-.^- •••. I I ' •-.••.• , i | 1 . 1 ! i , i r M . ; . = i ; i i T i i \ . n r - i i L s L U L V M J d i / l i l l " '
ap|H'ud]^L]i ThpM1 (unrerrerl j»Jtihal nir^ure.s SCPNI lo
liavf MiEJllii'd LUiidiliurLs and luid ri'.slLUL'ci sump un-jiM.ir.
oj' si.^liiliiv 10 mttets hy fhr end of lUr year, H
NOW.
lfiMhuLhiii&. ireilllun(tm \\MK tlrafl crcruunR.
ml thrift inslHiitftin'.V. (S) uvJugs Lf-jJii'iiJv O n r M t n g v»a\"\ nun
her dcpftslr a r r n u n N : (fih >.nui!l-riE-n»tnJiuHJun rFtnp i l p p ^ t , H(n
ull less than 5100,000} l r » iwflvrdiiiil wiln-mcrU
OCOJUQI !ir; \ i j i n l K*-f.it;Pi SMliiiKV. ,11 ilrpo^liory EiiMJuitCrnis: aitil
•:T • i».ii i;
: In iriEil] itiumy m irs-.i-i
.-I
i-, tea 1i; \ m.; K«'«^!i
II IIHllHiy HEdfMtl ItliUUjI Fulnlv.
s in The aefvanced foieigii vctinoniies
wore uftTily Hat owr July and Augutl of 21KJS but fell
-.11 -iiil- I . ;--i-i!ii"; i l l h\p Si'\i\rmhiT'
iii.ii Ju-i vt)talilily
10St to
Ik' V6\ S wll II I Ili j diit: |jei ti nft nt 11 ic I i rim IL ia I
nisis. On ni'l. hrnad equity prirc indcjccs in Irtirnpr.
119
28
Monclaiy Policj Ke|KH I lo ihe Congress
1 i
Febiuary 2000
I .i-k ;III: i\l foreign HXMWHlHft
I QUltY lIPfhMtfH til
2007-49
•
' '
••••
'•
••
(tluj dUTprenri1 haivvcpn yields on nninJn.il spmriilns
HH(] MIUM* on hiflaliuit ymstfcifd sc^urilitsl M l sharjilv.
As in (ht1 United Sialos. mraMirrs i>f inilafinn coittperv
nation were <|uile voJcililr. huwever. a% the Liquidilv of
innatioii-pralecrirtt SBCUfHi£$ M l markedly
Although in early ZflflH (he rmerRitig market economies tooled as if ihey iniglil &£$]& tin1 nia^il sirrtou^
• '.M1-.'
i|Ui
i i - ••-, > i M l n
i• nili:•>: f.11 r r l s i s , I h e
v\\-
11.i•
w j u n
ml linaritial Slnttfts in Seftentlra StHlS led lo ^fl^^tl ^ud
,.„, u t,i to fa fe forte fc
N u n 11 HI ilNJii m'- rt.nK I lw> tn\i nfUHVIUfiH (W PKA w i n " - i " ••>..--.
m. annu K w - n * * n*- >MktMMiii.iMp>tMwiiihMHiiT]h>ji-tf*-i i r a n t ,
Il«i H M I H urii-a FV M.idn.1 M>LlMl I K ' DKaitJW 88 VHIV.' l^.irm tiNw< ti|Lkib
i.i< turn, .rinj.i Ehm
Inning SUKV l : «ii*irjir :BIH D m p u t o
*
£fttH
u
) M '
r n i j
U
W
b
U
b
t
t
ti. aivl Canada fall 20 ptffififfl i« 10 p«flfifli ovor (he
l'n!' LaM yiiar and have t
(his yi*ar {(igmn" 45). I.nng-lcrul
fell sharply in Eunjpp and Canadii in lh(? lauer pan
ofiOfl^, wlitrh re net it?d hnM> rite i>a&irtg DT moiioraiy
pal fry and dliuLmUH'd growth [irospecis, but liavp risi-n
fe
-i*. in early 20IJU (HJL-UFP 4TI). In
M, yir-lik nil ii>n.iJi[Ti)|irnlf^riffE tong irrm wt urt
1
tit'S rosi in many cumum^, ^nd in 11alion CCHHIK'HWUMJ]!
•16.
Htls us iiivi'stors ill Iheiid\anted LTononifcs sougtit to
repatriate i
K Downdriifls In linanriid mm kels wefe
relnf{iTC.T[] by rnnccrns over thy cfT^rls rif declining
i'xpuils to llkh(id\'aTni'i] ijtunutliii^s andr for ^UEIHTIUEIJEV
BXpMlB¥. plnmnir:t3i]^ r.nnimoilliy prices. Mnsi sinrk
markeh in llir emt^ing eraiusmiei fell '£# [lercenl io
-1[> perrem, i?n iinl, over HIP Wrond halt of the VPar, and
risk spreads tin ttiicr^Sng market debl rose sharply (Ei|>
ui e 17)
Tin* Ferii*rai RrsE'rvp's hroadi^st measure of dw* nonv
hial iTade-wutghinl Turt-igTi ext!ia«gij vuJue urihedullur rose ahuiil t^ ppfci'in, do npi, over Ifif- >iKfnid half
or 1!OOS (fijiiiR' 48). Murk or [his rise reflected gains
,^.iinM I\IA\\U
\
\y
-ir. j. -, I in- i l n l l . i r . i p | i n - i i,iii-.[
1^ perron) a^ain^it itir niro, 2\\ percrnl n^ainsl
the Canadian dollar, ami Ui pMtefl against M--!lin;1
(fifiure 41!), Hie dollar"% sircngih WU aitrlhumliIr lo
^"."i;il fuiturs, in;lulling \W- iLiiili/:iiitiri Ijy tiumv inv(^
47.
Fi|Uiiy hn^hVA in hi-li'i'ird finpMj'i'i^ nPtfbai ffOOtORntl&i
Vfpltb tm Ijpnrhimirk government linnets In
I'IL< limit an.1 rj,nr>-. I'ti- hftl
. .'fhl'l hi^H..^Hn.M»innlLjiMi,rk I
,'IXJT Ihn- LIUIL, M .
m r i i I• HI |HHI I
'
. H.I,I I'nn r>ir
iihU.otl,. y.J.ivhlii. P'.ikhUiu llK- lt|i|ll|Hltl
Nan
•!•..,•,
l » tfmt, Htaltll m \m JM ..—r i
-
i,-,.,!,•, i . i
; I M A
Ml' LUIn
Mr
|R
-.'"••' i Vbt iiJlLil -\ii,i-i n..- mi-1 iHM-rajlu A*™. \ k i i p n i SUMtiy '-MiUliI
i'ii',,>.
LII rMSCU MHh-x FIM tilimp S h n a l r i fJOKUKMtfl fata .,-.
120
fsiard a! GoterBors of ihf Fedfrst Reseiw Ijittm
<\&. U.S. i1oll.tr iitHHifiJl excli.-sn^f r
.. ,
-. ii ilsH I
2(1
and Ihf H«/ill:in real. Thi> doll.ir a|)prr>riai«l iraidi
Eat ii^iiiiM IIIOM I ! IIIII);NIL! Asian rurrrniii'i, ahliou^h
il ilkl m t ntuip Ihai M |HTH'III again;! tin? Kuteaii wan.
In hH^MH
in Ilifisf p
praSBires. many rcnlral 1/ IHIM In
^
Udtntlttd in vijiporl rjf
Imlh l.ytin Ami^rim nml
Iheirritrrencfes.
i ii
Ml]
M l l i i n i y l i III' K i l l flit rttfOUIll del 111 I is .••.IMI. i l - . i I..
35
—
UU
sun
aft
Nftfl I<H A n , MiLini ka -in LL.C.-I^P. iLin^picv Miiii*ut* iHli"'
1..IL-.
I lie tml i httSBwata tin l1* Sri It-* (4 M i l linrv IK. Ztltll I I In' U i. el l-nliv |g .,
...,,,..-. L....,,;,. ,,| lr> r [gfltttd
. - l - i - . - l the I - . U l l f (flUllttt
1 I|S
i
r
B ri ri Uiuy H^'^I
""' ' H * * (i«ijiJr(.ini U S- D ^ k g | M s H !• I l^iiv1.'L ''"^i i IIMM1. HW IP'T^V'I'IJ In'in I' ii ipijHin
50MU
I > .1
RntfM EMd
UK'S 11i.ii iorcipn Rmvvih wuitld *!ow murh more slwrjilv
lEmn titic] beta E'rirliprantiripaipri as well Pisan inrTi-^sc
in dr/iiiand For Itn? relciiivt* wifely ol' U A assets such as
Trfasurv sfcurilies. In raninttl m its ilrci^fhajjainsl
otrier majur currenti^s. liie dollar df|>r«i:iiikJd I I |Hjrrcni at*alnsi ilic* ytfl, a:1! niiirki1! vnlalilhv Ifd titany Ja|>anese invKlon* Itj sell fort'ign uasel^r
Tile dnlffir aten rf>*:e nfiaifrsJ the rurrrnfies (if int>Sl
i. n is'J .L: i 11 L; murki'l rtonoinics. iri4 lntJir^ itpprrnEiNun of
more ifriui .10 JKTU'IK L^ainst fmili ilu- MfJikan pi^u
10,
I S. LICIII.'M isK
sr^cied rrukjor
ha\p narmucil In 2U0S, II (pnialns sl^hlp. rurtnilcncp
in {jlnliiil liuanrial ularkils liai nulitcably i li.m^til Ik'
niiniKKiilnit of ttir amwlalcd linanrial (IflWS. Esftirs
Ilu' liinnoil, financial iniliuvs were nrininrilv in Ilic
lorm nf HPI purchase of U.S. scf nriliirK by fnrr'rgn pnv&w iiiveslarsand sumewlial smaller net purchase l>y
lijit'i^n uflkial itisltlutions. Siiu.y lati3 Z0D7, huwfvi'i,
fnrci^n |)iL\;iiri ht'l ptirfliawj; nf U.S. RpfuridM havp
[llMp|!i"il \harply, l i v i n g lurfiKrl ullUial btBOW! In play
a ninrll largrr roll' ifigiirr Sfl|. FuDhr'nnnrf. wtn^rrjs
lnTon.' ilu< lunnoil private fujvi^n invi^iois puitluswl
lar(jo sinus oFL^.S. assets isbitcrt l>y private cilttMoi,
since Ihcn lbn?L^ii inveslm^n^- boik nl'Ekial and
privslc—lave lieeii ilunjiiialwl by »"Iligltl lu snfcl\~' If)
US. Trf.astny sneurHlra. Hnalty. In the third (jnatifrnf
2<Klft. miiKrlinnH in linMinps uNbrpign awh by private
US. f^ident^ playwl AIT uniiMijtl nfllt, which adilnd^lgmllcaniiv lu nel privalf inflows.
Overall. iiuUim fmni fun?E^n ]jiivaKr yftiiiisillons
of U.S. serurlllcs in 20DS were j m l one tifih of Ilu'
Him v uliiiiini'il in I he |»('i inin inn yt'Hns. gtl avi'iajji'.
AI1Ji[jti]>h pnrrhasK ctf U.S. TrrtLiniy srriiiitti'N FDSIL
funsidi'rabiy, Iliery wen.1 unpn'teiti'iilud nut Milts in otfi
IT Ll.S. SeoMUes In ?
i DTJW lligureiil) Twin,!! demand
VWS nanicuhrly weak for US. agency and OlcptMSE
••'I.
L . s . n,.| riiM,,, I
—
•
•
, 2WH-O8
II.I
^VulJlrlal
hin»lKn uHlfl*l
4M4tai|j
««,
- m
n.i
.—
II
n>i
••mi
-.••<
I l u
Till' I.AI ••
'I.
I,'
".'
,
Itelfl
t . I-I4IHI.1H IS ?
i i i..
•.•
..- •. !.• • I •
i•
•
•••!!.•,.
ii'
• • • i••.
u
'UK
•
121
Monetary Policy Report lo the tongR-ss
51
February 2009
in ,1 \ivang r*V6rs(l nt'banking h M (hark tSWMd III''
1 nili'i! Sl.ti™. nn net) in Ihe :..:i. ;i [nurler.
N>r private Foreign jmn Uws
•
i s. hrtftm
— JW)
US i
— sin
""I
i •^•l.l.lil,". III. I-H •>' ".l|-.l.|ri- If|-lll|i ^ n
IJUBIIS, wilh ihe weakness especially pronounced in Ihe
s m l i d hflllnf Ihe year
Foreign official nel purchases of U.S. assels
remained lelaiively steady in 2IJHK. at a |K«ce vlighlly
,ii,.n-i. ill.;; of MHJ7, finwcvef, (In1 composillon of
ofliual net purchases in the third anil ftmrih quarters
mnved •.harplv iiwsy friini U.S. agfncy sirnriilps ami
was coilti'ilimcd almosl i>xi lusivtly In U.S. Treasury
soctirititv FoifiR» oriicial ticqiiisilioi^ tflDlinitcd to IJO
ilitniiiulwl by Allan inMinnlons in ZOOS.
1'iiui lu ilii- [iiinii'il. U.S. iuvt'StiuV rat ptftliase! uf
rnil'lgn vi'ilrilles lyplrally gimcratcil 9 munrtal 0111
flnw, ' !:i •• purchases ^luwed Ibliuwing \lw InmiuH • in I
mDfc m f i i t l y hnvc innnnl 10 si?atih' ml SAlAS— flpncra41nga litianrial inilcw - as U.S. invralors have pulled
0111 ol Irjrchfin inv^lnnnn.s. [n adiillion, U.S. rrsidi-nls
considerably fpdured their drpusils in foroi^n banks in
The- ninitilil alftl J1=• 1 10 Linn.^il>'d Hnw^ Trnm n h •: • liailk.
iii'.11'-' i"i ami fruni ol'iicial (rdiisutlions in Ilie lonn of
ths- fpdcul Reserve'5 lii(iiidiiy «vfl|) arrangemems with
foreign fpnlral hanks. Net Hows reported by tnnklii"
o l i k e i ill the linilttl Slates art lyolirally sinall. Shut
thf onsni »f tlie tijrmtiil tlirotigli nild-aoos, howi-wr,
baoks JIMM1 ^I'tivi.ih'ii m•••! 1 -.11.111\ I.!];-. uuinVjws. in pan
rf fleeting a irspnnss1 In heighti'iird dnoFind rrsnliin^
From imerhank funding firossur<?s In European markets.
As ccnlial batiks ailed to adikess Utese contems ulth
1 In- expansion uf Ihe swap arrangements in September
ZtiflX, Ilir private bankJnr> oulliuws SIUMIHI to 4 liall.
I'oreign fenlrjl hanks eased dollar pressures abronu
by fiiiliiiK tu 11 •••ii ilonu'Mk- iianliN ihe tlullar lit|iilility
PCr|Ulnd frnm tfie Fprlr^il Resell?- Furlhrr dritwiogs
un Ihe swap lines In October and Ueceinlier cuntrihuled
Advanced Foreign Economics
F.rnnnmir perfnmianre in I he major advanrt'r! foreign
citinomies weakened sharply in the MTond half itl'
2I1IIS, as r>lnhal inanrial rna'tket tnrbitlniri', shrinking
wm lil trade, bind iulla}isiiig business and ajtiMiintt 1 tin
lirlKiice weight on arliviiy, Atiuss 1I111 aiiv'aiir'ni] [nrri^n erniHiiniiLs. rretlit LunHititjiK inl[l li'ndin^ M;IIIIIL|]IIS
tyuini-il
sidiM-.ilily. inditslrial iirnilnciton ilprliiwd.
^inl ri'i.ul \iilrs ^Itiw^l. I lunvMLf! ininJ. i-r, wmkened
everywhere and |ierforrneil paiticularly poorly in t ounIrles ill. 11 carhVr liarl aWHrttfleed Imusing bnuius. such
as Ireland. Spain, and dip United Kingdmn. By Ihe Ihird
quane.r of !asi year, linih Japan ami tin' enrn arfa had
enierefl rerr^sinm. and nulpnt fell sharply in all the
inajnr advBiired I'oreiRn eronotllies in ilie lonrtll i(ii<trICT, with mnsi rnnnlrles fxperienring especially seven3
dBClines in exports and ptivale investinenL
Alli'i sinking in ueptHtse to at (derating 1 onirnoriity prices in Ihe ftrsl llalflif lasl year, headline rales uf
.11:!.111.,-i fell niitireably as a remrll n! rnll.i/i*». enm•nurlily |iririvt and wuKening ei llunniii 1 thndlliuns
The 12-monlh change En rnnsiuner piif es fjeaked in Ihe
third quarter of 2U0K for all Ihe niajot ecnnmuiE-s. finil
Ihe peak values ranged friiui y high oKSfik ]iein j nl in
ihe Unlied KiiiKdnm in Pk percenl In Japan, Thp ninsi
rerenl rignies an* MLb.slnnlially Etiwer anil range fnmi
!< percenl in Ihe United Kingdnm la Mow 1 |ierci:ni in
Japan {tigurf 52). Excluding foud and energy prices,
p A Bd Tin imi
iF.V, ZOJWJ5
..,111.
M17
^imT' T|K< ifiiH BV nmrlllh'. .im1 'lip p#m'nl
r y
••
I. MM
..li PfCTUlW lim 6., C innil.i ii-l |l|W "•'
Ilirnui|ti IHIIIIIIIV ilk>1 liirltH niM,inmlino A i I l K
-
1 .
IIAHUWIVII"
122
ISnard at Cowman elihi' Ittlpral Reserve System i I
In lameaiaga [nice : • • • : • ! . hdvfe IH^H more
snMusd. Alter moving IIJI somewhat durins most ol'
AniK line iniLirlun is now ili'dlnlng III mnsladvanced
!•_•:•
-
Official tiHtneiary |inlic.y rales have uwn loweind
si^nihianlly siEiil- the tie^hming of ZtlOK Irl re'sriEinse k]
wvwe financlnl niarkei lurbulr-iirr. decelerating m i iiomir activity, ;m<i u,miiij> Inltallnn. A f t d MOB "'a*log
early lasl y w r l i j llie Bank of England and the Bank of
Canada, rapidly rising fluid and energy o»ls fed Ihese
c e s i l r a l I ••• i :• - i' •• D f l t t E j II Eicl, i n 11- • C A M • • I lie : ' M " i ' • I
Central Hank l!-XH). raise rates in ihe SUtttUBtt HowPITI, in Ihr fall, ns iinanrial raniHiinns i)p|rrinialwl
and conmimlily pricrs I I'll. p«li< nn.ikpfi in I lip niajnr
mdiiMiial «otu)inlps cm rali-i sliarply, incluiliti|> a roor
diluted [nave hi Odnbtr. bi lol^l. ilif Bank ufLi^iantl
han ItivviTHl i(f |ialit'y rah1 fmm 5te |K'rti'ttl in .[ajmajy
of 2008 to I pOTCOll. The Rank uf Canada and llie
h'CH have also ilmpprd ralPS ro I jwirpm anil
2 |)urct.'n[, nspi'iillvi'ly. In Jii|iiin. inlrrcifl ratyswurr
lowered lo near ^ero in l^tYcinoei (figure 53). IJI addition In ^uhstnjillal rritiic:[Lnns In jknllry tfcKQS. rcnlml
trjnk.% in lilt* niajor advanffd iT.untpinit^ Iwve laken i
niniilipr til>i(iraordiiiary OMSartS in im|irovr lii|iiiiliu
in finjinclaJ nuirhpb. including llu1 large SCBIP provision
of Icnn ftnuCin^ in local ['iirrmry and dollar mark^Fi
and dn l sij>niMriint cxpansiun ol aijmv'ahlp rollairral for
i.rnlrdF bank JunElin^. Some foreign iTiilrtt! b&ivk^ Etnr
lorning m tir rnnErinplattu^ Either nipasuiE'S to supptiri
iitlivity. sufh as [mrviuises of privtik'^wlor [isstli, t o v Wlintaid In die nujor indmlrlal nronnmira IBVP aim
jimoujii'rd fisrul piicrka^i^ lo bohipr uclivily.
OfHckilor lar^etnl Inif
odvnHcert loreij^ji i-con
_M
i i
M
.
•/mi
NOIK: TlwU
rmr'^ iri *H*-[
-,. 2(R]b CIS
- *i i
il.itlh tfrtdffil I iiinrtikli Mnwq m. 21HJH. MM. il.n.1
mwh rill'. Tap Qundl Ilro pmTniBln rain; FurOki eufii m m ibu nitiiliituni 1nt1
-sl>• if fri* .nr,i«iL n[f f inr^iv. Ql{ t-nrvui ihi- d l l d B W O K irwl. fnr
- I'lllk^l HNlVlllMII [lit' LllJit U\ \MAIA. PJI-I ^Illl I'll (*rlHIIR.|U..| M M
bM Bfl III
miniI.HII< niiflrtiMM'xKi
mMUfilmrtm
Emerging Maiktf Erononilf-s
fintnnnili: lirrfnrnisrac weakctii'd lirainallcaliy In
I'liiLT^in^ ilmrkel LOUjltries In llie M-TEjnd halfE>f 20t)S.
Ill riii' ! ii M i l l ! 0 lilt Vfal. ; i m ill ill many cinn Ninji
inarkel ri (inuEiiif^ WM n'ljlively ruljuM. ami as fttud
anil soagj |lri«>5 ioati'd. fjoiif VTiiahi'rs fm-nwd un trar
I3liilnj2 imlaHnnary |irrvsurp. llnwfvrr, in die sprond
iialf. weaker demand from Ike Advanced etonoinit'S
weighed nn tlii 1 PXIKIII sctlora of IIIPW counotes. ftlolral
liiniiH'i.il lurrnnLI I>-iI IE> lighter eredil innditiEins. and in
some cases, plunging fiimrncnliiy prices tonlfiljulfd lo
econntnir rtiHindus. By ihp end nf llii' yt^ir. onlpni in
etntrgiiig tnarkcl rcDimink's v,m dro|iping sharply, and
Inllatlonaiy (OTSSIBO view niodi'iafliiR. These duvplopmenis urumpied |io!ityntakei s in many tuunlries to
slilti ifielr form tn mnrr" slimubilve innnetary ami l i v a l
Iwlii i(* 10 iniiii'.Ki1 lln1 i-lTnls of lln.' miiioulit
downturn.
In China, llie pee ol acllvily slowed MIIIMHIIIIHIIV
Lik ^fKJft. mill fontenii n>garflin^ liii^li inf!ariyn diid an
nvrrfiraiin^ ernnoiny rere^led and £EWE> wfty Wi cIVorK
lo bolsler arUvily. Since Sejilember, Chinese authorities have iowered iK'iichnwirk leodhip aori driiosil rales
as well as bank reserve requirements several limes. In
Novemhi'i, a large iiscal slimulns plan tlml loi:itsed nn
infiaslnjclure. Inveshtienl was announced, and Chinese
aiillrufities olvo dialled ollitt EHilicies d«!>i£iiiit) losopfinrt the expofl sector, thr- real i^lale markE'i, anil small
anil medium siwd fnteruiises. AflE'rii|i|iret.ialliig slgnif
Irannly In the first lialt nl'tlic ypjr, ilie eKiliiinije valoe
of Ike renmlnbl viva vis (tie dollar UK rclalivclv sniitli'
lndvebei:oiullmirof2WS
f'Jsm'here In enier^lnft Asia, ihe downturn In acri\rily llai hecn dnwwlit. Hong Kong. Singapore. Suntli
Kniea, anil Taiwan all [insiiil uihstantigl enntractions
in real GDP31 llie end «f last year. Denurnd lor these
fonnlfies1 gooils fiom ihe advanced erononiies snd China |ilur!»nl in I lie second half of M I S . and aulhcrilits
,ii nisi I'liii-i-jiiii; Asia have iiiOiKluce
l
inunotary and lisral polfcies In tinkler Jlmir efu
In Mexico, grawlli was aiu-niU" in die firsl half of
lam year, blU It improved In the Iliifii ijnaner. Inrgely
li'.-niv- of strong activtly In IlieagrkuJiural and scrvtcp
seelOCS. However, ouijitti is esiimateil in have iInclined
tiliarply In thi> fntinh quarter, as wfatili'M In thp U.S.
• IIUIIIII'LII tmuiiisi'dorami iinamifllsiresihave tagimID
weigh on Ihe Mi'rxlran er.nnnmv, in BrnJil, Oflnvmfl*
activity remained firm ihrmRh much of Ihe year, but
tmliciliirs SUggftii lhal oinpiii (ell sharply in (hi'
qmner.
Knssia s EfE.'Oiiotiiy ^nd lin<uicial sysleni e p
r the s«nnd half nf Ihe ytar
123
M o i v n i y 1'oliry Report In (he CnngrisKi
February 2009
because of ilir vd-i-p ilmji in nil and olhi<i IUIUUIIBIIIY
pikes. ttli< I urn ml I in jjlnhal financial markers, .mil ggf.
|i-i.in ,il iL'itsidiis n'Mi[ling fmnt (he ronllii I with Gtotg b . : -• • •. -. i... i ,i. in ....., n>.vni'« fell siib.siiiim.iMv,
Ini^rJy bcCMIM nrintcrvcnlloiis m sii|)|iurl ilic currency
,inil lite iiiiamm] anil HH jim-alc in'Km more lifDinlly
Several lUimlrtoinenverging Euro|>ealint;u\w uiiiln
ii|>itilit-3i» linaiu ial pressures in Ilic fdunli quadiit n i
WHS. whicli ti'flec(ei) l l » afietniath of a jicri.ii o l v r n
higli rales of crttlll cxpaiukin iis wfll a kirgp cunrtil
arcuiuic ik'li[it\,iiHl PNlmul linaniing in'ccli. llmigary,
Latvia. Serbia, anil Ukraine reri'iwul official .usliiancc
fiom iiie bnenadonal irfonmuij Rind
124
Part3
Monetary Policy in 2008 and Early 2009
Alter cflSitig I he SttJ»a of mnnfiarv policy 225 basis
points over Ihf faral hall'012008. ihr IciJcral Open
Miirltul fJtttvfltUfi* (FOMC) Inwpwd Ihr auypt (edWaJ
funds NSIC EUDIHT hi IJIC vvoiid lialf uLn'malHv brin^lii^
ii io a tang*? af 0 to 'A poTWJfl (ligurt M) . l i The lt?dBfaJ NI-MTVM :iKn imjJ-; A imnlhrr o! nriilliihiiml .Mum*.
tU iiu-n-,iM- iHfimlih iiml intpruVO itinrki't linn, lion
irpnrlrd lo have irxpaiulft] in liir second quEnti^r linaii
cia\ market devel ti|3iinLnh suRpcsttd Thul ihc ["t'ononiv
wnuhl likely fuitiit- inij^r [rmisideraljlf <i\t?wa In tlie nw
siu'ci, hirilit'L, the F D M C amiDuacfid at its Dficcnibej
niiwlln^ ihnl ihc1 Torus of |>ollr%r fining fonvflitl wntitri
s'lU'Fjjy |jriiL h !i.
IILI.JI-.—in pan in 11:11 I . - - ! . ! -. I > . 1L! . , .|L< h 1
l l h ..-ll-^J
iiij< hoil-ting to nil iMiitiri. uinl (he rise in entrav1 iJrifis
OTTO expesird m we j[»h m\ ecunQAitc grnwfh over The
•i LI * i •••.-': 11.« - n ' i V wuancrs.
tj
Lure consumer jjrict' inllu
lion ivinaiiicd rot filivoly stable, hill lu-iulliiir iiiiUilioo
rt^s ftlpvaied as^ rpsiili of lai^p Inrreasps Lo food aoci
Wflrhihasnw i&ide.Qlions Jn mind- tin* l-OMC ko|ii
Uu j larget •'••.!••: -1 l'nnd*i rail1 iinrJian^cci ai ^ iterrc'tn a(
1
1
rrnnnnH lhrmif*h iP|tftii
Hnd oilier tiiLAHKurt'S lh;it would Mis(;iin lln* >ii/<n
Tifdoriif RewfVF 's liaLintr SIHX1! al a high Irvt'l.
n sirii'uiini. iin-1nn i[iMI uMii.unrirnii .1 i1m\ii\'.,nil in?nd.
the hi'.1M iji.it k>-i lb.nl weakened r»rMirr, ,nnl Nulu-Jriitl
|)rudu( lion had dvclinvd. Ahhuug^li aj^ri'gatt1 uul|>m was
its A n r i n s f n ^ i i i h i IP. The F» r[>[n|Hiivino iioUcy slalcmenl Indicated dial, allhouph do\vnsidu riiks; to ^m
iiMiiiihicd, ihc uji^fftL* risks t@ i n ^ l l o n w m also of
slgninfatiT (oiifprti to ilttL Cointniitpp, This rLsk J ^ P .
(neat, wtfch ninny Tiwrkei jwr^nij^ins t^p
jiFi'ir'ri as o.si^cnttally tuhinre'd. was 'n IWK* vviih n j i e r
laiimii at tin tiinp. Atcurdiiiyly- t!n> Kpecied path for
policy was II1 tie changed In [he wake* of ihi< announccIHL'TIL djid tlif CdpO0S^ in IjnwdiT Einnnrittl i
It. Xfanrtk-i*rt rNt- I 0 M L M 2tWBc
UoiiifJi ui i;ovinrni»rv ip
K
jfr
i
pN
deiin ufdir Frcktul Hwrvt Banks ul Chwfi«4 D*H», Miiinr*piiHi, New Vtiih, rtd ftiJWtlpkfl. Ln 2063,1 OMC imutbvi oHuW flf
h
f l Bd
l
C W
pflEihr jTC-Mrti1 nrs nl'ilir I Kkfal
n J'OMt.
64
B> Ibe limp nf Ihc* nwefing nn SrplrmU'r 10. ihc mil
|{jok ftw iollatuin had mode ralcd n^ a rrsoli ol suhslati*
lial decUnt-s in ihc prices ofuil atnl oilier commodity
as wi'll as mttkiMiijigag£>rcgalt> demand V.uiDtii mmson's nf inflation rxppclalimis dH liiud Ih'twifn Ihr ivvo
3clecteiJ Inter CM qtf«s, SOfifi 09
1 .«Mt P*Tk.T* I IIULTI*
I
If!
'--
1 1 h iwtinaui
• ••>
K«
-.11 . 1 ' '
\:M
11.11
i i t i w t IIIKUIH)] (P'UIMIV Ik i'l.NUi [In ifrVM frwllm-ri I,.I> I* I|H. mnn,ui
,„••• -jIN.'
ij»r-n-iii»T
(ni.nK itffi 1- .='.-. • I •• •• ii • i( •. •.'.,
HQVBUMiHlBHp
h
I ilia' t&n\ UMWIV
l
*
1 *ffLv?1v HWIN
125
34
Manulaiy Puliry Report In Ilic Congress
February 2009
meetings, nominal waye increases continued m be " « " ! win', .mil produitlvtly growth remained vnlid. in .niitl
Nun. declining ciiijiloymeiii mid wfteiiiiiK iin.il vile>
r nntribulod to a weaker outlook for nrjar-lenn erononiic
ai.-llvhy, Sill I, some firms reportedly were coiilinuinp,
lu | M M iii[;<iiuii in ONB custtmefs pwious increases
111 ihe OKU of energy <>n&rawman-rials, and teartliiRS
on tore anil headline inlialiun remained elevated In
Illis environment, ihr Conuuiilec was rxrarnrnrd i:.:i
b\vh iniiiiiiun tuiejil become embedded in expectations
and Ihetrty inipail considerable momentum la p w
.ill inltolion. I iii;)ii(ial siratns had liwmase.d fiver Ihe
Inlinoaeaiig period, tlttutigh ihe wasequentsj uf iiie
lt.inkni]il[ y nf I rlnnan BlBttWJ5 I liililingt mi September
15 WMC no! ye! d H t aj lite lime of Ihe meeting. Indeed,
ihe sufntantUI (vising atmoitcvvy policy over the ficViaiayat, i-omblneit wllli oriRoiiip. measure:, lo toner
iiuikri lii)nldiiy, via seta ai likely to MI]J|H:UI .niiiiiv
(in Ing farwanl. Thus. msnAOS ,iu;ieeil I hat ki-.-jimi'. the
federal luiwU mifitl rale uiii-liaiimMl al 'i pen «u JI tlw
q
K
ppp
Ovm the following weeks, Presses In financial inarki?ls ctnifliuit-d m ittmtil Irilcn-il rale iftinis iti inH'iii ii•!•• funding markets: '.'.id
i! markedly, cor|ioral(! and
itiutiii'i{ial bniiil yields ruw, and rquiiy pittes dropupd
'ii.h i.:-. file decline iti the tiei as.Mil value (if a Titajfir
money niarkci iiiuiu.il fund lieluw XI pw shnrf- spnrkcil
a flight out of primr mnney niaj'Kf*! Hmcis .iorl rjtn^L^r11
severe inipairmenl of Ihe fniii/immu^ of Ehe cutlunerclal
\M\wi inarkel. In i^jionse to dip exliaoidlnary strt^M
in liiinnfi.il tnnrkel^H I lie federal R^^rvtv to^olher with
L'.S. ^uvernmeni enilli^ and itiauy Eiireign tt'iitnil
U i n h and gnvcmnienh. iniiilcmenlnd a nnmlirr uf
iiHpr^ii'ilcriic^l \m\U y itniiaiivi^. Mea,sureji la ken bv lli(J
Fcdeiid Rosi'rve around (his lime, discussed iti detail in
I lie appendix, included the eMablishmeni of Iiie AsselH:II knl Cutniiierflaf ]':i| I'l MutlPV \l:nk.i VI : i i I mill
I J[jii1[1iLv I iir A\\\ CotnBWEdal Papn I'undin;; I'arHiiv
and Mnnev Marki'i Invt'stcir Kuntiins I'afiltly, which
wore utli-ndeit in improve Hie liquidity in vhnrt-terra
[3(4)1 iiKirkels and paw ihe sir.Lins in , ii'dil market* more
l>Foa(!lv. In addition. In arklrws IhesUable demand
for liclbi landing in foreign Jmlsrilnlon^. the FOMC
•uillhiri/i'il II rm\n in sis i-shriilji lh|iiidiiv Hm|J litlra
uiih furcipn ccnlial lj f ink\ .mil rM.Lhlistird Mm". ^. illi
additional ceniral bunks. In [jonifstic markcEs. thy l-tdvral Rest'ive raisnl ihe regular aiHiion amnuuls of Ihe
28 and :••;•! tlay maturily Term Auclion facility (TAf)
auctiuiis and aiiiiounc^d Iwo Itirwant IA11 auttii>us ir>
|Kovule funding over y^ar-enri.
file expiuDiutl of existing lii|iiidiiy lacilitles and tile
L'cra1i[H! nf ni'rt biilittev f milrilulled to a ^ulistaultal
increase hi tht> size of Ihe federal Kesfrve s balance
sheet. I n u iiillialivt's wvte intrtiiiuttid iti help
iiii<n;n>i' the nX|HI:sirai [if Ihe Italawe sllrrl aiul
ymniotc control of Ihe ft'di'ral funds [ate. Firit, un
Soptemiji'r 17. the Treasury announced a temporary
Suuplpmenlary Finanrln^ rro^rain al the rwpiesl of
II»• FBdSMl K«5MVt. Lutkr ilii:. program tlif litauny
bSQOt shod term hills pvw and ahnvr Its regular hnr
rowing pronrani. wilh ihe prtteasil ileposiiwl at the
Federal Reserve. Sceotiil IISIOR aiilhnrily (jninn-il miflrr
die Lmer^pncy Economic Sl;iblliMlionAi:l, the FLninral
Reserve aiinouiiLTil mi Clclobcr Ii Ilial II would IH-JJIII
|i:iiiii;.i. hiipn^l on r«|ulied antl excessreservehalaneeK.
Tin- payiiwnt of BMWK1 on finxs- reserves was intended to assist in maintaining Hit' frlleral fiiiuk rate [ Insr
to 111i: iarRi'1 set by the CoininilK'L' by treating a flour on
inieibank market Ntes, Initially, the interest rate (laid on
ivijiiiii'it reserve balances was set as a spread below die
average targeted federal funds rate established by the
FOMC over each reserve nnlntereince period, and Ihe
rale ji.iF-l on ateetS li.il.im i-s was set as a sprewl Muw
the Inwrat larfieteit fwle.ral funds raic for rarh nsSttfVe
niainleinnce peiind. SulHtiiuenlly. with ihe fetlcral
funds rule li-adinrj ninsisteully tielow Ilie BtrgSI rale, tlic
spreads were eltmlnsled
In I.HH- Si'plfiiilier and n"i I li njiii-i. iiiafiui'i uiHiriilc
eoiuhllnfis deterlorjietl in hnlh ihe LJnitrtl Slaii'.% and
F.urope, prices of crude oil and oilier I'oulinoiiilies
ilrnpivd substantially, ^nd^nme nKflsurcs ofespwlwl
hillatiun declined, En li^lu of these developments and
Ilk' e\IFiU>fdiiiary turmoil in iinanclal iihirkets, Ihe Cumtninee members agrp.e.rt tfuil downside risks lo econnmLr
nnji.Mfi had inni'.iMilnm\ ili.ii upside riskstu inflation
hail itlminisheil al an unsrhrduH niceiIn^ in early
Orlolier, the t''OMC cm lis Israel lo Ito percent in an
unpriTtilcnled corirrlinafi'd policy action with live OIIHT
major central hanks. This action. alouj> with Ihe accom
fianyin^ Malemetil. led inveslurs lo mark dr)wn lutdier
Ihe ex|Hyteii palli for did federal funds rate.
Al i l l Oclober 28-K) nwfiinn. die i'OMC lowered
Us targei f.ir ihefederalfunds r.ite an atldillonal
50 basis points, to I penrenl. The Committee's stalemeiit IIOIHI that economic m ilvily appeared lo have
slnvtnl markedly, a develnpnienl tlup inipotijntly In
weakiiiiinf" consumer ami Imsiueu spending and whenInft demaml from tiirtny fnre.iRri itnininiiev. Moreover,
the iritensificaLion of financial markel lumioil was likely
to cxi'H additional reslrainl on sjiendlo^ by Furtboi li^iiieniug credit coiiiiitions for households and businesses.
I he <.:oiiuiiillee uuled thai. In ll^iil ol ihe declines in Ihe
prices of energ}' and other cominodilles and Ihe weaker
pnis|ieils fur etui ion ik' acliviiy. it e\|jei-|ed intlaiion la
HHidexale in milling r|narrers In levels [cicisiMenl wllh
price stability. With risks tu etouoinlt acliviiy !o the
126
Bonid of&oventots ofthe hederat Reserve System
downside, Ihr (Lummillre fndte&ied ihai ii would monitor economic and finalesal devi'lopmenls carefully and
net as nopdfil to [iioniOK1 iUilHiiiial>lL' economic gmwlli
and |irSrn \u\U Hi •.-.
Tlit 1 decision of (he KJMC ai i i * Oi'lolwr mepfr
inn "A;IV l,s,i.«lh, in litM •".iih maiki i rsj»pi Mlum-.m.l
•Ii. :I--I only a nuiilcst reaction in tiiiiinnul uwiiii-i.
However, nuhstfjiic-nl eennmnic dala ty^flises suggested
thiil economic iuiiviiy was weaker and inlhiiiim lower
titan ; i."i beeneflrflof BfltlcipaKid Thusrrea&ta$balong
•.. M I .
•il
,-II L ..-.I a i m l i w i n • ii i n ' ; si I M I I - L ' - K . i i . i : w t i g b a l
•••''• • " • ' ! • ! • - • i ' ' - 1 1 •• -: 1 1 . •: ' ! i ! l i s l ' i i l i - . l
. ' i , l -•!..;; | i
i |i-V. i n -
.-.I • I
revision InIhr-eJinwtritpaihol'jinliry owrlln? Following weeks, l-i-n [Tcrtl iiiji investor concerns about ihc con
dilion ol' Jinaiicjal institutions, Jipioads on tiedil d^l'hii!!
swaps for U.S. hanks widened sharply, and ilitiw fur
^ remained v « y eJfv^iwI.
j
in LuinuiJiiT ti 111.1 sjHLitI I'lisiJU'ss tTt'diL cuiutitiojis; i
on NovcinbL1: 25 JILLHIS fur the Trnn
Secufilits Loan l r atEllly (TAL1-J to support lending lo
Th^p borrowers, Tlic Frdrral J^rsprvp also a
un Nfjvtjnil]er 2$ Thai, 4CJ ht'!|] ii'ilurf die DQSi t
11 :\i<n\'\
i f l i l l . H r - LI | j l i i : , h n l i !• • | ' l : ^ | i !'••• I : | ' !• • v I MM l u l
Htm in direct obliga(icin?i ol' housiug-M'Ifllwl juovirrnmc-n[-sj>ori^cjrfJ £*nicrprisci and uplo S.lOt) UUMon In
roortgBge-taeltrf SKairttfeS (MBS) bat^L-d l>v Faiukif
Mat1, rteiidii 1 Mat, and Ciinnir Mat'. I In1 amuittiiL
n ufllic JJ^LTK S 15 I J r n J L II v * =•
11ii IJIJLII i|u-ilii\ hiiiiu^i'i'i in iIn- |nii]LHrv rcsiti
morlgage maiki'l stihscqutMiily rw
AFdioo^h stmw jinnndal niarke(i> o\hiblUhd
i i u | j f t ) V H l Urn liiir-iu-.- -iln-1>] O f t h f i
DiTfinl
C nilif rnndilirjns hm\ rnnfmtii'ri in n^hlt'ii for bnrh
htnisHujklii and bns,inrssp?(. Fiml nngoinp di'rlini's in
njuKy iitiH ho»M- [irtrcs fuithrr rrfiiiciHl hfHisrhnld
vvrailJi A^aiJLSi lilii batkdrttp. liidiraiDis
m:oiK>nUc aclivEly contlntiud TO worsen.
rAjH'Lled tNLCJiiintik duUvity iu Lonlrdd sbuquH In UIH
knirlli qgnrlef uf^CUS and in i«rly 2009; il ii(Me<l tfiai
ihi' jHKL'KriJHiy sLirniUndii^f [tip finilnitk vviis rtiiuicjpriibli' ;iucJ didi tin.' doun^idt- riik (o even ihis dour irajwrrory For cronomir activity was a sprlons COIKPFII Inllalion pfpssurps had dimJnishni appreciably as piifii1;,1
.imi MIIH'I conittKKJily p i k i ^ drouficd rtr»! eroiwillit:
activity slumppri. I twiking Torward. member* agvepri
thai InrTttiicjTi ^resjtiup^ spjicpr^l SFI (O nHi(h'rnuj lurlbLT
En rowing qti.in-c-re, and MIIIW saw ri^k-s Mini tnllatEnn
coultl drop IK1 low rail's they VIVWEHI &a niuii run&istcnl
35
ovor tinIP wilh ihr Federal RttWVC'S dual miiJidaif for
niiixrmuni fnijibymfnt und nrii:tr iinbitilv.
\YL<II Mic lrdpi.il himh i.Vi1 .ilnwly [radiii^ BI vt^ry
imv kjvii]s as a result of Mir langr volume ol t\xcc^
Cesevta awociaTi'd wiiti ihr Fodcral Ri?sn"Vc's HquMi(v operations, pahiripanis agreed Mial the ConiEiiJltcc
wduJJ soon niwd lo UJ* urtiei louls ro inipaii urlLiinnit.il
nmnelary sliinuluv (n MifPfOTinmy, Flip Ifd^ial HKC'rv*
had alrettdy acluftivtl a gtftts pfTpmttma Mii'i were ptH
v«M<i;i limddily sirp|ior^ in a rang* L.I in^iMilnns and
nuirkiLtsh and a conliiiLied focus on l]ie i[iKinlily ;iinl (he
fonipasitiuii of fcfifeftri EESMVC iissi>ts ap|M-,nori lo Ix1
iU^rrsArtr)1 rind dp.simhk. Fariif ipFinK a^rred Mini matn4fnnii(.(j gf it linv Ifv^l til ^J-iurl-fffi^a itiU'ruslrais1^Un
scsVd (itiLL* md rulipiirp on ihf u&e CHT l^lnnro sbr^i pnli
Ctei ;md conmiunicslion^ alioul nsonelary policy could
IK I Hirclivp and apprcppn^ic, in \\\*\n of MM1 VIIBIJ) iirlcrtoratian in the ncanqRife ouMookand the appreciable
I'rtbiny thf [iHla(innaiy [jressinev
Arrufdin^jy. ilu* ConitiiiEtriftaimuiiTtt^iJi a rar^oi
niiigf ft IT (be fwleml fundi riile of 0 to H perciMtl and
ii.-:ii
.•'!.'
iii.ii
••• r:l
!
• • ••
• ••
lik*
K
( 0
warrdJit cxcepMoniilly Jow levels of the fbckial fjndv
rate for some timc,TlH< stAtcincril also nolod thai tile
size of ihr rrderal Rpstrrve's haJjinccr^heei unnltl \>c
iiuiinuined ~M a IIE^IL Ifvt'l llunu^L open marled uj^ra
linns A\K\ Dilif r m ^ s o r ^ losupeiort fin^nrial n^rkeh
anil Tilimulate [lie cconumy. In addition, Mil- ^alcrncnl
iii.ii' -i p : i- 'I^.M die Coin mi I tin- Moot! M?ady to expand
;.iII•. 'i.iv •. of aRrncy ij--i-i and agency MBS and thai
it was evaiuiiiiujj |}itr pok'nlfdl beu^filii of p u r d i ^ u i ^
lanp'Mernt [r^asury SPI UI itlps. The VOMt iHi-jnlju-v
fmpliasi/pd I Ihi I thdr oxjifLlallon cibuul tht" [ILLMI of
|lit» i :••.!. •.. .1 funds riiii' was Conditioned rm I tip i r View nt
Ihi' likily |Killinf pidnnimc m livily.Tht* Inlfn'sl rflu^s
on required rwfrvp balance ami WMSS reserve balniK"fts WPIP Iwih i<?< at K^ basis poinlsr Thpsc mon^iary
putitry dwisions a|i]taieri!lv weiv more dggrt^ivt" Mian
Uives(nrs luid teal QKpectlflg, M^rki'i |tariki|>anis weiv
M i m i ' ^ h i i i M I ; [ • M ' - r i J I m i l l h\
t i n 1 M / M i ? l ilur-11-••• 111• l i m i <n
(M hntgtf fMWB) Inndsi rah' and by Ihf slfllnlmils irwi
potlry rale* wnuld Mfcrlv rr'ninin low fnrsnmr1 Mmc and
MiiM [IIH I OM(_ mipliP L'ligs^1 ^(| aritlilmnal HOI tradition
al [tnttcv aclffltis \mU as the purchase or/nn^i!r-lcrrn
TI • ::M! I •. ".i • u.rili<J1i
Ent timing liftla UVIJJ- ill? l o l l u w f i ^ wwks hidir.filtd a
runHntii'M shiirp trjiitr^Lliuu hi I-I -in- • • • i.• :n n1. .". i i,
bLUisiti^iijiirhH rmwirnif un it <aw\idowim<iiTl irencl,
rrm^i,ifiii:T.[.|wLinllii^ ronMimihM il*i vijJiiiJlKvuK rincline.
ill" si i iv, 11
. ii y. \\ in I'li'.iPM's.^ vi|LM|uiukiii invi'snin'iii JIINTI
r>llk'd,di]d ("n'i^n nVmaiid weakcuetl ^oiutliSous In
iht' lalinr :n.n'i!il rnnliinn j d ID dt'lprinral^ raprjly, and
MKJ ilft>|) in initial rial prodnctlun Hrr^leralei'l, Mt-acl-
127
36
Monetary Policy Ifcporl lo Ihttougress _ f ebmun, 2(309
I imp consumer p r i m (Hi in iVovrmlwr
whkll refleciffl c!i-( knr^ in uinsiinH.r trifi^y p r i m ;
CQCV i:in]* timer prices weft.1 about lint in liio&> mom hi.
Crodll < ondiliom genorally remained itghl, VYHII fiiumi i.iI n.:iiI-.i=is fragile ;LIHF SQUIB JWIK (jf llir funking gag
tor under suhslatilfal xinxA. Kuwever, mmJe.sl signs al
inifimvniK'Til wi'ft1 cvidcm in wmw liiunicial ninrkclK—
[i;triirttlFir!y ilitisc flirtt WIVE1 inrE'ivin^, support I'mni Frf
ktsi-rve liijuiditv lacitlltes stiul (
A11 fit' mcHing jnimiuary 200B4 piirtlciptiJih antic i
|iitK'<l 4hat .i ^rcUliittl rtTQvpr) In U.S. rroiKinnc ncitviiy
tvtiuhJ lii-^in in IJIE' •SL'[-[]JMI half »f 1|y? year In re.vpunsp
lo moiu.'lary Erasing, anoliienlow [if fiscal sllniulus,
ri'lafivrJv I'JW energy prices, aiiti mnlintipd pITorjs by
Ihc1 ijnvivnjiit'nl lo M;idili/t- Ihc *ni.nn i.il SITIOJ .MM!
ifirrL'ast* I hi' avaliiibilKy of crwlil- A* o|tuk j January,
howpv«r+ wilh hnainlal idiidiiions
mw-u-mi ectftWfflicottUwk w™i( L D K W
agreeil lhal (he L.-unmtHli.T sluiutd toiKirtue kx IIKUS
tm supportinf» HIn"! ruiKjIioniisgornnanahl markers and
slimulnting llin pronnniy through pujvliasra ciraptncy
di-lM ami MBS auUuLluT illfdMirfs -including Ifti
imiJlt'iiirHlflfioii of tlii1 TA1 F— that u i l l keep Ific SfZC of
(hi! icrtpral K<,nser\'if's lialsncu sheet al a high level lor
smiw.1 iinu\ Lnmnnlirr nii'^nhrrs agrccci Slml keeping
I h r i •••••• •
i " i i h i 1 !•••!•. i l i i : - i I - . i i i i - a l 0 l u V A ] • • r
OEfU would lHf d|)j)roprbl^, TJiey n,ho agrt'^l lo toniiinii'
Uslitu liijuidiry rtinl rtssff-jmrchasc |Hi>^raM^ ift !$ii|t|)r>in
I III 1 !i i,. :!..|:.i • ...
i:..:...
| g . M ;..:!..;. 4 h i '
sr.
In Its Jannarv ^Eai^iitE'iM. I In1 f-'OMC it'urtiplia\t7cd
ihai tin- Fockrai Rtticwe wifl tcegJI availiMe tenth
io promoti' tin* nesuB|RkHi ofjusufiofefrt eoonomlc
^idvaM nnd lo pvT'jprvt! price sidljiliiy. Thi'Coinmiut^
also stalwl lhalr in addition lo Ukfe pun INIM.^ of agency
f if In ;iiid MBS alrpjdy under way. U wsts [mpnml tn
|>tirt hvi^e lou^PMiMiii Treasury ^turNici if rvolvin^
icalcd ihil such iraii'saclioiis would be
v {•MW:[ivr in improving trtirKUlipn* in pnvnlr
rn-tlii niarkt-is The Committee will continue lo numi
lur carohdJy t\ic si/v jmd i:omjKjsHinnoi llic J-i'drral
' shrci in light of t'votvlny immv ial
b. Il wiEl u\\u Loiilinup m ^Si'ju
wlu-lhrr pxpamioits ofL or nnxlilica<ions ID, Ictitliitg
l.n ]liiir\ wmild sprvu ID (iirihci mi|i|i,ni neilit iii.nt-.Hs
and ttfaHfttk £iriJv ifv y d IJC- E| h pMSWi/lB jsnr P
128
Part 4
Summary of Economic Projections
TheRilkiwing watfiial3fi}H.'^ttfJm, JUI mhh'thUim to
the unnaits ttfthe January 21-28. -?fflW, uitttirif! ciffite
Federal Opm Market Committee.
h U M C )JiiHjLipBji^ V I U W H J l l i t outlonk lor e
au[]viiy diid irritation as having vviMkriii*] sigtuTtcatiUy
slncp !aM Oclulwr, when ihtHr InM p r t j j i t i i o n i were
inti[li j . A i indii-Hlett In l a l i l f I ami -IU^MI M l i n } ]»>\\i. I,
parlidpailts p r o j u c l t d IhiU real UD1 1 w u i i l d cumrdcl
liminjuiirimu wilh th* January 11 » , gfflS I [JML
nnHUinjj;. ilwuitMnberc ofihi* Buunl of Guvemur* ami
Ubf |jrc^idLiiiii iifihi' t^wictal SfcSOVe Hanks, all olr
wlium (HftigJjSdB In delibpraliuiiK o! Qbfl H}MC, pro
vided pruferlloiiii for mrouomk- gmwlh. unE'inpIcivment.
andfafutitonin 2<m £010, 2M1. and evw HtetDBgw
run. Pfoj^rlkins wrrv Ivi-spd on irifrirnmijinfi ^ymhiHr
through the11 iirmt'luwoii nflhe meeting, cm i-srh pardri
p;inr'i ovumpTion*. rpgnrdingfi range tfiactfl&S U M y in
iifTWr n osmmir OittCGJtMSi iiinl mi hin nr hcrassrsftnt'til
of jpihrujir^lt 1 ihunpiiiry pnliiy 'A|}[int|}riJir itmnrl^rv
pollfA1" is ilc-ienccl as the fun ire policy ihai bascfl on
tHirri'iil Infonivitkin. Is rttTtntfl mosi likely lo foslrr
nud nun's for^roiiomit -unviiy •»•'• •-.< ',-.
• •= i ••• • i
• i- is v ^ r , i h.ii i in- •.mi 'Hill.A M I-III raw ••...iii
taoras*
biihiiuiiiijitlv, Jti(] i-i. cQiwflwwr p r t o j inflaSOn w u u l d
W
tigdificMiiy
lowei • !>:•• • in r e f i l l \i-,uv, Given • •••-
iirpngih ol the IQFCES I iirrenily w e i g h i n g on (he ec«nomy. |3arrirjjiains g^nurally cxpcrEHil lhai I he r f ' r o v i ' i y
-.-- - -•= 11 • I I"- Illi'Cilliilh, ^hJilihil IMUl pC'luli:.1;'.'!. A i l |Jdr
liL'lpants dnMcipal^iE ih.il untiiiployrntinl wouEd remain
- < • 11 '• -•; • • i ~i; i i-k 11 •• . -1=• • •-1 - i t s l - i n ' n r J i m ' - U M . i i i t i i f i l i - r , ' n - . r
:\. i-iul of 2011, L'VIT atiM-ni hntht-F frmioniit: siKKka;;
M Tew intiicaled ihal more Mian live lo six years wonLd
Iw iH'riln! lof iruM'rrmoniv in ronv^^c EQ n Ifnij^rr nm
,niil iiti'Miii^rvnii'iti unri by -in approprinir' ralp
Ifnn. r'artlclrwnils (jcnprnlfv jurlgcti Ihnf fiwir pr
1'nr IHHII rrniinTiiir .idlvily wu\ inflaliiiii v,vw .s
Id .1 ripguvof iitLErriiihnlv cxtf^nllnj* hi<;iorir;il
Nearly till parliripanis vlrwc-d tht1 risks lo die
cmiloQk it\ 'lkt'wcil UJ dicj ilownshif, nnd nil iiai
D M iiif riskJ io rho InilRitnn rnitkoh a
or Utied to lh
Rr^^rvr'sdital objccllv^s of iMttx
prl(T s^biltry. Longn-run pmjcc
p
each
parlScifwnl 5 ^Sie«iiiiK.*ti( of (lie rate 10 which Pijfh Vji
1
j
iible would hi? txpL'Lfetf ic cunvi'njt ov^i lijnt undrr
iippn^prtHir MHrnrFBiy policy ami In ilt
t foikher sluicks.
GWnttfflk pti^ontora ui l : rtert1 K a w v e Girt etfflia tttd EitfidVi Bank prcsktnib,
Ottnl
V-i.bL
l*< I'll.lT ITU
Uilfiiei pni|prriHit
mm*)"
MBit
*uiu
•Um-D.i
-0.2 In 1,1
J:.n.;t.<
T.I in 7 F,
tj.aiui.il
115 in 7 3
11I in [J
1 1 in IH
0.8 In Li
1 ) n. 1 »
IJI.ii.li
lilt Id
iLltplta
,l»ll
II
t t lu 3.r.
:ii..! l
1.1
in™! is
Ilk
ijnns.il
1 I.|..'l>
Win I.S
IJiu I.I
an
\.lutl
fSmil
•'.ti't
'.II i
• H.H
1.1 III 1.(1
O.I III L I
I.I .1.1 «
1 , 1 . ^ . ^ Nun
H.i.Jll
ntt
LSnH.5
1 IIH. l ! i
1)11113
.. .
U.VUT.I
l.l mill
M
IUilul.8
........
riBi.. is
NUM.. I'miiTikiiRPiif^iyiimiifi i».ii pirviil.
- n , |tn.li r ,i r<;U(ij JIH.1 uliBltjiurPJi*ciiituit\w.IrtrilbI|UHIHI n(Jrwfin,t«w,wwiiJ[ltfln*lflliilu*firtnritKTftn
Iwilcid-rt lt.F tiidillfiH infl mir H I M U
<l l W H t i i l l H i l " j H i < urj-hJii^i- Hi i>^vrt^rlv. ih" |*Hn- 0 4 H r>- IHTS i ] i f i w w f i u i f i UttaBBW**(POBQ JWHI-ftrlr^ hrik.*r IB" K H HIQ luillnjl 1rk«l JIU] iwh^-. l'Pn|n-fMlH In* ihi- Uifrflii^Lvincw n P I N ' ' w Hw nhrt^vU' rlvHUn ilainnifihU^liHil Mir MI Ihe Iniinb npliriiM nl lllr \rtt
11
miJU iii'il l",if li |KirlK tEHHH in "I ' - IfeW NI Jwwil i m Mi ur 1in iiivauinlt "FdjififthgiiMr iiHflii'M> ^ulky i.iniinT-iun |irnjw.mjitt KIKFM'H t»i l» |wi Ni timnl '»• i w u r n n l
uT [Ik-1 n lu in K b L-ULII >L »\ LJLU- ^>iukl IV KlfM M l ED IOM "SLJI- UIRJIT J|I^J«^H L»i' [WMHH y jmln •, .(ii'.i jn ih:- jkiwin'L' -\t (m tin.-: JHH ).•. l» ihi' LTUIKJIIIV. [ I f frlCHrtf
|H..|hi Lll.m Win no»k. H.<nn^B.1iMi vrlib *»WVMI iiMi.ljnginn I hirjl^i VM T\ \t\m
1 liH' FrXIrd ll-ndn H y I'XM JmJr-k I lu- Ihtvr !il#jli^iJ IIFJ 4taii' IIMI-M |NJi|rcHu*, li u y* ill * ,irwJ*' 4JI . - It p
K, P»tr n w i / F* ,1 vurk*!*- in * R i m i vmr Int.lwk-i dll | u n r l ^ i n > pfljiriluin. nSfll liWW in M||lM:(W ilhrt vmldik MI i l w vrm.
1. ll mijjiir run jifuj^f !l*im |iw cmr I t ' I lnfUl hjn ;m> iteii nillM-in!!
129
3S
Monetary Holiry Kppnif In llw Congress
l-'elituary 2(109
Cutiuvil tumlrnciL'i tmtl range* cifwoHftRAc tjiujtitlioiis, 200H 11 anil ovn [III- IOIIME'I pun
j
a
-
•'•
-I
g
— i
a KM
am;,
mm
anu7
araja
21)11
!«i
Kmt
T
i
!
I I
20W
itlli
2005
2IJ00
,'007
SOOS
20IJ3
2MM
IMS
2I10B
MB?
2WIS
IB9
JOHI
aflW
J005
JOIII;
2007
anog
!<iiffl
2nw
PCE ml l.n IOIi
Nl» V- I liiiriiiluin 1)1 vnrliililif mi' 111 Iltf Wltra W luMll I. I III! dun lu< Ilie iinwll villiu-s <>[ ll»i wimbles li
3111
|
r
130
ftoxrd a( Covivn&rx ttftht* lateral Risen* Sy&ew
The Outlook
•<• '• • i :!••.• die Sharp rise in actual u i i e f i i p l o y n i i i u
j
1
R-irlirinnnEs' prfyerjiuns for lln rhiingt in iwil GDP
in 'mm Hid a tim& read&wy of •%£ iu ~n.5 pert-em,
OnaijwiiaJ wlih lhr ronrral lenrirnry of 0r£ lo 1,1 ppr' I-JII for Uieir pmjeclions I:N (.MM ha In explaining
i h ™ licnvmvant revisions, pa rile (pawsreferredin ihe
furiEii'i iiiti-JLsiik.il LDII oftfii? Einatu ia! tmi&aiid i k
i-Mi'i i on rruilll JIM) \Wttftht i In- u.iiiiiiM of consinm'i and
ItuNini ss ruuntIL'IH L\ lilt- marked ilecelirjliun in global
emiiumfCHtliviiy, :mM die wvakiu'ss nr im- jn- >I.•..
mi S|u-nr1bi)g aiul rmplnyinenf. ]Jarlirt|innl£ anliripiilefl n
broail-b£mjit lift licit' in .ij^ie^Lnlt.* ••Jiii|,nir I.]EI;J|IK tilt1 !ir-.i
hall of ihfe yeax, diey noted iliac coiisuniei ^jerutinjj;
U'Liiildliki'Ey Itf ile*nif]tji.l I11, ill' 1 • I • - L-* • • ininci^u m lulim
inufkfis. thv l4gfetB#ttGf i r H l l umiliLiuns. il|th t unliiuiilng.dn.lim? in IIPUSP prices, anri ihp rreeni sharp fledtiK
lion En Mot k nuirkul wtakh. And ihL'y law rt'tlti^iHinis in
consumer dctMBnd CDinrlbuiiti^ IFJ funln?r wt-aknrss In
biLSbiL-s^ iuvrsditpiit ETuWuver. \i.nm. iji;ini\ ips[i-' • J• -rJ
tIanr \\tv i^onumy wtmld be-^ln ru Jrrciv^r—afbt>ir
I'L'kl'i.iU1, during Hw *iecout\ fi.il I nl 11n - yfnv, iiKiVnly
tvAetlhiiL; (hi* e&tctsrffifcea]Mhrniliis am\ oi ivdrml
Rr.srrv^ incastiref providing siip|)f)r| locrertll
iiinrki-1%.
Looking fuviliti alieari, participants1 growth \uo]i\lions h;id a rtrrral l^ndfitry r>l 2.5 En 'A.'A pt'rcfiil lor
201II ami 3.8 ttt fj.tl [JiTt't'iit fet 2LIIJ. Parlicj|iaiU*gennraHy fsptrErn dial slmins in hivinrial nj-irkrls wmiM
pbh tjnly slnwly and KU^RSB IIIHI itn3 pare (il rtcovi?ry
in 2010 wmilri be- i(.i(ii|]r<1 fipneflK^ss, panltlpains
^uwally aiiiki|]a((!d dial ivA GDP ^niwlli wuuld gain
ftirlnei iimtin'iiiuiti in 2011, rtat(iiii^;< jjyrf MJJII would
k'niuurarily Efl6CB«l llic-ir ivMinadJi'.v cif dltp lunger run
bt
d
d
h
In ![J n>t1i]t'c.L ilu- slat'k in n-Miun'Miii1HAitiu[i. Mctsl |-.u
ii«:iji,tiiis expecied (tfcii, iib^cm funiicr s!iock^H economic
^rowlh would rvcnliiRlly roitvcfgr «o d rate of ^,S to
2 7 percent, rftfl&tiog UmgLT timi ireatda in i
h
ul (jtwlyi livliy and lilt' laliur force,
1
1
I'illlli ip.tlK , .UK!: jp.idil ill- ,! Ictl
ll.li I-1 -I
\\<}\iU\ HpirriunUf MEbsi^niifilh hirlhr*! nvi-r iln1 mursr
i
of this ycflr, nnd nearly all < xpiM[*d lliaT unt'cnplciytncnr
would ilill b.1 wi'll abuvt iLs lunger-iuia iitiiaiiNiljlf
rail1 at Hit4 end of^UI 1 Patiiiipaui^' pRgjfcetiOng for (lie
»vtLragib ijnt'nijtlf iyjitenL rule tlucinjy; tlio fourdi i.]iL'in i i)f
a t^iiirai ipriftpmy ni H.5 m K.H |terre!nt markHT Uiriii i'A^i \}i\smites\ M\U\A niit'Enpliiynii'Jii
raic of 7.2 iHTwnt— rJu" Isiit-*i nvailaljly figure ai i\w
limp of HIP January I-OMC nu4eUn^. Nearly ^11 narllrli|MiitNr umjcrliini^ ivwi 1 ninn.1 lltun a pcri>jnliiye |Hjinl
bi^lifi Ifiaii llii'if previous [J.>i>t:dsli tJittdr lasi Otluiu'i,
Occurred during Hie linaJ tnorife of 20UH as w r l l as
pnrlid[^nK' ^raKi j r oeilknnk for mutdniiriirl'ivir^ lliis
l
in 2OI0 vvntiM nni ho MLliMnntinlly nbnvr iis Jf>n^c*i nun
inrncl rale and licntr dial uneiiipluvuicnl wnuld dt'cMnr
unty intMlrMity ocxt vcaf. With rrnrtomir iKiivitv; and
ji ill tFL'alion £< in i >l h jii i MIH h-<| i(j M:\f\vrdie i ti SOI I.
|Wrlkif>jins Hnli<:tj)rilLHj thai joblessness would drcilne
iiiort'ii[^]rf*f lably llul yearr as k uvidrnl from |IIL< tt i n
irid teiHl^nry (if BJ iu 7-5 i^ri'fiil for UuHr tiricmjilrjymnil niif pTUJDcttnns. l^irrir i|i,mi.% p*jiprlfd llmi ihc1
aiSLShployiiiieiil rak1 would dt'tline J~tirElir-r aflif ?01 J.
ami mnsl taw It si'UlIn^ In <it a rati4 of 18 to-51) HrCSU
s0 3 lo 1.0 peit
BITLHII A |icfi:iin!agp pnin( ktwfr ilmn ilw1 ct-nf
ty nf fhr]r |jfn|ertiQn^ Insi fk'Uih
mill ..| ili,n tKfiil Ji'-inlini-.^ on inllaliuJt }iad IJWH s
inj>lv few* anH somu an(ki|iHTL'ii dini die u
dtt-linpjs bi 1IH? jirit r i uf eiiL'r^y -'"J ufliei>ii.n hail in i UNVLI in |]ip lain i pan ctf :•'•:':;': wouM COT"
linnp lu bctld down ieiMnliun al HID: t unsuincr level in
200J). I^r1kl|}ants also ntarked down Iheir proji?rEion5
for rori' PCF «mi.
\\\h yeai lo Tl^hi of I heir vk'ws
rtl-H^Lil dttf indifei:t 4£B*CQ of tuuer energy j j i i u i a i u l tile
iniiHcmf oi iDenssed iGWiiroe slaok.
[.nrfiling IH-VI Hid iln-v ^ VM [j.nfte i|i.inK" jimjfrlinnv
j<;r tfififl rcE iiillalitm had a Gfeftttal IfUilcnt-v e?l 1.11 Ha
I .S prrrenl for 2111(1. 0.0 ro l.Jpetcenl fnr 2011. and
17 lit V:- pwCeul aVej HIP longei run. FaiLicipnis 1
lun^r-run pmjtrtioi^ fnr lolal I C I i .iiii.iiu:n reftjetfld
Uieir iniJividunl as^sitist'iili; ••!' un m.-.-.
! >>
i -. uf
ilinallon i onsislenl wllli ihe Fritpral Reservi>'s iliwl
maiiddie for prurnoJMig \irkc Jsuhiftly and m^\jinniii
t'liipioyrneiK, Mosl pattidpUttE judged thai a longermn IJCF hiOatkiu mi*4 of ill portWtd would Iw i^nnslsicnt
With Ihfr filial nidiliidt.:; Q(heR iiidLdltHl Ellnl I Vj ui
l;»i ppfteiu iiiltaitoii would be appropriate. Modestly
nmiiivL* InngE-r nm intl.tiinn wrmhl ;il]nw ihi1 Cnmniil
i^e 10 tthualM trumpmh adivily nml MJppOfl t-inpby
nwni by veiling ihr fpdt'Tiil 5mih m|p lenipnnniiy bclmv
iJie in tin im i rate ivheo thf tennomy is bnlfeiefl by a
large ik i ^atKi' ihork in demands for ypfnis and sfrvict*s
Patlicbfunts ^iier^lly wtpfi.it.HJ liial turf and
i:. :.!. . :i M:H; i i'ftnve^e^vf1! lime, and
L^rundiiiir '•link wuuJd LuiUJnue tu wti^li DII inllarictn
OttlMrtiea for Ihe 11^x1 lew ypani ftncl herue ITMI Wtfl)
PCF ttlflatUm in KOI 1 WwJtt silll he l>elow Hieir av^ssilliiil'i of llie .!.;•!•••<;.. i ,!•• : i r iiji-'i rdte I'of ihe L- • i«-.- -1
131
IE)
Monetary Policy Itopori tO UHJ Cw
pehruaiy /w W
table 2. Averagi1 historical pmjprtloTi vmnr rnnj^
R i s k s i n ilnHaiijfrpaws tmiiinued lo view uuaJiiaiJHy afimu die
uuHcwk fflr ermmthit jriivity us hlghrr than nuimaU'
Nur risks lo [heirnrujei/lionsforreal tiUl'grtwili vrere
jii«l*ir'(i» helnjjj skewed in ihe dnwusfdi' arid lhi?*55nrimen I risks lit (heir pnijfr. firms fur I hi1 iiminiptLhyrstfiir
ri!'- w^rc lilted lu iJ11• ui.mi'Uv 1\iiiin|wrn^ lii^ltlipliU'ii
I he considerable dcgr^? of uncertainty iilHuil fbt Allure
rnjrsf oflhe linundal rri*is ami ii% impart on die real
etruinmiy; for example, rising uiieiiijikjyim'ril diul wt'dkor growth fou IdraJtcertBTitWOsjiwrctcs an hAitaritplri
and Intfiim'hiii (tians, EIMCIIEI^ Iff higher Itivic^ fnr hii.inrial
flrtfla ,iti(L MI it;{3 furtheriijilii"i;i=i'»uJ irtilii EOUdilJoM
I hot wmiliJ in Mini i>m further dimnwarri jprrKure (in
siH-siiliiiL lei ii i.n :if.!;i degree than currently foreseen.
In addition, sonic parlfc ipanfji iiolin! llml a substantial
i l ^ i w of uncerlrtintv was iivscwiafeii! with i^Fna^ln^ ilu1
fclimulatlve elltcts ol' noiifrddiLional monetary polirv
li«)ls Llkil an1 HOW In'iiijLi i.'jiiplovi/il i^ivi'fi liiar convonliottaj ]iu\\r\ ia^iit^ was limited hv lli-r t.t'ta lowrr
IKJOIKI r.u« nnmfral Inlerefl tates, Otfcets reft'rrwi iu
uiirrrtftiiilir^i rpganlin^ [JIE> si/i', rfiinfH^ltJoii, anrl rlln'i
ItvrilHs ill ifif Jiv.il %finiuLu!<> j>iic k;i[;r vvlkif Ii W33t Mill
ilniliT cuTi5i(kjr«i(iu!i di llip limvflfIftB bOMC fwafitlg—•
siid fif t tin her mrasnms TO itahlH/p llir iMcikji^ syslcnv
As in Qttohi'r, rno.si panicijwiitb cQTilinurd lo view
I lie* uncertainly stnroumlliig their imiadoEi urojet lions
^s highi'r lh;m hMfjifral norms. '\s:li^lir mnjrtrily nf
jurliLi|>;niH |LKE^ES:I ihe risks lei ilic inflation ciullook
Ab roughly fjJilEiik1^!. wlitlo (lie rest viewnl lliesc ilsks
45 ^kewnfl lo rhc downside, Panirlpanls lodirarpd lhaf
flt'vultfl 11n• • • 11 is iir\ aljwul ghilwl gru-wih wti^ t^utulii^
rl i«- ntillnnh lor \miv\ nf piirr^v And flthtt CDBI1)Udllltt
,i!nl henri1 (tMin IIUKPII-1, In y.re.mT tinrcTtfiinry in iluMf
inETaliun prujcctiunii, Many |*Hrti-rifHinis fsltticd ihtti ihHr
fiSwHjisnieilis regarding Ihr level (iltmn*rfainEy nod Iwl
ancc Q\ risks m ihe intlafian oullook were ckrseiv IIMJU-M
lu Lririr JLtdgii leu Is A\:nmi i\w loiteiialnEy ami risks lo llie
cHillook for econotitic ^cdvify. Some panic irnaius nolifl
lilt riik did I inHdiiun ^K|ieLljliOus rni^lil b^f.unit tuian
tliorthJ and drlfl dnwiiwaid in tespoiisf lo pfi^isieiir[y
Imv un'.Lini\s oiu: in:h11- while nfhers ,i
=.f i-.• \nIK'ssiljifiiy of an n[?waril sliill il invusturs lx j tiiiue win
(I Ihdt sii(HH[ftI!vi* [julir y o&HU&g migJll not IH<
ivnifnl nHr. unil \t\ial i^n-iiuatr
nm IIW7 to 21W7 Aj HIT i-ml nl rh:s
bnv ' I'orw.wi Ll«i.-fTiiitii|vn dlwiraws fhf wurr*-s iinil
iff uiniiiliLhity fti •gpffflifr f u i t i JSJ* Jtkl i1.*;|jinllis llntBtSIHUlIn uptMTl:ilJplv .LI II 11 i-,k-> urn lnluru; \\,nUti
(
il-
my II i PI . i
(IUP1
. irm r.l>[Ur%-J|itAi| in'HH'j'.iMinl M |I1UIKT
W H nt jno|.nnh(P, ihil w m ' wltuni
i i f r w i M i i i l i c l h m h i ^ 1>IQ)
th
A l l f iflU MK'.Hi Vjluixil
In Ihn IMflUT limn 1 U|*J lllrutfjN /|JH71 i r rlir
'.
|i p i l l >•. M l y j l i n l l i W H rtjl|HP,ilQ|l
A#
i'M rUnil hi HM: b w "Vow u-ii Uiiritlvlpil^/ uiNtit MTUKI uvmii|iiJoib. Hmr h
MilLl ,i . ' I I |»n hill ilfnljiJhlllli lfwl.-. Hi.l1 inLlinUn- ILH i.'.il i . l l l "
••• I
•"•• -i |- h ' -. H m
TISTT ihiiuJi- In t\m fiyy
t\i\,\.,\ il H i>l
VBKl iHtfM IJV lln- H W H MW 11» |«J0 I lW
I utLkr riil<imuiiliiii L.lti DIIVW k r i K iHii'iitrr ,UIL1 I--, i n
IHIL|N/IH»;) •f1.«|iim,
until
iy-nrib-roBn*in*. Ui-iUiki
«
il
'lHirMlln I n w \ liniKMH- HIKI L'cmiLinliH-> Dt^LAltttt iJfliln JUIIV^I LlJunrJ
tftWinHlltOl llm I «ltfal FW-rw .SuH'm ^ m w i l i n k
I HimlcfiiilPiiwpi. K I U in i^'wriiP fhwi- ini..l.i. i
7
M I I M I A - Iv ilMi I.TVWIII rnirttinirt |Hlr*i Imldv. fin |H-Ji r- ii«nmii¥ I4ia» Pim
feo M
i Coputm.
of *
i.ihiu,nnf
•
41 • M.I -,
lidil ^Jlilrili
ttmm eutrara
ml i l
1
1PH
M
I
iv.J
inijr.iiHil Midi 4liKi
brVai
I I I .,...• l h l.k. IT, lU.
* p'fi'n!ftnMfhii
irjjij; ||i,
•arLirii ^
IEII wound In n ilmcly fa,shlon once I lit (irooojny Iv^ins
in reiriivfj.
Diversity of Vwws
Figures 2,A ami 2.B provide f u n h e r d m i b on [he <li- - r
sity ofpastiflipajtff1 VJPW5 n^nJiMg likfly OtffiXnuieS Pet
iral CDP Krawih and the oncinploymeni ratrH rnsppcHvt'tv. For 2005) In 2011, ilic di^pfriiun in |iarliri|iaiir5'
prtJecTioittfarem h vartabli was muchly ihp same 3S
fnr iheif projt-Tiiiqns lusl OnolitT. This di^pt^%ii,7n iTi.iin
Ly indicaltnl I hi1 diversity nlnarlitipanii' fl^u^^tnpnis
regard tog Ihesiimnlatlvc erTrfls nf [lira I |mJky. I he
I.!' > of recovery in financm! insrkels. and mi! evolulion
orhowiphuIlls'dt'sired ^iviMy rales. Till' dispersion in
pard[nl|]aols' longer-nin prfajcriinns rellected diflfroncTS
In llieEr eslimalps r^gardin^ (he .^u^lainahle ralps of output giuwdi anJ nneni|]loyiriHiu lo WIIIL-II BIB ecoitotny
would i mivi rgf1 wuim ajppn)|>r]Air jkiliey and in \)i>
absence t>Fany further shix&s,
PlgureS IX' and Z.I) provide eorrwpniKling inrnrjMi^liihii E^Hiinlimi; iIn- \Y\\ v\'\M\ ni |jHiiir jpruus vtows
y a r d i n g MKJ intlalrmi outlook Tin.1 dispersion in parUdpOfttS |irojeilions for rolal PCI1 inllation in 3UUFJ
was siil'M.i11ri.iMv (.:n:iiiiT than lor ihelr projerlions made
last Oclobrr. dim la increased diversity of participants1
vlnws regard I IIR the m-ar-lorm evodilion of prices
ol'^nefgv and raw materials and I he exle.nl lo which
rltiiii.nr"! in rlnrsH piin's wrriihl he Itkfly lo OBSS intuLi^li
Into ovpraf! Jnrlaiioiv The dispersion in |>.inl(tpini-;
prujtiiiur&fur tun° VLV inlluUun in '<HW)\\ wai nulite
stilly lower Ihen last Gfitflttif; \mi i\w dispersion in ihctr
132
tfaant utCmiTuors uflhr iuilrnl ttnrnv Srxt<!m
projM:!ions for corf rnflalimi in 21)10 and Sffll1 was
niiirki'dly wiiter. retiming varying HMSSnMttS alxiul
llw litniiiK BIHI pacp or economic racovcfy, the scikslliytn ultiillaiiim Hi duck in MtMrtt uiiliznlioo. Ihp
| i . -
.il'-i••• •
• I • •: ------ r i - . - . . I • . i
ii.-.I
I-1.-1 W B R C
11 . - i : n l -.
a n d
lii-
likelihood Illnl fadUdM cyjpi-i-lalioiis will rriiiain hrinlv
ii. A few partlcipmiii Biiliii|wii-il IIIHI Inflaiion
in 2(111 Huulil I K tfOM In ilieir togeMOM i
Mnwi'vn. (ttoa fiarllt:i]!anl<>' tirniniiini!. fur iiniil PCE
tiill.iiiiin in 2011 wcrp bclmv Iheir Inngpi-riiii prajer
lifiiis, iiriiii.LiiK Ei-Hri iin,n rln-rtfiii(ip8Je.df(TtJrisnl'
siihMdiilidl slack CIVFI ihe rtcsl ihrrr years: this iiiflsiiim
gap w;is atmiil W (n K orrcrnlngi1 (mini for somr psrtk ijiaiils bill i-WMinVit n Till! (H'lii'niapp poitil for iilhprs.
133
Monetary Policy Rfi[i»rl In the Congress ~ February 2009
Dlsrrlhlillnn nf panls-ljuiiw- prnjKrllnn-i trirlhr rtangp in m l GTiV 21109-H ami DVK Ihp Intigir nm
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134
Ihinnl atCavemoti of the Federal Reserve System
Figurf 2. fl, DlwHrnlimittr |jaHM[*mli' |nnjrriinm Un ifw iiiii'iii[plf>yiiirnl Tiilr. 2UIW 1 I ;iiuln\rr 11 ^r- loip^a inn
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AA
Monetary Policy Reporttcifin> fJoiigress
1'eliruaiv 2009
F]JJ,[II.- t.C DlUSbollOB tit [.«|rllt IpHnl-.' |irajerU<piis fur PCF iiiHilt|i>ri. 2 M B - 1 1 .lllil IIWJ: till' lotlgH Hill
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136
Honnlol'Cmenton of the Federal Reserve System
Figure Z.D. Dislnbulloi] o[ pjmri|Hnls pfDjfctions IbrrarePCI; in nation. 2009-11
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137
Monetary Pnltrv Report lt>
J'rbruarv £0OS
Forecast Uncertainly
The economic pirojedlons provided by (he
members ol (he tin.ircl oi C iovernoii tind (he
MM
,,,|,-,i|s MI r I hi Finfpr.il Ki".H'itH' fUnk; inform
thstUftJOrtt ill iiifHVi.'i.u-p |hiilii. v .inirmj.; \whi.y-
mflkffl'S ;wid c>in aid puijlir LIndfrstondinp of fh-t1
basis lor policy actions. CoiiiklPMblp uncertainly <ut<wds iUme jjiOrertiui^ however- Tlit*
gOOAOfrti
' &l I ' H H *\ muclelv jntl relationships uied 10 help produce economic rbretj^it
4M? neces&arily imperfect clu&cr'ipiiGiih of ihu real
SM.II.I. Arnj tl*C CultiW (Kith Of lh»' !'• 0'iriiny i S(1
be affected liv mviml imiomeiHii dL-vtlupintini^
iirifl everHs, Thiii. insfiliny ihe Jinnee ol MI on
'!•' v. pflitd fpjintj
(To>rnocontv whiii
an to bv lite most 11 M y tconomit atdmnE
in Iheir firojeclions, but also (hf
til tiwit tjcturrti^ .ind HH-
hld h
t^tisls U>the
2 su m mj ri zt% Uie
j g
rdry «f a r^njj^ of IbrecflsU,tachitftngI&OH
p d in (Wit Monetary Policy PcpuiK and
those IJWpjirerl by Federal Reserve Biurd ulnili
in adviince of meeting erf i]ie Federal Open
Mdrkcl Conioijtloo- Ihi* p»ojeclion ertor ran$fi\,
shown bi> ihe tali If Hlu^itate ihe n
unri'FtEiinlv aisociiletl with economic f
i in i^.nniiloj sufi|W*e ,i (ianicir"nl proj
rftit GDP find totfll eantuAm pfiees will rj«*
ilftnlily ail iinnunf tiile* ol, iespec(fvely1
H<nd ^2 p[?Fceiil- If ihe oncertJinlv Jltendinji those
| i did liiy risks .iroun
pf
hr..i,viiv l.j,iiflncfd. iht* numbers p^poned to t^A
2 would limply 1 probabilhy or .iboui ?Q percent
thai ,ii tu.il (^DP woultl ftxpiind between 1.H iwrCtffl to W fWaem in iho*.urfenl year and
1 .(> pt'Fcertl lo >\A [wrceni ii^ thy second .md
ilind yeart Fhe coirfspondinp 70 fiercenl confi.!.-..- < . Ki-rvjl-i kw ov^f^ll inllatioii woMtd lie
1.1 percerti lu 2 9 pt^rctrti in ihi? t-urreiit year,
1,0 penrenl 10 3.0 jrercenl in 'hefiecOOdyear,
ami 1.1 porceni in IM> pfrCfiM !fl the ihirrj ye.u.
Setduso curreni eonditions UMV differ Iroin
(hose ibiil prevailed on avprage over hislDryh
iJiirficlfMiUs lUovidp ju(J^.nieni^ a^ JQ wheUicr tlw
rrijirity attached (o tln-n pnijKiiarBdf ench
bl s^reti(?rthan, MtuHet (NJO, Of briwtJIy
limfift) IO ryp^c.d levekor iVjrecj^L Mnestdlnty
in Lhr p4iM .is shewn in l.iiili.1 2, Portfti^ants ."ilsfl
provirjf iiui^inool*, ts Ui ftthttfttf the riik* lo |.hpjr
profeclJO'i? »W wemhwd to llw utJiidc, downside, orjrebfoacOy Ijabnct^j. Thii( rsf parlici'
p u n o judg€ whfiihw I'.n li •-.H...I.I. is more l i k r i y
k? bt ^iltuve B I l*ettiw llieir tMUj^tiron? ol \he
mott likely outcume. These judgment* abuul the
unccrt.nntv 3i>d ihe fisk^ Pmit?niljn^ each |j,irlJclI:MHI-s |)r[/n*ciionb'Firt* dffttncl from Hie div«rstly
fti piiriii.iit.nim1 vn'^!. .ibout (he mosl lrkelyoir(comes. Turecasl uncerUiriTV i* concerned1 wllh
Ihe risk* iflsccialcd w i t h •
Ti-n1 (
-tmrih.
p
l
H
138
Appendix
Federal Reserve Initiatives to Address
Financial Strains
Since die oustu of Ww taiatitial Itunnil in die sunimti tf
2IH17. tlm FrtliTdli Kt?%ervt! \\IK aunouTit iJil M.jvt?nil new
WSSiStS Eo addii^s iln- slrttinv In linanfial oiuiXeb, .is
well as I'liLatit finfrils lo ilb exisling liquldily facilititii.
O'ur OUIMending Liiliiufi'S irtalcil in ilir"*.- ?:n
.able)
] pdt'ral RescrvT |!rovl*Lon uf llquidily JSKI acdil, ^
MLIMmn ofdHtW
IThTV rmlJI l i n p j i n
Wl
| * i 1 L
Si 11*. 1.1. , Ifiit IJII. I) i lie >
Provision of Liquidity to Banks and Dealers
i
l
l
l
-
, i
• .
i
Mmtifi'i-Hflom fit the Primary Credit PrOgttaB
l-nllnuinglhoonsri of (he linnivrtnl lumiod, ihf Foilrrai Reserve ftnani irtitonnced tenponc r i m n ^ to
iis primary ciwlit dhcoum winduw facility on August
17 2IHJ7. Tlicsr change werr designed It* provide
iJ.'|MAi(-'nr> with greater assurance abnm ihe rtjst tod
availability of funding KkM, ibe KpdWftJ R&SWVfl Baud
approved a 5U IjdSis ]>oinl reeluclIOJI in die primary
ciidfl raie EO w r r w to spread bet weed die prtmiry
cretlil raleiuid ihi? Federal O ^ T I M^rhfi Cinnirihi«ev'»
i.-i •.'• i ••-••- s i fluids arp I' i Sfl l..;-.i. |lUilllS ' i i \ . ii -1
iht* i-'fdeuil Hwservr Buaul :iiuiotiiiujd ;i diangv to die
Hijsrrvc liank^' riNiud pmrlircv i n a Him lhi j pnivishin nt
icirn IliKJiiriiig Ji?i i]1! I(M9^ tts L+i I LIHVV i^ricwkihlc Ir^ ilubomnvtr.
Tel bulsitT miirki-l liqutdliy funhc^ in itit liii(L t>f
imFi'asiJiK ttiuiiri;tl sirtiJEis, mi Marrh I IK'IQOE,LtaP
I'eiJeral RPSPFW Hoard unanimously approved a requi^l
by ihr l-rd^nil Keservc Rank^ indrrrrEisr die sprracl
of I he primary rn'riil rai^nvpr ibe FDMC's MIRIS litl
f-ral funds rale |o *A prrrrntji^e. pnlni. Thf: Hoard .iKci
n liirrrase In Ihe ni>ixlnuiiu nmturltv of pri
fr frnm Hft d.iy%-
1
BfiHni of Giivcruois of
fie Ped«ji3 RBSBTVI: Sysifun appmveri chr i^iablishiiifiil
Ejfa frmi Auction Facility (TAD Under diisproftfam,
llu- k'uiJi.Tal Ifoserv? tturiiiMS icnn fmulis lodcjKjsHoiy
iitsiinuirnis a^iinsr flwwitle variety of collaioral Ural
M,I.LUL U«Ml hir,
M.11
1
'Ihiprjir
iRCililV ^
a/w
ti itMiKiMtiimm
V I (Hi
hi-||..l.|ll||:.."M him l4BB'].ll.
?nillW
Hftrt I.U
I ?IP- h'lHal Refef* li.n,
VkJlll rTrtf^ IN S*Jfi[« ill > 1 liiijl
JI i;.nr. .. c
WUtltjf Mir lirjr
llV 4AEC11. M.MltrU I ,;iDi> III 1.1 £
LmNlrlN ^.llu-iHirs ..n whii
C n U ^ N l l l l SWlllKDIIftlll tl
ran hv IIM-I.I I-I ^eiuit1 lottii^al iln- dibiiounl winJow. By
incriraslng die arfesi of clepo^itoi>' iiiiliruliuiis tol'undlug, HH? TA1' iia.s bopouiiciJ die abitiLy ul Such irLSiilu
Lions lo riwi'i die Cfeptt Jietds uf Elixir LUSIQIIWI^.
Lech depository inslilubun dial h judged lo Uv. in
j^LTitTrflls srnitu! liniirti'inl t tmtlilion by ic^ K^SITM.1 HRHU
(anil likely In rftiidin NO GtVtf die term u! (lie ban) liin
|nint' i|.ijn- in TAL jjcliuns, Alt ii^aiut 1 , nniM 1(i- fully
mUaE£riillv<.'d. linch TAI1' aut-Mon is fora f
widi iIn* [,iti- iMi'iimiiiil by die UULIJUTI pro
cess (sulijccl Id a minimum hid raid. A deposiiEory InsiJ
iiitinn suhmUfi bids Ihron^h JIN RESftrve Hsnk The mini
nium bul rnti" fnr liie ^tirlions vva*i irtiii^lly c?ittib1isbprf
HI ihe overnight Index swan (0151 rate rorrespomllng
Id tnt* m^nirHy of itn* r n ^ i l Iwing ,nicHniii»fl. lit |^insiir>r
afHHj. iiir minimum bid raw was ctanged id dip imwesi
139
IH
MoiH'iary Policy Report 10 the Congress
February 2(109
rale paid by the Federal Reserve on excess rraerve
l&lances.
Initially,TAFaualons wereInamountsof S20billion and provided primarily 28-rtay term funds. Over
I lie course of 2IWH. ttiu Federal Re serve extended I lie
term of scjmp nut [ions lo 84 days and raised Lite regular
ainuunls or hoih tlii? 28- and til-day I A I ' auctions {a
1150 billion. Tlie Federal ResetvS also conducted iwu
Forward TAF auctions In November for $1511 billion
each, which provided ftmdtng CNUt yezrrml.
securities, fwleral agency dehl, leiieral agency rr-slden-
Liquidity Snap Linen with
Foreign Central Banks
Tltr Primary Dealer Credit Facility
To address HIP inrnsutng demand EM dollar funding in
foreign jnrisdirlionSr in Dfremhcr ZiW7. Ihe J-ederal
Open M.iikel CuriunillL'L' (KJML'J ULlliarizvil lempurary rillproial riincm y Jilarigi'ini-ilis liWilJI Urn's)
wltli liie EtttajKOT Cenlral Hank (ECB) and the SwiSJ
Nnlional Bunk (SNI3). Tlieie arrariMfnu'iits iniii.ilb,
provided dollafh in BniDimls al up lo $20 billion and
SI billion in (hi' F.CR and ilu> SNfi. respctlivfly. fur us?
In Iheir jtirisiliclions, the FOMC approved Iliese !k|uirlily •.« jjp I i n n for a period of up ID six months and lain
raicndrd illis lemi In Ocloher .1(1. 2M)R.
As demand for dollar lunding* rose ftirllver over Ihe
(nurseof2(K18, the FOMCaulliurlra! theeniiiniii
f
iis existing vwap lines wllli Ihe VCR and SNB In Ihe
fall, ilic fiiintd ijiinniify linills on (liest* line*, m well as
on swa|i lines Ihal were set up wiLh ihe liank of Japan
!0»d lln' liiink of lingland, ww-f eltniinated. TIIL- FOMC
Mv> .unhun/pil new lifpiidily swajl lini's wilfi 1(1 Dlher
rein ml luinkv dn1 Reserve fiank of Anslialln, Hie ISani ii Central tin BfttB, ilic Bank .,11 ,u,,ia.t tin- DaniMAs
NaliotiallMnk. Ihe Bank of Korea, ilu> Hank nfMexirn,
Ihe RJBOVB Uaiik of N i w Zsatond, ihr N a p s liank.
Hie MoiK-uiry Auihoiiiy of Singapore, and die Sveriges
RlkslMnk.
The Term Securities Lending Facility
On Man-It 11, ZWiS. lo address Increasing llquidlly
pressures In funding inarkvls, Ihe l"«leral Ri'serve
annminrted Ihe csrahllshnicnl of a Tetni Si'ciiritiM
t enrfing facility (TSl.f). Unrter Ibp TSU-. Ihe Ketferal
Heuervt1 lends up lo S200 billion of Treasury Stfjurkle.s
(o prinKiry dealt'is for a li'im of 28 days (rather than
overnight, as In the regular securities landing progratn);
Ihe I [•ml ing is sccuinl by a pledge nf oilier SEMHUtt.
I.iiliallv, the eligible collateral inclodwl oilier treasury
Iliil mi.! IJ..I!M• liiji ki'ij M < HI inr:
(MRS), and inns : i ; v ! i n
AAA/Aaa-ralrd jirivaie-label residential MRS. In
September, this list was broarfcn«t lo include >•!• Investincnl-gnnle dfiit seturilips. The TSl.F i i inliMiilwl to
Mrpngllien I he tinanrin^ positinn of primary cksl^rs and
[oslpr htijirovttl coiidElioii^ in financial itiaik^is Enure
generally Srruritii'i arc msilt1 avnilabk1 through weekly
,iui:tl»irt This IWtililv Is cilireiilly uhnluled Id wpitc
on Oi itiln-r 3D, MB,
To bolster market Itrjuidity and pmnwie orderly
market funciliming, on March IS, 2IKJK, the Federal
Reserve ho^rd voN?d uuaniniousJy In authorise ihe
Feitrral fti'setve Bank of Mew York lo fn-Me a lend
ing facilliy—ihe Primary I M I T Credit Facility— tn
improve llu> ability \>{ \mwmn ili'slfrs In provide
tinanriiig lo [larlicipanls in sucuriti/ation markets.
This facility became available lur husini'ss on Munday
March 17. aiui was originally instituted for a femi of
sin moiiihs; this lerm was suhsenm-ntly extwwlcit, and
the fadlliy is ctirrently sel lo expire on October 'M).
2009. Collateral pledged lo secure loans outlet this
fartllly was Initially limited lo inveMiwm srjilt-(lelii
securillfs; sulisft^uently, eligible collateral was expanded to Include id I rollaterai eligible fur pifilRp in iri|jartv
funding arrangements ill rough dn i:i,i|in i \r iriirj hanks.
The lulea'sl rale charged un such ciedh Is Ihe same as
Ihe primary credll rale alt Ihe Federal Heserve Bank of
New York.
Provision ul Liquidity to
Other Market Participants
The Aswf- Backed Comtuercial Papv.r Miutey
Market Mutual Fttml Liquidity Facility
On Sepieralier 13. ZDOB. the Federal Reserve announced
the creation of I be Asset- Rack ptl Commercial Paper
Money Market MUHMI Fund Uquidlly Facility
IAMl.r-,1 Under this {irogram. the Federal Reserve
• • \ l f i u l 1 , I n i l i l i - i - i i i i r i i - I ' l i i i l S III d l i | B
I'. l U l l l l
M i l ' 111
U.S. rleposilory inslllulions sosi haok holding companii-v lo 'iii-iiiii' ilii'ii purchases uf high-quality &&&<
hacked colimterclal pa|>er (ABCPJ from rmmi'v in;irket
nnilual fLintls. This initiative Is inteiufed to assist mooey
funds that hold stich paper in meeling demands for
rerk'mplions by investors and lo fosier liquidily in ihe
AUCI 1 narkets ami hroa<ler nuiney marks*. Alllioiigh
140
Saanl uf Governors oftlif Federal Scxcnv System i'J
the AM1..F was Initially 3iilhuitei'ri ihwugh January
2009, Nil- I :n..i.I M.IIV: ,|
!-. . •-.n-nd.il in. operation
i
a
The Commercial Paper Funding Futility
(Jo October7. Ihe Fwleral Reserve aullinrifflil the ticarinii oMIv-CnratiK-ivtnl Caper Funding Facility (CI'FF)
lu i'ii". ill- a iii;iiiii'i;. liiLkslnji lu U.S. liMU'ii ul iurn
men lul fmp¥l, The f I'Fl is Intended In hnpmve liqulitily • ri short lenn liiu.lm;: madteta unit then-hy hlarase
iln- ii\,iil:iliilii\ n l r r r d i l fnr I m l i i c w s awl IKHIWIIIIIIIS.
The ' I ' l l . rijm'utly rhUIhnriyed to piiFi husi' nmiEiijj*
ri.il papa ii.M.n-ji, Ociohei 30. 2009
Under itii' CPFF, Federal Reserve credit Is provided
It) ,i special pwjiose Veifole (SI'V) lll.nt. ill luni |iui
Ctases i ommtTrlfll papw of eligible issuers, fit Fedend He-serve Rank nf New York has cnmmilipd In Jrntl
i» the SI!V tin a recounvt1 hflsis. w\lh surh IIMUS ttoCmttti
by nt! llw assets of (hi- SPV, The SPV pun lusra I'nim
••liyililf ssuers (Iiir-f-iiion(Ji US. ddlln-ilFiiumiiulcd
loninii'irlal paper ilumijili ilir ['fdi-ial jtesWve Dank of
Ntw Yuri;1.', primary d r a l m . Eligllilp issii«\ are U i
i « i i e n nf rnramprrisl |W|MT, im kniiiiR U.S. toucrs with
a fi)ix.Li^n pjrrnl L-umjiarty. The SPV jlunhasrs Eliity
LF.S. dollflT'driioiiiinatorl ronnni*rcial paper flur luctin^
AHCP) thai Is ralcd al leasl A - l / I J - I / F l .
Tlith maxiimun ititiuuiit ol'a single issurr's cutnilierclal 1M|HT ttiBi Ihc SI'V may own al any lime Is Ihi1
grc?a[rst aninunt of U.S. clolliir-rtfiinTi Linked cnmniEin:i.i3
fispthr itir1 iw«T hrtd (MiislatntinK on nnv fiay lielwi?Hn
January 1 and August 31 2008. The SI'V Mill nol
jliutiiil rcmmjornal j ^ f i n Fimn an ISMM ;
l (unimrrt ial i^api'r Diitsfaitriln^ iu all invi-sinrv (imludiilg IIIL^SPV) r t p u h ur eKl.ei-lls [lie .*.-.M:-I .
llnill. I'riring it liawri on llw Ihnv-minitti UIS isle
pliLS f i \ « l sprc^ck. Al Ihr lime uf its n'glslraliuil tu ilsi1
the CI'l'K each issuer musl pay a fnciliiy lit' equal ti>
0.1 pej'L'L-nr ..'I MM.1 iliii>. urn mi IMMMILIU t}f (I-. rulllllivn iill
f)a]H'i t\iv SPV iiidy UWJI.
Market Investor Funding
Facility
On (Jnober 21.200fl. Hie 1'edenil Reservr- Mia
ed
the tmtlinii nf Itic Money Mnrkfi Inveslnr F(HI[1IIIJ>
liu ilily (MM1FF) UmltT the MM IFF. the Ftili-ral
l''H'i u- ESiink of New York will provide v^nior ^I'lttretl
In a M'rits rjf SPVi In BdllUtt an inillislry
vUIMiWtSi inlli»livi* In liiwmr ilif pur-
aswn incloile LLS. dollai-denniuiiian'il r^nHirates of
itepusil and r.onimerriat pajter Issued by highly ralcd
liiiHtifial iiisllluliuiis anil Iwvitig miiialiiltii^ mmuiiHes
or nil day; nt IfW- Fllgililc Invraiurc uirreuily iiu luile
VS. niunty inarkei nmtiuil funds and tulitjr similar erili
tiif.. Hy harlntnppinR the sales of ninni>y rruitkci insiruIIH'IHS in (In- snundary ritirkH, iln- MMI1I' sliuuld
Improve the liquidity of oioney market Investors, thus
Increasing Ihelr abillly In meet redemption icquiali and
tlu'lt wilHugiiess to Invest in niouey maiket tiiiiiuiuciili
liiijiinvi'il money m.irki'i rouriiilon^ riilmm e ill.- jtiiliiy
ul Ijantsand ullici linsmial InlFtnu-'diarii'!. In wcommodnli' tin- I idlll Bwdk nf Imslnesscs and hmiserinlds
The SPVs will puivhase eligilile umnev insrkel
iiMrunifiiii from dijilbk 1 Invaslou iisiut> Ijiwnclug
from I t ! MMII-I and From thetouauceufAftCP.
The SPVs will issue in ihf seller ul eatti eiltsllilc asst'i
AHt!Pri[|]al In 10 pi'HTin nfllir 1 LLVM't'% [mrrhasf1 priti-.
willi tlie rciiMiniiiK 00 percent of the transition I'urated
In rash The Federal Reserve Hank of New Vork will
commit lo lend to earh SPV 9() prarenl of the piircliine
ptiteoE'eitcheJlglljk'EtUift.Tht-^e LU^IK will
too^n
ovfrnlghl hasd and nt the primary credit rail' Ttie Insns
will lie simiur lu ihe ABCP, wiih ri^mme lu lbi< SI'V.
anil sn-ured hy all the nssHs nf Ihr SPV Al the linuof an SPVs purchase nlr a debl instrunienl issued by a
financial iusl Etui Ion. tin1 debi Instrutneins of that financial Institution rnav uol conslitule mort than 15 pcrccm
of Hit n»els cifilw SPV1 fxcegil Outing m initial tanipnp pi'richii when IJi•.-1 nm piiLniFfnn liniJI nkay lie 211 p'rceni. The Sl'Vs linaiitvd by Ilie MMIFF are scheduled
to enter a wind-down process on Octoher 'it}, ^tHJil.
The Term Asset-Backed Securities Loan
Facility
On Navcmlier 2S. 20I1S, the l-'ulerid Keserve Hfian!
aniioLint'ei] plans for Ihe Term Asset-liat'ked Securities
Loan facility {TAI D a farillly dial will help market
fiarllcipaius meel Ihe credit needs of households and
MI Ml I businesses by supporting I lie issuuuee ol Jssel
lisckwl serurliies (AUS) coltalerallicd liy siiulem loans
aitiu loans, rtvtlil card loans, and loans guBtufkln^l
hy Ihe Small Business Adniinisfrrtlinn. Fhc TAI F Is
designed to Increase credil a^ilabibly and support et-n
UOUIIE: activity by fac III fating renewed Issuance til cunsuiiH^r and small business A^S M more nnmial interest
rjtie spreads.
Uniler the current design nf Ihe TAI .F, ihe Federal
K e v i n ' Hank of New York will lend up to SZOO tjilliun
rm .1 LKinrernurse hasls In holders rvf certain A A ^ r i U ^ I
A13S backed hy consumer HIUI small business Joans.
141
SO Monetary Policy Report lo the Con^n^s
Fehiuary ZOOS
? securities mnM havr* hpen Issued on nr after
y I. 2 (Hilt, 11 ud all ur iuh^liiHti[illy id I til'ihv \ it j dil
irc^ underlying rtigililp /VKS must ho newly or
rcrenEiy originated exposure* to U.S. domicilc'd obli
JJOIS l hii 14.111,11>>
' -is of iln1 credit exposures underlying eligible A US musl have agreed tu comply with, or already
be MIIJJI i (to,the DKtioiUve LOinpi'nsalion requiiumPiKs
of ihc* F.nierfiency Kconomlr SlabNiratltHi A n of
Cin I L'liiiwry |Dr ZUUD,foeFederalftWGTVEI
MUtMUtOOfl H'iJi it [•• prepared tn ninlrriakf ;J MLb-.iiinH.Ll
expansion of Ihe T A L I . The expansion remit! increase
the* Sfse of Ihe TALI 1 to a* much a* Si irillloii and rnnfd
broaden Ihe eligible ra I linen] to encompass oilier types
oi i^wly issmd AAA-rdEida^ii't-bittk^l 5ecttflHes>
Mich a* roinnvrrrlal MBS and private-label resid^jWial
MBS. An gqttdflttt tf (he t A LI WMW IK- ^ipi^rletl
by ihv provision by Ihe 1 'rfASory Ol 'add ilium I linidi
fraqn Ihe Tmulilisl Asset Relief I'ragram ITARFJ.
All U.S. peisons who own rli^ibli 1 collateral ui»y
participate In the- 1AI l;, and each borrower must um1- a
prinwy dealer lo access die TALF, The Federal Restrve
Hank nf \ i : w Vnrk will nlfer a fixed aiwuinl ri-l" Ur,nt\
under i l r TALI- on a nininlilv basis, Via it curnpeiiiive,
walerf-bfrf cturtion proceish trw Kederal Heserve Hank
of New York will award loans tn amounl.s equal lo ihe
ntHrkfl villuc uf the ABS l^s a lidiictst. The ILHHIS will
he Jionrecourse, will be seaifft! ?u a] I linns by ibe.
AliS. and wiU havt1 a Ihrrt >x^ir [CTTH, with inlerrsl
payable tnonflirv' The Treasury. nnnVr tin1 TAKP. will
provide credil proleeliou lo ihe frdcral Re^er\'e Bonk
of New Ytiik in connection WJIII the TAL K The facility
will feast* making new loans an Dpccmbi'r 31, HUB,
iNiii-v1. i In1 IWunl agrtvs tu exl^ud Itie I'm itilv.
Direcl Purchases of Assets
un S^rteoNr Ift ZIHW, ihe Federal R«wn« anKwwed
ihui. to sup|ion market font ittinlng, ilie Opon Marker
Trading Desk would begin pun1taning leileral it^emy
discount iioi™ tn I In* siTiiiKlnry mark^f for Ihe5iyslt'iii
Open Market Account, These instruments Ate shodtenn debt oblations Issued by Fannie Mac, Freddie
Mac, and ihe Federal Home I MMM li.iiik^. Similar to
seuinddry-nitirkei fiurthawi ul Trvaitir^1 99CU(1Ii8fti
pUTCh^iW til FaraUl Mar, Freddie Mac. and PMtOl
Home Loan Jnicjkdebl are rondnrled wilhiSn1 Itdeml
live auctions.
LEI liflu reduce Ihe cost jnid kticreHSt (he availabil
ily of residoutial nson^a^p t r « l l l . i\w letforM Ri'servf1
-mil
I •f?i "-.n 1 : • • i i i l i . - | 'I :, ;i |JH.1JLH41NI 1(1 | ) H H l l i t > , l I | i
In sttKI b til inn in duvtl oblifiiilioitt ofliousing-relalwi
nfprprlsf^ (GSFsj and up in
^ M;I> hiIIinn in MBS tffidffid by 1 aimie MiG, Kitddie
Mac, rhf I fdcrnl Jhinw* L b U Goiflkf. and Q n n i r Mar.
Purchases yI apenev dt-ht t'blinotions began in Uecenj
hrr, rind pure hniscv of MBS began iojannrirv
The pm^ratn to purchase C.SL dircrl obli^alionEi
lias i n i t i a l l y f<H tlSCd <ni |\xed-ia(lf, rmm :i li. •hL
-j in-);
hrnenmarks^nirllirs]ssuciiby TamileMae, In'ddie
Mac aiitr the federal Hoiiw Uwifi Byrika, Over Hie
roursc of'lJip |im
Ilir i-nilrr^l Rsa^vc ttHfV t£angE
lhi i sccpfl of purciwsiLble securities. Purtbases will be
i a muil(pl£-price couh|H-lilivi' auction
Primary dewier* are pii^ible lo iransarl dif£hrlly
e atul tin? encotiragtil lu submit
(jffprs for ihfrmsflvi's anrE ihMr nisifunert.
Beat Steams
\n n>iil-Man h rtf ^DIIH. H I P Hear Sl
Inc., a inajor lnv^stint-iit hank and phnmrv (iiialcr, was
pUSftEgj (0 lhf+ l>Miik of Ifiilore after losing tlK- conlrileuce
ofinveslori and linrting itseif without ac.crs.i to Nhort
if mi futaiJL-mjj; niarkels. A btntkrujik y filing wouM have
forced \\v ttc.met\ rvedllor* and t-unnw^wiivs of Hoar
"-•ii-.i.ii 1 . \> ! i i | M i ' l , H i - • i . i i ' . - T i M i i : j i n i l . - , i i . l
i. id g i v e n i h e
illiqimlity ol markp^s. Ihose cfettftOrt and cnnnlerparElc\ mlghl well have suslaijicd sulislanlial losses. Illh^v
had responded to lowus oi (lit1 uiiexpHCltHl illiqutEiily oJ
fhrii holdings Lay pnlliai^ \n)\k hum providing secured
fuLaiki]^ lo uliicr FiiitLS Lind bv du
of illiquid a^^ls nn ihr maikf I, A NIIII
(i.if orkfs likely would have ensui'd Tfius, I
Reserve judged Mini a disorderly ft Hun- or Hear *ir
wonld hflvi11 thrnaliwrt overall rmancinl ^lubMlty and
would iii-i'M liKi'K have IILMI sixiisfjrdlit adVfiM1 iiiiplitd
I Lous Joi the US> economy.
\f!i.'r 4li*.Mi-.*iis)]i^ willi ijii' St'iiiriiii'v aiiij I xc
y, Itie Titl^ral REterve {ti'iemiincrl ihat it *hnuld
r- pini.'rgenirv sidhorilie^ to provide -SMI i.J llnaucing to TatliJlate ihr nrmtisliton ol Rear Sleams Vjy
JPMoi^an Chssi- K- Co. J^Mtu^an CJiase ygwssd lu
|imt hase liuai Stearns ^ud assume me roin|jjim s Mnantiat ubli^anum. Tht FwJttdl Ri-M-i-ve af-m^d i{)Mip|]lly
nun Inmling. KOUERl by Ktflhillhui in K ^ r SteSBIE
assets, mfecHiat*ibe purfbra, ^ limited Hatt%
eompany, Maiden Lane LLC ww Funned to facilitate the arran^einenls associated with the purchase by
acquiring i"i-p i£i in• iis*n'hi nf \W,i\ Sceanih and IELIM rr'\t\\j
imisirnin n [i,iv nu ut uf Ihe
142
i til Gavtvimrs (jfthp Federal Restrw System 5 J
credit ewnded and to minimise dmuption to linancial
niLirb'ts. JPMtirj;mi C\mw completed lhe;tt:({tJisitltm
of Bear Si cams unjunc 2G, and uV Hrderal Reserve
a f U M N atipiuxiinaiclv S^U hi 11 inn of hi tiding io Maiden I;
IT. ikn date.
American International Group
In Parly September die condition uf American International Group, Inc. (AIGL a large., complex financial
irLsliluliim deteriorated rapidly. In view of trie likely
Systemic implications and HIP potential tor HBflfiolU
adverse effects nn the econnmy of a disorderly failure
ol AIG. nil Sp|ileinlier Iti. the hnleral Reserve Utvtnl,
wilh the support of the T I M Miry. aulltoiizerf dip IVdpial
1;. •..•• ••• Hank nt'New York ID ktid up lu SBfi billion
10 Iftp firm t o n s * ! il In meeting it) obligations and 10
faiililiiti' I In." onli'rly salt- uf Sam uf i l i Uuinrsst-j, This
far III ry had .124 n ion III lenn. will) l i i l w s l arrming nn
11 - -: :iu-.i. . - !i-1- balance al a «(J rf 3-niaitili l.ibor plus
850 I..™'. (iuinl>. ,11111 was nrftaftratbuj liy all uf lite
it.twt.iflF A K , and Its |irlin.ii\ nnnri-gii[Fili<rl sulisIriiniles.
On Derate8. iiu> I i d t r a l IW-IVPannoiiflfft! sn
additional program nnilrr which It would lend up to
s:i7.H hilliini in liimm c invrMini'iil-prTiilc tiyttd Inrniiiisi-i.uiilira hi'ld bv AIG. TlifSK wcuiilii^ liad ineviuuslv
been Icor by AIC'i iinutam-c roiii|iinv .wbitltllatlis lu
third unties.
In Novwnlwi. IIIP Trfssury announced tlmi it wuuld
jiurrliasp $40 hill Inn ftfnewty I M I I - I I AIG |in>fcrred
sharps miller ihp TAKP wlifch altnwed Ihr Vcdctal
ReSWVt 10 refoW from S85 hilliini lu SBO iiilliuti lln-
Mil amountavstlabh" imkt 1I111 iirdit fwtUty. Purther.
tlip inli'ifsl me on I I H I facility VtK rpdnuvl to I ilmi
pfns ^(K) liasls points, rhr tpp on undrawn funds was
tpdur«t Iti 75 hssis [WltKS, and ihp ti'rra of tin1 fai-ilily vvas IfngllieneJ fujni two vi'acs lu five y t a i i . T'IH.*
f'I'dpia! Rt'^crvf1 alscj aniioinicud plaii^ m rMtrtittur^
i l i l(*nditi^ roliifpd to AIG by ONIrndin/; rrodit to two
newly fornitil liinilyd ti;d>ilrly tuni|JiintKs. Tlie first,
Miiid'en tjinr I! U.C. rrrcivwl n $22.5 billion l.'.m from
|}IP Fpdpial liusictvp and a $1 billion subuidiiiril^d loan
froin A[C ami unrt Itasi'd 1 ttiilenlial nturl^a^p Ijackrd
securities from AIC. As s result of Ihpse actions. l(tf
sviMiitiei Itiuliift facility esiablisliMl o n U i i o b t i 8 was
subsequently H'paid and lenninated. Thy si>cund nnv
couip^tnv, Mrtidru [^op If I I..LC, tveeived a %rM) billkm
luan from thi.1 Frilrral flpsmve am) a J5 bilibn SHilwr
rltnai<Hi lnim t'timi AIC ^hiul |hirrli.isrd imillisw l o r i o l
ImettUied deb obBgaiions o« wliirii ML has wrtncn
tmlil delimit swajp niiitnitls.
Citigroup
Wmk^i anxiely IIIHUII Ihp rnndltlori of Clli^riHip 3nle»
siltpri in r^ovpiulwi 200S. espfcitxlly in the waku olr
thP iirm"s announr.finpnt ihat It would lay off bZ.OUfJ
workers find ahsorii S] 7 htllion in distressed ^wets i'min
slfurtured mvpstmeut vehicles that it sponstired. and
CSfjGOCHS ahmn Mir1 tiuit s aite.^H to luiidipij; [imnnii'd.
7bsupport financial oiatket stability, Hie Ll.S.govprnhhiii nn November ?3 enii'Ti'd into an agrppnittnl with
Clltgffllip til prfividf a lackafte oli-a|>itnl. glWttKMW;
and liqiiidtly access. As putt otHH> agiu'iiietil, Hie
Trpasurv and Frdetal Deuotfl lusuranci.' Corpnialion
II'DIC) sre providing capital uranTtiun aj;ainsl m i n i m i
losses un 4 |KHil of auuiil $3W l)illion in residential anil
foniraerrlal real estate and other assets. Uilgroii" has
issiinl picii'rtrd shad's la the Tipasuiy and FDIC ami
tbp TrMKury has (litrehasni an addiliuTUl $20 billion iti
CSBgrqjIp |iietiTied Hot* using TAKI 1 funds. In .nfili
lion and il'iu-ri'ssaiy, I he l-edera! Rt93V0 sutnds rrady
to backstop neslifugl risk In the asset |HMI hy providing
nimreronrsp r[Pilit
Bank uf America
Despite the Improvement in bank funding ni.irki'ts aflt'i
year-entl. Bank of Amedra also OUDS under Intmse
lirt'isnre In mid-Jautiary 2IKKI. thi1 linn rpptirii'il a
SI M billion nfl loss for ihe fourth quarter, and it was
further strained by its merger on January 2 with Merrill
Lynch, which rc|H)rl«i a fourth-quarter luss uf
Sd'.i billion on a pretax basis and SIB billion on an
altfi-iKK basis, tin January IB. Hank ui America enlfrcil
into an agretMiitwt widi die Treasury, the 1-DIC. and Ih^
Icdcral Kfissrve similar tn ttiai arcan^nd wilh Citigroup
in Nuvi'iniier. Uftdof Die arrangement, ihe Treasury ami
the FDIC provide protection agninsl Ihe possibility of
UDIMIMIIV Inrfii1 hisses nn .1 [nxi\ of aiijiroxinwiel)1
ii 18 billion ol financial Instruments. In niMilion. and
if necessary, llw Federal Reserve will provide nonre
CTinrfh credit 10 Hank nf America H^ainvl tEiis pnijl ol
liuiimiid instruilieiits. As a lee fur this arrjEl^eilient,
Rank of America JsMied jjreferred sharps to the lVciisury
and Ihe FDIC.
143
Haint affjtn-prnur* ai ihr I-'nit'fat
Abbreviations
AHS
AMU'
Aispt-Hacked Commnrial Paper Money Market MuluatI-'und Liquid!!}- Facility
C&T
saarmrtttl ami indmirfnl
t MhS
I'UiiuiHTrlsl utiin^a^'-liattictl wi uiiuti
CPFF
CcmraiiTilal Fiiju'r Funrting F;irlliiy
(HI
iiunuiimlalrMlffliaie
FOMC
Ffidoal Open M j i i t i Conmilti™; also, (be C'omnilllcv
trbti
ggvtrainciu s^i^orrJ Li»ii'rprii*
l.lbiii
l.uinJini liiii'ib.ink uffeietl rdlc
MBS
mongagc-lHcW ipcuriUcs
M M 111'
Minify M v d d Invralfir liitnllus 1 -ii iiii i
niS
• ••. I I II, .hi ii!,ri r iv^ap
BO3
Mnnry Dralir Lrftlil 1-nriHly
SIT
Supplmnfliiwiv I i"<im I'lK I'rnsttin
TAf
Term Auttjun Farililv
IAIJ'
1'i-nhiAyMl IlinkiM* Sfi-ririlii-j 1 iwn S-'ai ilii,
TA R P
Traub] nl tasa Rf I Iff l>hi|jfam
Tr.UP
Toniptiraiy I.U|likli(y GawntljK Prrjgianl
TSI.F
Irrm .Sumfilira 11ndiug lrarill|y
ffasprwSyunu
@FedFRASER