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S. HRG. 113–6
FEDERAL RESERVE’S FIRST MONETARY POLICY
REPORT FOR 2013
HEARING
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSUANT TO THE FULL EMPLOYMENT AND BALANCED GROWTH ACT OF 1978
FEBRUARY 26, 2013
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
(
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island
MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York
RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey
BOB CORKER, Tennessee
SHERROD BROWN, Ohio
DAVID VITTER, Louisiana
JON TESTER, Montana
MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia
PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon
MARK KIRK, Illinois
KAY HAGAN, North Carolina
JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia
TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts
DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
CHARLES YI, Staff Director
GREGG RICHARD, Republican Staff Director
LAURA SWANSON, Deputy Staff Director
COLIN MCGINNIS, Policy Director
GLEN SEARS, Deputy Policy Director
GREG DEAN, Republican Chief Counsel
MIKE PIWOWAR, Republican Senior Economist
DAWN RATLIFF, Chief Clerk
RIKER VERMILYE, Hearing Clerk
SHELVIN SIMMONS, IT Director
JIM CROWELL, Editor
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C O N T E N T S
THURSDAY, FEBRUARY 26, 2013
Page
Opening statement of Chairman Johnson .............................................................
Prepared statement ..........................................................................................
Opening statements, comments, or prepared statements of:
Senator Crapo ...................................................................................................
1
37
2
WITNESS
Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve
System ...................................................................................................................
Prepared statement ..........................................................................................
Responses to written questions of:
Senator Warren .........................................................................................
Senator Corker ..........................................................................................
Senator Johanns ........................................................................................
ADDITIONAL MATERIAL SUPPLIED
FOR THE
3
37
41
44
45
RECORD
Monetary Policy Report to the Congress dated February 26, 2013 .....................
47
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FEDERAL RESERVE’S FIRST MONETARY
POLICY REPORT FOR 2013
TUESDAY, FEBRUARY 26, 2013
U.S. SENATE,
URBAN AFFAIRS,
Washington, DC.
The Committee met at 10:15 a.m., in room SD–106, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding.
COMMITTEE
ON
BANKING, HOUSING,
AND
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman JOHNSON. Today’s hearing is with Chairman Bernanke
on the Federal Reserve’s Monetary Policy Report to Congress.
While progress toward maximum employment has been slow, it
has been positive and steady, thanks in part to the Fed’s thoughtful and well-measured monetary actions. Our economy has added
private sector jobs for 35 straight months. During that time, over
six million new jobs have been created, but we should not sacrifice
those gains by slamming on the brakes now.
Without a fix, automatic spending cuts will take effect in just a
few days and could send our economy into reverse at a time when
we should continue moving forward on creating jobs. Projections
suggest that the sequester will cost us 750,000 jobs this year. In
addition to layoffs for cops, fire fighters, and teachers that could
devastate our communities, these cuts will impact many of our Nation’s most vulnerable citizens, including kids, seniors, and the disabled. At a time when the U.S. faces an array of national security
threats, the sequester will affect our military readiness.
It is unacceptable that we are lurching from one manufactured
crisis to the next, and Americans have had enough. These fights
are bad for the economy and are making it harder for families to
make ends meet.
The steep drops in consumer confidence during the fights over
the debt limit and the fiscal cliff rival the fallout after Lehman
Brothers’ failure and 9/11. This has consequences. If consumers do
not spend, businesses will not prosper and hire more workers. If
businesses are not hiring, our economy will not grow. It is that
simple.
We must do all we can to restore confidence in not only our financial system, but also in our ability as a country to tackle longterm challenges in a responsible, bipartisan manner. In addition to
Congress acting on a deficit reduction plan that is balanced and
promotes job creation, there are things this Committee can do to
help achieve these goals. From rigorous oversight, to confirming
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well-qualified nominees, to reauthorizing expiring laws, to reaching
consensus on the future of housing finance, there are steps this
Committee can take to promote consumer confidence, provide businesses clarity to move forward with long-term plans, and strengthen our economic recovery.
Chairman Bernanke, I look forward to hearing your views as
both the Fed and the Congress pursue policies supporting our Nation’s economic recovery.
I now turn to Ranking Member Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator CRAPO. Thank you, Mr. Chairman.
Today, we will hear from our Federal Reserve Chairman Ben
Bernanke, who will testify on the Fed’s monetary policy and the
state of the economy. Mr. Bernanke, I want to thank you at the
outset for your ongoing initiatives to improve the transparency of
the Federal Open Market Committee. Because so much is at stake
for the U.S. economy, the Fed has the responsibility to make as
much information available to the American people as possible on
its actions.
I also thank Chairman Bernanke for his steadfast reminder to us
that one of the most important risks to our economy is our fiscal
situation. I completely agree with him. That is why I have consistently said that the fiscal reform and economic growth should top
the list of our priorities in Congress. We need to address the Federal spending problem, reform our badly broken tax system, and
promote a sustainable economic recovery that will result in increased jobs.
Unfortunately, with the fiscal cliff deal completed, some officials
are looking for an easy way out by claiming that our fiscal problems are nearly solved. Nothing could be further from the truth.
Our economy contracted in the last quarter. Our unemployment
rate remains far too high. Medicare will be insolvent in just over
10 years, and Social Security will be insolvent after that. Until we
take specific steps to reform our entitlements and to make them
solvent for generations to come and reform our tax code to produce
significant, sustained economic growth, our fiscal problems are far
from solved.
In addition to our own fiscal situation, the ongoing fiscal and
banking crisis in Europe also presents substantial risks to our
economy. In response to unsustainable fiscal policies here and
abroad, central bankers throughout the world have turned to unconventional monetary policies over the past few years. Near-zero
interest rates, large-scale asset purchases, and record-size central
bank balance sheets have become the norm.
However, some authorities have become increasingly concerned
that the costs of prolonged easy money policy outweigh the benefits. In its annual report released last June, the Bank of International Settlements laid out the risks entailed with the worldwide
expansion of central bank balance sheets and their extended low
interest rate policies. Not only did the report conclude that such actions may delay the return to a self-sustaining recovery, but they
create longer-term risks to central banks’ credibility and operational independence.
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More recently, the minutes of the Federal Open Market Committee’s January meeting show that several FOMC members expressed concern that the Fed’s prolonged easy money policies could
result in excessive risk taking and threaten the financial stability
of the United States. These concerns warrant serious consideration,
given the scale, scope, and duration of the Fed’s unconventional
monetary policies.
The Fed has kept the target range for the Federal Funds Rate
at zero to one-quarter percent for more than 4 years. The Fed has
engaged in multiple rounds of asset purchases, commonly referred
to as quantitative easing. The Fed is currently buying $40 billion
of agency mortgage-backed securities per month and $45 billion of
longer-term Treasury securities per month, for a total monthly pace
of $85 billion, or an annualized pace of more than $1 trillion. And
primarily as a result of its large-scale asset purchases, the Fed has
ballooned its balance sheet to more than $3 trillion and growing.
I look forward to hearing from Chairman Bernanke about the
concerns raised about the risks of the Fed’s prolonged easy money
policies and why they cannot overcome our bad fiscal policy.
I also look forward to hearing from Chairman Bernanke about
how the uncertainty surrounding the Dodd-Frank implementation
is hampering our recovery. In particular, what specific legislative
fixes can be achieved to remove this uncertainty?
At our last Humphrey-Hawkins hearing, Chairman Bernanke
confirmed that regardless of Congressional intent, the banking regulators view the plain language of the statute as requiring them
to impose some kind of margin requirement on nonfinancial end
users of derivatives unless Congress changes the statute. Chairman
Bernanke also confirmed that the Fed is comfortable with an explicit statutory exemption. I look forward to hearing Chairman
Bernanke’s suggestions for other legislative fixes to Dodd-Frank
that could garner bipartisan support. These and many other issues
are critical to us and I appreciate again, Chairman Bernanke, your
attendance at this hearing.
Chairman JOHNSON. Thank you, Senator Crapo.
This morning, opening statements will be limited to the Chairman and Ranking Member to allow more time for questions from
the Committee Members. I want to remind my colleagues that the
record will be open for the next 7 days for opening statements,
questions for the record, and any other materials you would like to
submit.
Now, I would like to introduce our witness. Ben Bernanke is
Chairman of the Board of Governors of the Federal Reserve System, a position he has held since February 2006. I thank you for
being here today to testify on the Monetary Policy Report to the
Congress. Your written statement will be included in the hearing
record. Chairman Bernanke, you may begin your testimony.
STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. BERNANKE. Thank you, Mr. Chairman, Ranking Member,
Members, I am pleased to present the Federal Reserve’s Semiannual Monetary Policy Report. I am going to begin with a short
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summary of current economic conditions and then discuss aspects
of monetary and fiscal policy.
Since I last reported to this Committee in mid-2012, economic activity in the United States has continued to expand at a moderate
if somewhat uneven pace. In particular, real GDP is estimated to
have risen at an annual rate of about 3 percent in the third quarter, but to have been essentially flat in the fourth quarter. The
pause in real GDP growth last quarter does not appear to reflect
a stalling out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory
declines in a few volatile categories of spending, even as demand
by U.S. households and businesses continued to expand.
Available information suggests that economic growth has picked
up again this year. Consistent with the moderate pace of economic
growth, conditions in the labor market have been improving gradually. Since July, nonfarm payroll employment has increased by
175,000 jobs per month, on average, and the unemployment rate
declined three-tenths of a percentage point, to 7.9 percent, over the
same period. Cumulatively, private sector payrolls have now grown
by about 6.1 million jobs since their low point in early 2010, and
the unemployment rate has fallen a bit more than 2 percentage
points since the cyclical peak in late 2009.
Despite these gains, however, the job market remains generally
weak, with the unemployment rate well above its longer-run normal level. About 4.7 million of the unemployed have been without
a job for 6 months or more, and millions more would like full-time
employment but are able to find only part-time work.
High unemployment has substantial costs, including not only the
hardship faced by the unemployed and their families, but also the
harm done to the vitality and productive potential of our economy
as a whole. Lengthy periods of unemployment and underemployment can erode workers’ skills and attachment to the labor force
or prevent young people from gaining skills and experience in the
first place, developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and
earnings associated with high unemployment also reduces Government revenues and increases spending, thereby leading to larger
deficits and higher levels of debt.
The recent increase in gasoline prices, which reflects both higher
crude oil prices and wider refining margins, is hitting family budgets. However, overall inflation remains low. Over the second half
of 2012, the price index for personal consumption expenditures rose
at an annual rate of 1.5 percent, similar to the rate of increase in
the first half of the year. Measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years. Against this backdrop, the Federal Open Market Committee, the FOMC, anticipates that inflation over the medium term
will likely run at or below its 2 percent objective.
With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of
maximum employment and price stability has required a highly accommodative monetary policy. Under normal circumstances, policy
accommodation would be provided through reductions in the
FOMC’s target for the Federal Funds Rate, the interest rate on
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overnight loans between banks. However, as this rate has been
close to zero since December 2008, the Federal Reserve has had to
use alternative policy tools.
These alternative tools have fallen into two categories. The first
is forward guidance regarding the FOMC’s anticipated path for the
Federal Funds Rate. Since longer-term interest rates reflect market
expectations for shorter-term rates over time, our guidance influences longer-term rates and thus supports a stronger recovery.
The formulation of this guidance has evolved over time. Between
August 2011 and December 2012, the Committee used calendar
dates to indicate how long it expected economic conditions to warrant exceptionally low levels for the Federal Funds Rate. At its December 2012 meeting, the FOMC agreed to shift to providing more
explicit guidance on how it expects the policy rate to respond to
economic developments. Specifically, the December post-meeting
statement indicated that the current exceptionally low range for
the Federal Funds Rate will, quote, ‘‘be appropriate at least as long
as the unemployment rates above 6.5 percent, inflation between 1
and 2 years ahead is projected to be no more than half-a-percentage point above the Committee’s 2 percent longer-run goal, and
longer-term inflation expectations continue to be well anchored,’’
close quote.
An advantage of the new formulation relative to the previous
date-based guidance is that it allows market participants and the
public to update their monetary policy expectations more accurately in response to new information about the economic outlook.
The new guidance also serves to underscore the Committee’s intention to maintain accommodation as long as needed to promote a
stronger economic recovery with stable prices.
The second type of nontraditional policy tool employed by the
FOMC is large-scale purchases of longer-term securities, which,
like our forward guidance, are intended to support economic growth
by putting downward pressure on longer-term interest rates. The
Federal Reserve has engaged in several rounds of such purchases
since 2008. Last September, the FOMC announced it would purchase agency mortgage-backed securities at a pace of $40 billion
per month, as Senator Crapo noted, and in December, the Committee stated that, in addition, beginning in January, it would purchase Treasury securities at an initial pace of $45 billion per
month.
These additional purchases of longer-term Treasury securities replace the purchases we were conducting under our now completed
Maturity Extension Program, which lengthened the maturity of our
securities portfolio without increasing its size. The FOMC has indicated that it will continue purchases until it observes a substantial
improvement in the outlook for the labor market in a context of
price stability.
The Committee also stated that in determining the size, pace,
and composition of its asset purchases, it will take appropriate account of their likely efficacy and costs. In other words, with all of
its policy decisions, the Committee continues to assess its program
of asset purchases within a cost-benefit framework.
In the current economic environment, the benefits of asset purchases and of policy accommodation more generally are clear. Mon-
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etary policy is providing important support to the recovery while
keeping inflation close to the FOMC’s 2 percent objective. Notably,
keeping longer-term interest rates low has helped spark recovery
in the housing market and led to increased sales and production
of automobiles and other durable goods. By raising employment
and household wealth, for example, through higher home prices,
these developments have, in turn, supported consumer sentiment
and spending.
Highly accommodative monetary policy also has several potential
costs and risks, which the Committee is monitoring closely. For example, if further expansion of the Federal Reserve’s balance sheet
were to undermine public confidence in our ability to exit smoothly
from our accommodative policies at the appropriate time, inflation
expectations could rise, putting the FOMC’s price stability objective
at risk. However, the Committee remains confident that it has the
tools necessary to tighten monetary policy when the time comes to
do so. As I noted, inflation is currently subdued and inflation expectations appear well anchored. Neither the FOMC nor private
forecasters are projecting the development of significant inflation
pressures.
Another potential cost that the Committee takes very seriously
is the possibility that very low interest rates, if maintained for a
considerable time, could impair financial stability. For example,
portfolio managers dissatisfied with low returns might reach for
yield by taking on more credit risk, duration risk, or leverage. On
the other hand, some risk taking, such as when an entrepreneur
takes out a loan to start a new business, or an existing firm expands capacity, is a necessary element of a healthy economic recovery. Moreover, although accommodative monetary policies may increase certain types of risk taking, in the present circumstances,
they also serve in some ways to reduce the risk in the system, most
importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding and by reducing debt service costs for households and businesses.
In any case, the Federal Reserve is responding actively to financial stability concerns through substantially expanded monitoring
of emerging risks in the financial system, an approach to the supervision of financial firms that takes a more systemic perspective,
and the ongoing implementation of reforms to make the financial
system more transparent and resilient. Although a long period of
low rates could encourage excessive risk taking and continued close
attention to such developments is certainly warranted, to this
point, we do not see potential costs of the increased risk taking in
some financial markets as outweighing the benefits of promoting a
stronger economic recovery and more rapid job creation.
Another aspect of the Federal Reserve’s policies that has been
discussed is their implications for the Federal budget. The Federal
Reserve earns substantial interest on the assets it holds in its portfolio, and other than the amount needed to fund our cost of operations, all net income is remitted back to the Treasury. With the
expansion of the Federal Reserve’s balance sheet, yearly remittances have roughly tripled in recent years, with payments to the
Treasury totaling approximately $290 billion between 2009 and
2012.
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However, if the economy continues to strengthen, as we anticipate, and policy accommodation is accordingly reduced, these remittances would likely decline in coming years. Federal Reserve
analysis shows that remittances to the Treasury could be quite low
for a time in some scenarios, particularly if interest rates were to
rise quickly.
However, even in such scenarios, it is highly likely that average
annual remittances over the period affected by the Federal Reserve’s purchases will remain higher than the precrisis norm, perhaps substantially so. Moreover, to the extent that monetary policy
promotes growth and job creation, the resulting reduction in the
Federal deficit would dwarf any variation in the Federal Reserve’s
remittances to the Treasury.
Although monetary policy is working to promote a more robust
recovery, it cannot carry the entire burden of ensuring a speedier
return to economic health. The economy’s performance, both over
the near term and in the longer run, will depend importantly on
the course of fiscal policy. The challenge for the Congress and the
Administration is to put the Federal budget on a sustainable longrun path that promotes economic growth and stability without unnecessarily impeding the current recovery.
Significant progress has been made recently toward reducing the
Federal budget deficit over the next few years. The projections released earlier this month by the CBO indicate that under current
law, the Federal deficit will narrow from 7 percent of GDP last
year to 21⁄2 percent in fiscal year 2015. As a result, the Federal
debt held by the public, including that held by the Federal Reserve,
is projected to remain roughly 75 percent of GDP through much of
the current decade.
However, a substantial portion of the recent progress in lowering
the deficit has been concentrated in near-term budget changes,
which, taken together, could create a significant headwind for the
economic recovery. The CBO estimates the deficit reduction policies
in current law will slow the pace of real GDP growth by about 11⁄2
percentage points this year relative to what it would have been
otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March
1, which, according to the CBO’s estimates, will contribute about
six-tenths of a percentage point to the fiscal drag on economic
growth this year.
Given the still moderate underlying pace of economic growth,
this additional near-term burden on the recovery is significant.
Moreover, besides having adverse effects on jobs and incomes, a
slower recovery would lead to less actual deficit reduction in the
short run for any given set of fiscal actions.
At the same time, and despite progress in reducing near-term
budget deficits, the difficult progress of addressing longer-term fiscal imbalances has only begun. Indeed, the CBO projects that the
Federal deficit and debt as a percentage of GDP will begin rising
again in the latter part of this decade, reflecting in large part the
aging of the population and fast rising health care costs.
To promote economic growth in the longer term and to preserve
economic and financial stability, fiscal policy makers will have to
put the Federal budget on a sustainable long-run path that first
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stabilizes the ratio of Federal debt to GDP, and given the current
elevated level of debt, eventually places that ratio on a downward
trajectory. Between 1960 and the onset of the financial crisis, Federal debt averaged less than 40 percent of GDP. This relatively low
level of debt provided the Nation much needed flexibility to meet
the economic challenges of the past few years. Replenishing this
fiscal capacity will give future Congresses and Administrations
greater scope to deal with unforseen events.
To address both the near and longer-term issues, the Congress
and the Administration should consider replacing the sharp frontloaded spending cuts required by the sequestration with policies
that reduce the Federal deficit more gradually in the near term but
more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more
effectively addressing the longer-term imbalances in the Federal
budget.
Finally, the size of deficits and debt matter, of course, but not all
tax and spending programs are created equal with respect to their
effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policy makers should
not lose sight of the need for Federal tax and spending policies that
increase incentives to work and save, encourage investments in
workforce skills, advance private capital formation, promote research and development, and provide necessary and productive
public infrastructure. Although economic growth alone cannot
eliminate Federal budget imbalances in either the short run or the
longer term, a more rapidly expanding economic pie will ease the
difficult choices that we face.
Thank you, Mr. Chairman.
Chairman JOHNSON. Thank you for your testimony.
As we begin questions, I will ask the Clerk to put 5 minutes on
the clock for each Member.
Chairman Bernanke, what is your assessment—please elaborate—of the sequester’s impact on our economy in the short term
if Congress did nothing, and what would be the impact if Congress
manufactures another crisis with a fight over the CR?
Mr. BERNANKE. Well, Mr. Chairman, as I mentioned in my remarks, with respect to the sequester, the CBO estimates that it
would cost about six-tenths a percent of growth in this year and
the equivalent of about 750,000 jobs, and so it would be a drag on
near-term economic recovery. More broadly, all of the actions taken
this year, according to the CBO, would be a drag of about 11⁄2 percentage points, which is quite significant.
So in that respect, I think an appropriate balance would be to
introduce these cuts more gradually and to compensate with larger
and more sustained cuts in the longer run to address our long-run
fiscal issues.
As you note, there are a couple of other issues this year, including the continuing resolution and the debt ceiling. Again, I hope
that Congress can work together effectively to address these issues
with a minimum of uncertainty, because the uncertainty itself, of
course, is also costly in terms of the ability of the private sector to
plan, to take risks, and to help grow the economy.
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Chairman JOHNSON. Housing is important to our economic
growth and the Fed is working on mortgage rules in Basel that will
have a major impact on housing. Chairman Bernanke, do you agree
with Governor Tarullo that nothing prevents QRM from being the
same as QM, and what will you do to ensure new Basel rules do
not hinder mortgage lending?
Mr. BERNANKE. Mr. Chairman, as you know, the QRM is required to be no more broad than the QM, so we have had to wait
for the QM to be done before we could attack the QRM process, although we have put out previous proposed rulemakings.
The QM, of course, is intended to help consumers. The QRM is
meant to try to strengthen the securitization market. They are
somewhat different purposes. But I would say, responding to your
question, that the six agencies which are currently discussing the
QRM consider the idea of making the QRM essentially identical to
the QM is a realistic option and is one that we are considering.
Chairman JOHNSON. Thank you for your answer.
Also regarding Basel, Ranking Member Crapo and I sent you a
letter on the potential impact of Basel rules on insurance companies and community banks. I look forward to your response.
Chairman Bernanke, there is an increased focus on cybersecurity
and the United States, including within our financial system.
FSOC has noted the issue in its annual reports. What is the Fed
doing, both with the banks you supervise and your own networks,
to strengthen financial data protection and enhance the
cybersecurity of the financial sector?
Mr. BERNANKE. Well, Mr. Chairman, as you know, your point is
absolutely right, that cybersecurity concerns in the financial system have become more acute lately. Since last fall, there have been
a number of so-called denial of service attacks on banks, which essentially flood the public-facing Web sites and prevent the public
from accessing their accounts, for example. These are obviously
quite disruptive and problematic.
The leadership on cybersecurity for the financial system is being
taken, on the one hand, by the Treasury, and on the other hand
by the various intelligence and securities agencies. The Federal Reserve is very much engaged in cooperating with these agencies,
sharing information, and working with our banks to make sure
that they have appropriate procedures and oversight in place to
deal with such problems. But, I have to say, we do not have to
press them very hard because they recognize it is very much in
their own interest to do whatever they can to prevent these attacks
from being effective.
Chairman JOHNSON. While some urge the Fed to focus solely on
inflation, which has been a bigger threat to our economic prosperity
since 2007, Chairman Bernanke, unemployment or inflation, what
is the most important step the Fed has taken to promote maximum
employment?
Mr. BERNANKE. Well, Senator, as you know, we have a dual mandate given to us by Congress. That is entirely appropriate. Congress should set our objectives and then the Federal Reserve
should figure out how to meet them. So we are interested both in
achieving higher levels of employment and in maintaining low inflation and price stability.
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Our monetary policy, as I mentioned in my remarks, has been
quite accommodative in that respect. It is very much like that essentially in all other advanced economies. In doing so, we have, obviously, in the first instance, provided support for the real economy
and for job growth through strengthening housing, for example,
through strengthening the demand for automobiles and other durables, through wealth effects and the like.
But I would note that with inflation at or below our 2 percent
target, our policies have also had the effect of greatly reducing any
risk of deflation, which at the moment does not seem like much of
a concern, but at certain times, as inflation gets close to the zero
critical level, that risk increases. And keeping inflation from going
too low—I realize sometimes it is hard to explain to people why inflation that is too low is a problem—but if it is too low, you run
the risk of a Japanese-style situation, where prolonged deflation is
a barrier to economic growth and stability.
So our accommodative monetary policy has not really traded off
one of these against the other. It has supported both real growth
in employment and kept inflation close to our target. We have
many other things that we do on the regulatory side and so on, but
the monetary policy, of course, is the tool that the Fed has to try
to address that mandate.
Chairman JOHNSON. Senator Crapo.
Senator CRAPO. Thank you, Mr. Chairman.
Chairman Bernanke, as you mentioned in your testimony, the
Fed is currently monitoring whether its prolonged near-zero interest rate policy could result in excessive risk taking and threaten
the financial stability of the United States. I am interested in what
specific metrics you used to evaluate whether these risks are increasing.
Mr. BERNANKE. Well, first, Senator, we have greatly expanded
our resources that we use in the monitoring process. We have created a new Office for Financial Stability. We are working very intensively with the Financial Stability Oversight Council. So the
amount of effort we put into this has greatly increased. Our internal monitors, in turn, report regularly to the Board and they report
to the Federal Open Market Committee. So our discussions of monetary policy include extensive discussions of financial stability
issues.
The kind of metrics that are used include things like leverage,
are people who are investing taking on too much leverage? Are
asset valuations out of line according to standard metrics? Is interest rate risk or other kinds of risk too concentrated? As you know,
of course, the Fed is also a bank supervisor, so we spend a lot of
effort looking at banks and other financial institutions, trying to
ensure that they have appropriate capital, appropriate liquidity,
and are appropriately managing their risk. And so there’s a wide
range of ways in which we look at this.
Again, as I indicated, we are watching this very carefully. To this
point, and I think this is a view shared by others on the Committee, while there are things that we really have to pay attention
to, at this point, they are not of sufficient concern that they outweigh the important benefits of trying to support a continued recovery.
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Senator CRAPO. Well, thank you. I probably would disagree with
those conclusions. I know a number of my colleagues are going to
get into this issue a little further, so I am going to go on because
of the shortness of time.
I want to talk with you briefly about Dodd-Frank reform. If we
are able to achieve some bipartisan consensus on steps to improve
Dodd-Frank, what are some of the provisions that you think need
clarification or improvement for reconsideration?
Mr. BERNANKE. Well, first, as a general matter, Senator, DoddFrank is a very big, complicated piece of legislation. It addresses
many different issues and I am sure there are many aspects of it
that could be improved in one way or another. I recall, in fact, that
you yourself had a bill 5 or 6 years ago on regulatory reform and
simplification——
Senator CRAPO. That is right.
Mr. BERNANKE. ——which was a bipartisan effort to find ways to
reduce costs without losing the purposes of the regulation, and I
think something along those lines would be very doable in this context. The Federal Reserve would certainly be willing to work with
you closely.
In terms of specifics, we would want to do the work, of course,
but you mentioned in your opening remarks the end user issue,
clarity on what Congress would like us to do about end users, for
example. Another area which is proving difficult is the push-out
provision for derivatives. And I think, more generally, I think we
all agree that the burden of regulation falls particularly heavily on
small community banks, which do not have the resources to manage those regulations very effectively. So I would say as a general
proposition that we ought to work together to try to find ways to
lower that regulatory burden on those smaller institutions.
Senator CRAPO. Well, thank you, Mr. Chairman, and I appreciate
your advice and your expression of willingness to work with us on
these and others as we move forward to try to improve our regulatory climate.
The last issue, at least that I will have time for in this round,
is I want to talk about the crisis in Europe. Last week, the European Union released its 2013 forecast for the eurozone economy
and the E.U. economists predict that the eurozone economy will
shrink for the second year in a row and the third in the last five.
What specific risks does a prolonged recession in Europe present to
the outlook for the U.S. economy?
Mr. BERNANKE. Well, the risks that we have been facing for the
last couple of years have been primarily financial, given uncertainties about the stability of certain countries’ sovereign debt, given
the risk on, risk off behavior we have been seeing in financial markets as news comes in about financial developments.
The European Central Bank has taken a number of important
steps, including most recently the outright monetary transactions,
which have helped to bring down the sovereign debt yields for the
more fiscally challenged countries. That has been helpful. There
have been a number of other positive steps which have generally
reduced the financial stresses in Europe, notwithstanding the
issues raised by the Italian election yesterday and today. And so
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while that remains a concern, I think the financial stresses are certainly less today than they were over the last 2 years.
At the same time, as you mentioned, even as the financial
stresses have moderated to some extent, the European economy
and the eurozone is in recession. Unemployment is rising, not falling. And that affects us in a number of ways, partly through the
financial sector, but also simply through trade. Our economy prospers when we can export and the European market is an important
market for us and we have noticed a decline in our ability to export
to Europe. So that is a risk, as well.
Senator CRAPO. Thank you.
Chairman JOHNSON. Senator Reed.
Senator REED. Thank you very much, Mr. Chairman.
Thank you, Mr. Chairman, for your testimony. Over the last several years, the Federal Reserve has been providing stimulus to the
economy through QE3, through other programs, and particularly as
we are on the verge of the sequestration, it seems that our fiscal
policy is not complementary to your policy. In fact, contradictory.
And as you suggest in your testimony, if we could in the short run
have a complementary policy, that would also add jobs rather than
subtract them in the short run, add growth that would actually do
better in closing the deficit and, in fact, provide an opportunity in
the long run to solve some of the challenging problems.
In addition, and I would like your comments, if we continue to
sort of use austerity as our major approach, that, I presume, would
complicate your ability, as you suggest you can do, to, in a measured way, move away from quantitative easing at the right time.
Could you comment on those points?
Mr. BERNANKE. Well, as I have noted, and I noted again today,
monetary policy is no panacea, is no cure all, and we do not have
the ability—we can all disagree on how powerful these measures
are, and I do think they are effective, but I do not think that they
can offset the 11⁄2 percentage points of fiscal restraint we are seeing this year, for example. So in terms of the near-term recovery,
I think there is a sense in which monetary and fiscal policy are
working at cross purposes.
Having said that, I want to just be clear that I am not in any
way denying the importance of long-run fiscal stability. I just think
that, to some extent, the fiscal policy decisions being made are mismatched with the timing of the problem. The problem is a longerterm problem and should be addressed over a longer timeframe
and in a way that, to the extent possible, and perhaps it is not entirely possible, but to the extent possible, does no harm with respect to the ongoing recovery. And that is the kind of balance I
hope that the Congress will consider.
Senator REED. So do I. I may be repeating myself, is that if our
policies in the short run were complementary, that would probably
bring down the deficit faster than the current sort of cross purposes. Is that your sense, too?
Mr. BERNANKE. Well, certainly the—I do not know if it would be
literally faster in the short run, because on the one hand, you
would have fewer cuts and tax increases. On the other hand, you
have greater growth. So those two factors might be going in the
other direction.
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But it is true that you get less bang for the buck, so to speak,
for a given cut or a given tax increase because of the effect on
short-term growth. So you would get a longer and larger long-run
deficit impact and do less damage to the growth process by looking
at this over a longer timeframe.
Senator REED. Thank you very much.
Let me quickly turn to another issue, and that is the Basel Committee announced significantly weaker liquidity coverage ratio
rules, allowing sort of the use of mortgage-backed securities as liquid assets, et cetera. Do you intend to follow that approach with
respect to the Fed, particularly the cautionary words you gave us
today about risk taking and adding leverage to the financial markets?
Mr. BERNANKE. Well, I think that will be our starting point. We
need to start with the international agreement and ask ourselves,
to what extent do we need to strengthen it? To what extent do we
need to customize it for the U.S. context? You have to remember
that, unlike capital, liquidity requirements are a new thing, and
there was a significant amount of discussion about what was reasonable, what might be the side effects of liquidity requirements in
other markets, and the like. And so there was a bit of iteration in
terms of what the international agreement was. But we will certainly, of course, meet the international agreement, and then we
will be looking to see whether additional steps or U.S.
customization is necessary.
Senator REED. Finally, and very quickly, Senator Crapo touched
on the European situation. From afar, it looks like their policies of
austerity have not helped them grow at all, in fact, have complicated their economic situation. Is that a fair judgment?
Mr. BERNANKE. Well, austerity is not the only problem. They
have, obviously, high interest rates and a variety of other factors
that are affecting their economies. But, again, I would say that it
is possible to achieve both objectives, short-term growth and
longer-term financial sustainability, with a more judicious combination of short-term and long-term fiscal adjustments.
Senator REED. Thank you very much, Mr. Chairman. Thank you,
Mr. Bernanke.
Chairman JOHNSON. Senator Shelby.
Senator SHELBY. Thank you.
Mr. Chairman, welcome again to the Committee. The portfolio or
the balance sheet of the Fed, you said is $3 trillion, more or less,
is that right?
Mr. BERNANKE. I did not say, but yes, that is about right.
Senator SHELBY. Is that about right?
Mr. BERNANKE. Yes, sir.
Senator SHELBY. But you said it then, did you not? It is about
$3 trillion.
Mr. BERNANKE. Yes, sir.
Senator SHELBY. You studied the Fed a long time before you ever
came to the Fed. Has there ever been that type of balance sheet,
close to that?
Mr. BERNANKE. I do not think so.
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Senator SHELBY. No. OK. Does it concern you, not how you add
to the balance sheet, but how you might have to deleverage the balance sheet, and will that be a challenge for the Fed, or could it be?
Mr. BERNANKE. Well, Senator, I should comment that although
the Fed has not had a balance sheet this size, other central banks,
like the Japanese, for example, have——
Senator SHELBY. And they have paid for it, too, have they not?
Mr. BERNANKE. Well, it depends on your point of view. The current Prime Minister thinks they have not done enough.
Senator SHELBY. What do you think?
Mr. BERNANKE. I think that they should try to get rid of deflation. I support their attempts to get rid of deflation.
In terms of exiting from our balance sheet, we have put out—a
couple years ago, we put out a plan. We have a set of tools. I think
we have belts, suspenders, two pairs of suspenders. We have different ways that we can do it. So I am not—I think we have the
technical means to unwind it at the appropriate time. Of course,
picking the exact moment to do it, of course, is always difficult. You
know, you want to withdraw the support at the right time, not too
early, not too late. That is always a judgment call.
But in terms of the ability to get out and to normalize our balance sheet, we have, again, a set of tools, which I would be happy
to go into, if you like, but which will allow us to normalize policy
either by selling assets or by retaining assets and doing other
things, like raising the interest rate we pay on reserves.
Senator SHELBY. Do you think you will grow to a $4 trillion balance sheet?
Mr. BERNANKE. Well, we do not have—we did not announce any
number. What we are doing is we are looking—we are tying our
asset purchases to the state of the economy. We want to continue
purchases until we see a substantial improvement in the outlook
for the labor market, conditional on inflation remaining stable. We
are also, as I mentioned in my remarks, we are looking at the costs
and benefits, including the financial stability issues that Senator
Crapo alluded to. So we do not have—we have not given a specific
number, but we are certainly paying close attention to all of these
issues.
Senator Crapo mentioned the transparency of the Fed. We are
having this debate in public. You may have noticed that many
Members of the Committee talk in public. We want everyone to understand that we are looking at all these issues. We are taking
them all into account. And we are trying to do the right balancing
of our objectives.
Senator SHELBY. Is your portfolio public?
Mr. BERNANKE. Yes, sir.
Senator SHELBY. It is public. In other words, the $3 trillion value
of your portfolio, it is public as to what securities you have and
how they are doing, performing and nonperforming, is that——
Mr. BERNANKE. They are all performing, every single one. I
mean, they are all Treasuries and Treasury-guaranteed agency securities.
Senator SHELBY. Just about all of them are Treasury and Treasury-related securities?
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Mr. BERNANKE. By law, we can only buy Treasuries and agencies.
Senator SHELBY. And they are all performing right now?
Mr. BERNANKE. A hundred percent.
Senator SHELBY. OK. I want to discuss Basel III—I just have a
minute. Where is Basel III as far as implementation in Europe and
the U.S.? Bring us up to date.
Mr. BERNANKE. Yes, sir——
Senator SHELBY. Because I think this is a very important regulatory challenge for everybody.
Mr. BERNANKE. Right. Well, as you know, we put out a proposed
rule on Basel III. We received lots of comments. We work to those
comments. We have continued to talk to our international partners
and we are planning to have a final rule out on Basel III—I cannot
give you an exact date, but somewhere in the middle of this year,
and with the aim of getting the implementation of Basel III during
2013.
I would point out, also, that as far as we can tell through our
stress tests and other measures, virtually all of our banks are already well on track to meet the Basel III requirements. So it is not
a question of the banks not being adequately capitalized. They are
already either at or about to reach the Basel III capital levels.
Senator SHELBY. What about Europe and their banks?
Mr. BERNANKE. Europe is also in the process of implementing
Basel III. Their banking system is weaker, I think. It has strengthened some in recent quarters. We are discussing with them some
of the details of their plans, some of which differ from the international agreement, in our view. But they are also in the process
of implementing this agreement.
Senator SHELBY. Thank you, Mr. Chairman.
Chairman JOHNSON. Senator Schumer.
Senator SCHUMER. Thank you, Mr. Chairman.
First, I want to welcome Senator Crapo as our new Ranking
Member and look forward to working with you on the Committee.
And to the other new Members of the Committee, welcome. It is
a great Committee with a great group, and I hope we will have a
good, productive time under the Chairman’s leadership.
OK. My first few questions are about sequestration, and then I
want to talk a little about Italy.
Estimates suggest that letting sequester take effect could reduce
the GDP by as much as half a point over the remainder of the year.
I first want to know if it is—I am going to ask you a series and
you can answer them. Is that a fair estimate?
Instead of stopping sequestration, some have suggested letting
the full amount of cuts take effect, but rearranging the cuts rather
than imposing them across the board. In your opinion, would this
reshuffling mitigate the negative effect of GDP growth in any
meaningful way this year or next, or would the net effect on shortterm GDP be more or less the same since the total amounts of cuts
would be the same?
And my second question on sequestration is this. It goes into effect Friday. There is some debate about how quickly the cuts will
take place and how quickly the impact on jobs and the economy
will be felt. CBO says sequestration will cost 750,000 jobs. When
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do you think we will start seeing the impact in the job market? In
the March job numbers? In April? When? Those are my questions
on sequestration.
Mr. BERNANKE. Sure. The six-tenths on GDP growth in 2013 is
a CBO number, and we get very similar results to that. I think
that is a reasonable estimate.
In terms of whether or not rearranging the cuts would be beneficial, it could be beneficial from the point of view of more efficient
allocation of the cuts or cuts that are more consistent with the preferences of Congress, but that, of course, is a Congressional decision. I have no input there other than to say that I think the nearterm effect on growth would probably not be substantially different
if you did it that way.
In terms of the effects on jobs and employment, the spending implications of the sequester take place over a period of time, so I——
Senator SCHUMER. Mr. Chairman, you did not answer the second
one. I asked you, would it—regardless of the political preferences
that the Congress might have—would the rearrangement, if there
is flexibility, affect economic growth in any real way——
Mr. BERNANKE. Oh, sorry——
Senator SCHUMER. ——if the cut level is the same?
Mr. BERNANKE. Not significantly. It would be about the same, I
think.
Senator SCHUMER. Got you. Good.
Mr. BERNANKE. In terms of the impact, the sequestration takes
place over time. Furloughs take place over time. Spending cuts
take place over time. So I would not expect to see a big impact immediately. I think it would probably build over a period of months.
Senator SCHUMER. Right. One of my colleagues—I do not want
to steal his thunder, he is not here—but at a meeting earlier described it like the metaphor of the frog who jumps into a pot and
the water just starts boiling, and you do not feel it at first, but if
you stay in that pot, you are going to be singed pretty badly. Is
that a fair analogy?
Mr. BERNANKE. Well, again, I think that it would take effect over
a period of time, and remember, it is also in conjunction with the
other measures that have been taken this year, as well.
Senator SCHUMER. Yes. Thank you.
The next question is on Italy. So the markets reacted quite nervously, shall we say, to the elections in Italy and the idea that they
might not be able to form a Government, or might form a Government that would be less willing to go along with the present economic policies. My question is, A, what do you think of that, but
B, more importantly, what is the exposure of our American financial institutions to Italy’s debt? How dangerous—let us say—let us
take the worst case scenario and let us say they cannot form a Government and they go through a little bit of what Greece or Spain
has. How big an effect would that have on the stability—not on the
world economy, not on our selling to Italy, but on the stability of
our American financial institutions?
Mr. BERNANKE. Well, the market is reacting, first and foremost,
to uncertainty. It does not know which way the Italian Government
is going to go and how those policies will be affected.
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I am not an expert in Italian politics, but I do not think that any
of the candidates have outright rejected either staying in the Euro
or maintaining the policies that are being required of Italy in order
to continue to receive—you know, in order to continue to be in the
eurozone. But, again, there is a lot of uncertainty there to see what
happens.
Italy is unusual in that its current deficits are not very large, but
it has a very large outstanding debt, and so there is a lot of Italian
debt held around the world. Our assessments, going back, is that
our banking exposure to Italian and Spanish debt is moderate, that
it would be meaningful, but—again, I am not forecasting in any
way—would not inflict serious damage on our financial institutions.
There are, of course, also money market funds that lend a lot of
funds to European banks, including Italian banks, and those are
connected. The fate of those institutions is connected to the fate of
the fiscal situation.
But, again, I think that the main effects would be more indirect.
I think—and again, I want to emphasize, this is totally hypothetical—that serious concerns about, say, the ability of Italy to remain in the Euro would probably have much broader effects on
other asset classes—stock market, bond yields around the world,
bank stocks, et cetera—and those effects would be more unpredictable and more concerning probably than direct losses and exposures in terms of Italian debt holdings.
Senator SCHUMER. Thank you, Mr. Chairman.
Chairman JOHNSON. Senator Corker.
Senator CORKER. Thank you, Mr. Chairman.
When the Fed decided that it was going to stimulate a global
currency war as it did, did you embark on that thinking, well, our
country is in trouble and let us sort of the heck with everybody
else, or did you think it would leverage the wealth effect, if you
will, if everybody had a race to the bottom? I know the Fed has
been really purposeful in trying to create this sort of faux wealth
effect. Did you think it would multiply your efforts?
And speaking to that, so overall wealth effect, I know you all do
calculations all the time, but could you tell us exactly what sort of
the wealth effect is, the part of it that is not real, that if you were
to stop doing what you are doing as it relates to monetary supply
today, how much of a diminishment in national wealth would take
place?
Mr. BERNANKE. On the first question, we are not engaged in a
currency war. We are not targeting our currency. The G7 put out
a statement which was very clear that it is entirely appropriate for
countries to use monetary policy to address their domestic objectives, in our case, employment and price stability. Our position is
that our expansionary monetary policies, which are being replicated, of course, in other industrial countries, are increasing demand globally and helping not only our businesses but also the
businesses in other countries that export to us. And so this is not
a ‘‘beggar thy neighbor’’ policy. It is one that benefits our trading
partners.
Senator CORKER. But the wealth effect is something you have
tried to stimulate here, and I wonder if you could tell me——
Mr. BERNANKE. Yes, that——
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Senator CORKER. ——how much wealth diminishment would
take place if you were to, if you will, move away from the punch
bowl.
Mr. BERNANKE. Well, there would be some, but I would point out
that if you look at the stock market, for example, that the so-called
equity premium, the risk premium associated with stock prices, is
actually quite wide. In other words, stock prices by that metric do
not appear over-valued, given earnings and given interest rates.
Now, if interest rates went up some, that would have some effect
on stock prices.
But the point here is not to create what you call a faux wealth
effect. The point here is to stimulate the economy, create some forward momentum in growth and employment, and that, in turn,
shows up in earnings and that creates a genuine increase in
wealth, the same with house prices.
Senator CORKER. So I think that, you know, I do not think there
is any question that you would be the biggest dove, if you will,
since World War II. I think that is something you are rather proud
of. And we have a Federal Government that is spending more relative to GDP than at any time since World War II. Those are working well together in that the Fed is actually purchasing a large portion of the new debt issuances as we live beyond our means, and
so it is working very well together in that regard.
I am just wondering if you all talk at all in your meetings about
the degrading effect that is having on our society and how it is basically punishing people who have done the right things and throwing seniors under the bus and others that have saved money. Do
you all ever talk about the longer-term degrading effect of these
policies as we try to live for today?
Mr. BERNANKE. I think one concern we have is about the effect
of long-term unemployment and people who do not have jobs for
years. That means they are never going to acquire skills. They are
never going to be a productive part of our workforce. So the jobs
part is very important.
You called me a dove. Well, maybe in some respects, I am, but
on the other hand, my inflation record is the best of any Federal
Reserve Chairman in the postwar period, or at least one of the
best, about 2 percent average inflation. So we have worked on both
sides of the mandate and we are trying to achieve a stronger economy for everybody. I do not think there is any degrading going on.
You mentioned, in particular, the issue of savers, and I think
that is an important issue. I would just point out that if we tried
to raise interest rates from, say, the current 10-year yield is 2 percent—if we tried to raise it to three or four or 5 percent while the
economy was still weak, it could not be sustained. Our economy is
not weak enough to sustain high real returns to savers. If we tried
to do that, we would throw our economy back into recession and
we would have low interest rates like the Japanese do. The only
way to get interest rates up for savers is to get a strong recovery,
and the only way to get a strong recovery is to provide adequate
support to the recovery. So I do not agree with that premise.
Senator CORKER. Do you concern yourself at all with just the
whole notion of being perceived—you know, we watch regulatory
capture take place here, where basically the regulators end up
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working for the people that they regulate. You know, we have
TARP, which most people who voted felt like that was a needed
thing during a crisis, and then we have had this easy money policy
which really allowed the big institutions, especially on Wall Street,
to really reap tremendous benefits in the early stages without
doing anything. And then you are getting ready, I guess, in a few
years, as you alluded to, when interest rates rise, to basically have
to print money to sell securities at losses and then pay interest on
reserves, which people have pointed out, and I think all have
talked about, is going to be billions and billions of dollars going to
these institutions that, again, you regulate. Do you concern yourself at all with the Fed being viewed as not as independent as it
used to be and working so closely with many of these institutions
that you regulate?
Mr. BERNANKE. Well, we are concerned about perceptions, that is
true, but none of the things you said are accurate. For example——
Senator CORKER. Well, yes, they are.
Mr. BERNANKE. Well, so to take the case of paying interest on reserves in the exit, for example, that is, number one, that is beneficial for the taxpayer because on the left hand side of the balance
sheet is reserves, but on the right hand side is the securities that
we hold, which pay a higher interest rate than the reserves. So by
doing that, we actually make a profit which we remit to the Treasury.
Senator CORKER. Well, it is really good for the institutions.
Mr. BERNANKE. We are not helping the banks. We are not helping the banks because——
Senator CORKER. No, when you exit. When you begin to draw the
money supply in, it is going to be very, very beneficial to these institutions.
Mr. BERNANKE. Why?
Senator CORKER. Oh, they are going to be yielding huge returns
on their reserves as you pay the——
Mr. BERNANKE. We will be paying market rates. We will be paying exactly what they can be getting in the repo market, in the
commercial paper market, anywhere else. There is no subsidy involved.
Senator CORKER. OK.
Chairman JOHNSON. Senator Menendez.
Senator MENENDEZ. Thank you, Mr. Chairman.
Chairman Bernanke, thanks for your testimony. You mentioned
the housing market and that being important. It has always been
one of the drivers of our economic recovery. And in that respect,
Senator Boxer and I have reintroduced the Responsible Homeowner
Refinancing Act, which would remove barriers to refinancing for
borrowers with GSE mortgages and have a history of paying their
mortgage on time. In the State of the Union, President Obama said
too many families who have never missed a payment and want to
refinance are being told no and urged the Congress to act.
In that respect, could you discuss the benefit to both individuals
and the national economy of enabling more families to refinance
mortgages at today’s historically low interest rates?
Mr. BERNANKE. Well, on the side of the borrowers, if they are
able to refinance, then they will have, obviously, lower payments,
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lower debt burdens, and to some extent, more income and ability
to spend. I guess the question on the other side is whether there
are needed subsides or other costs and how large those would be.
That would be the tradeoff I would look at.
But it is true from the borrower’s point of view, being able to refinance at a lower rate is going to increase the chance that you can
stay in your house and increase your income.
Senator MENENDEZ. Would we not be, in essence, solidifying an
entire universe of responsible, so far responsible, borrowers to be
able to ensure that they can continue to be a responsible borrower,
be able to avert any movement toward foreclosure and create an
economic stimulus, because if I have been patching the roof on my
house because I do not have the money to fully repair it and now
I am paying $300 or $400 less a month, I am going to have the
wherewithal to spend that money in an economy that would ultimately have a ripple effect? Would that not be a fair statement?
Mr. BERNANKE. Well, Senator, as you know, I do not like to endorse specific legislative proposals. In this case——
Senator MENENDEZ. Well, forget about the proposal. Just the
question in general of the possibility of refinancing at historically
lower rates.
Mr. BERNANKE. Again, from the borrower’s point of view, that is
clearly better. They will have lower payments. They will have more
income, discretionary income, a better chance of staying in their
house. And I guess the question is, what implications would it have
on the lenders’ side or on the fiscal side. Would there be some
money coming in from the Government to offset it on the other
side, would be the question I think you would have to look at. But
your basic point, would it help borrowers, obviously, it would.
Senator MENENDEZ. Let me ask you this. With reference—you
said in your testimony—I do not know if you verbalized this, but
I read it—it says, the sizes of deficits and debt matter, of course,
but not all tax and spending programs are created equal with respect to their effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policy
makers should not lose sight of the need for Federal tax and spending policies that increase incentives to work and save, encourage
investments in workforce skills, advance private capital formation,
promote research and development, and provide necessary and productive public infrastructure.
With that view being your statement, is not sequester—which is
something I did not vote for because I saw exactly where we were
going to be headed—is not the way sequester takes place totally in
contrary to that view?
Mr. BERNANKE. I think there is a tendency, Senator, when you
are thinking about the budget and the deficit, to just talk about
total spending, total taxes, and I am saying, and I think it is consistent with your point, that it is also very important whether the
tax policy is a good tax policy, whether the spending is productive
spending that increases the productive capacity of our economy or
achieves desirable social goals. So I hope it is not too controversial
to say that I think the Congress ought to think carefully about how
it taxes and spends and try and achieve the best outcomes it can.
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Senator MENENDEZ. Well, in sequester, you have across-theboard cuts.
Mr. BERNANKE. That is right.
Senator MENENDEZ. Now, if you are in the private sector and you
lost revenue, either you try to make up that revenue or, if you had
to make cuts in your business, you would make it in accordance
with what would pose you for growth again. So it might be in the
context of one company human capital. In another company, it
might be technology, whatever.
Mr. BERNANKE. Mm-hmm.
Senator MENENDEZ. Across-the-board cuts are indiscriminate
and, therefore, do not have the balance that you suggest is necessary. Would that be a fair statement?
Mr. BERNANKE. That is fair, but the question is, will the Senate
and the Congress be able to agree on how to replace the sequester
with a different set of programs? If they can, obviously, if they can
find a better combination, obviously, that would be better for our
economy.
Senator MENENDEZ. Well, it would certainly be more desirable,
assuming that that agreement could be achieved, than a meat axe
approach, across the board, regardless of understanding the very
issues that you raise. How do you create policies that create incentives to work and save, encourage workforce skills, capital formation, and what not.
Mr. BERNANKE. I agree.
Senator MENENDEZ. Thank you.
Chairman JOHNSON. Senator Toomey.
Senator TOOMEY. Thank you, Mr. Chairman, and thank you,
Chairman Bernanke, for joining us.
I would just like to follow up for a moment on the point that the
Senator from New Jersey was making, because I think, if I understood the gist of what he was saying, we might have a lot of agreement on this, and that is whether we like it or not, it is certainly
possible and actually looks quite likely that the sequester will at
least begin. And as it is currently codified, it is without regard to
any sense of what are higher and lower priorities in the different
agencies that would be affected.
It is hard to imagine that that is the optimal way to go about
cutting spending. It is impossible for me to believe that all spending is equally meritorious and that every category of spending
within every agency has equal merit and equal priority. And so it
seems to me that the most sensible way to go about this would be
to give some flexibility to the people who are closest to these spending decisions—the agency heads, the Administration, the OMB—so
that they can at least make the cuts that are least disruptive.
Some cuts are more disruptive than others, and it just seems that
it could be less disruptive to our economy if they had a chance to
do this through a thoughtful process than if it has to be done uniformly across the board. Does that make some sense?
Mr. BERNANKE. Yes, sir.
Senator TOOMEY. Thank you. Another point about the sequester
I just have to make—I was not going to get into this, but I just
have to strongly disagree with the notion that we have some kind
of severe austerity program that is about to kick in. We have a
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Federal Government that has doubled in size in the last 10 years,
100 percent growth in total spending. The sequestration contemplates 2.5 percent budget authority reduction, which, as you
know, about half of that would be actually spent in this fiscal year.
So we are talking less than 1.3 percent of Federal spending and
outlays that would be curbed.
The fact is, if the sequestration fully goes into effect, in fiscal
year 2013, the Federal Government will spend more money than it
did in 2012. It is hard for me to understand that as draconian
spending cuts and austerity. And, by the way, by my math, the actual outlay is a reduction that is equal to about one-quarter of 1
percent of GDP. How that has a disastrous impact on GDP growth
escapes me.
And, frankly, the idea that we would somehow postpone it and
promise that we will make cuts in the future, I think the credibility
of those promises would be worth zero and our economy would respond in a very adverse way, because it would see that we have
absolutely no willingness, no political ability, to begin even the
slightest imposition of fiscal discipline. And so I think that has
very negative implications.
My specific question is for you on monetary policy, Mr. Chairman. You talked about the fact that inflation has not manifested
itself as a problem by conventional measures at this point. I take
your point. To what extent are you concerned about asset bubbles?
There are people who think we have bubbles in the works right
now in Treasury securities and agricultural real estate, some even
in the equity markets. How do you know when there is a bubble,
and how concerned are you that this absolutely unprecedented
monetary policy could manifest itself in inappropriate asset appreciation?
Mr. BERNANKE. It is a concern, as I said in my remarks. We are
approaching it two ways. First, we are putting a lot of effort into
measuring, monitoring, assessing asset prices and financial activities. Second, we are trying to make sure that, to the extent that
there may be some frothiness in a particular asset class, that the
holders of those assets are prepared to deal with the losses. So, for
example, banks have twice as much capital today than they did a
few years ago and we stress them according to different possible
scenarios where asset prices move sharply and ask, would they still
be able to lend and be stable.
Senator TOOMEY. And I have got very little time, so I acknowledge that, but I think you perhaps would agree that it can be very
difficult to know when a bubble is really forming and it is getting
frothy as opposed to being driven by fundamentals.
And the other concern that I have, as you mentioned earlier, I
think, in conversation with Senator Shelby and perhaps Senator
Corker, that you are confident that you have the ability to unwind
the very large balance sheet that you have got. There is no question, you have the ability to unwind. What worries me is the impossibility of knowing the impact of the unwind.
For instance, just the suggestion of maybe a little bit more dissent within the FOMC than people previously thought existed precipitated a significant sell-off in equities a week or two ago. What
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would the impact be of actually having to liquidate a big portion
of your holdings on the bond market, on the equity markets?
Mr. BERNANKE. We do not anticipate having to do that. We think
that we can——
Senator TOOMEY. Not ever?
Mr. BERNANKE. We could exit without ever selling by letting it
run off, and we could tighten policy by raising interest rates that
we pay on reserves. That would be one strategy, for example.
In any case, we have said that we will sell slowly, with lots of
notice, and we will, of course, also be offering our forward guidance
about rates so that there will not be a shift in rates, expectations
on the part of the market. So we are giving a lot of thought to
these issues.
Senator, if I could just make one very quick point, there is no
risk-free approach to this situation. I mean, the risk of not doing
anything is severe, as well. So we are trying to balance these
things as best we can.
Senator TOOMEY. Thank you, Mr. Chairman.
Chairman JOHNSON. Senator Warner.
Senator WARNER. Thank you, Mr. Chairman, and Chairman
Bernanke, thank you for your work and your efforts to, as I think
we all have some concerns, take extraordinary actions, oftentimes
because, at least to date, it seems like we have failed to keep up
our end of the bargain to put in place the kind of balanced, comprehensive, phased in deficit reduction plan that you have called
for and many of us have worked on for years.
I would add, as well, that every one of those plans from SimpsonBowles on had a revenue component that was substantially higher
than the revenue secured on the New Year’s Eve deal. I would also
acknowledge all of those had an entitlement reform component that
also has not been part of the agreements to date.
I do want to come back at one level on the sequestration, because
I heard some of my colleagues say the hit to the economy of sequestrations, which was set up to be the stupidest option possible, such
an outrageous option that rational people would never allow it to
come to pass, we look at that kind of top-line number and its effect
it would have on the economy, and one of the things—I know you
have got great folks who do analysis—whether you have been able
to kind of dig in at a kind of level below—beyond just the kind of
top-line cut, the failure to have it phased in, the failure, for example, to have a balance with some revenue additions, but to actually
get to the level of granularity where, in many cases, because of this
across-the-board approach without any prioritization, 975 separate
line items in the Navy not of equal value to the taxpayer or to our
defense, where in many cases we will actually be costing the taxpayer more money by these cuts, where we will be either in one
case breaking volume contract purchases on—not just on the DOD
side, but on other sides, or the cases where—I had a university
president here today with me where NIH grants that may have
had three or 4 years’ worth of research where the last year of research now cannot be let and consequently all of the previous work
kind of goes down the drain. Or, while we talk about the economic
costs of furloughing individuals, whether you have been able to do
the analysis and say what that downstream might mean when it
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is meat inspectors or poultry inspectors which then might have a
subsequent driving up of prices to consumers because not as much
food gets into the grocery store.
Has your analysis taken on the kind of, not just top line, but the
kind of the extra added stupidity value that was not built into this
legislation?
Mr. BERNANKE. Well, I agree with a couple of previous speakers
on both sides that a thoughtful approach that looked at all these
issues would be better if it could be agreed upon than a just acrossthe-board approach. But we do not get into line items and specific
programs.
Senator WARNER. And I agree. Top line, the number is going to
have an enormously detrimental effect, and again, why I think we
need balance. But I would argue that there is a perhaps stupid and
slightly less stupid way and I am, I think, only digging into some
of the—literally some of the absurdities that will take place. And,
actually, some of the costs that the taxpayers will incur under the
guise of, quote-unquote, ‘‘cutting’’ is pretty remarkable.
I want to come back to—I have a host of questions, and my time
is quickly going away, as well—two other items. One, a lot of conversation for those of us who have been wrestling with the fiscal
issues on any kind of historic basis. Clearly, we are at historic
spending levels, historically high spending levels. We are also at
historically low, the last 50 years, at least, revenue levels.
One of the things that sometimes is cited is, well, our goal ought
to be a 50-year running average of what our revenue should be as
a percent of GDP. I guess I just really wonder, with the demographic bulge that we have, with the aging of our population, that
even those of us who have been very strong proponents of major
entitlement reform, do you really think that kind of a backwardslooking 50-year historic revenue target is appropriate as an economist when you look at both our aging population and the kind of
demographic bulge of the baby boom coming in, even with meaningful entitlement reform?
Mr. BERNANKE. Well, the way I think about it is in terms of debtto-GDP ratio. As I mentioned in my remarks, we had a national
asset of a 40 percent debt-to-GDP ratio before the crisis and we
have lost a lot of that asset. And given what is happening, you
know, 10, 20, 30 years out, we should be trying to buildup over the
next decade some fiscal capacity to deal with it.
Senator WARNER. My time is up, but just would you say what
that debt-to-GDP goal should be going forward? You have made
that comment at various times——
Mr. BERNANKE. I do not think there is a magic number, but historically, we have not been at 75 percent at any time since just
after World War II. So if we can bring it down from here some, it
would be helpful, I think.
Senator WARNER. Thank you, Mr. Chairman.
Chairman JOHNSON. Senator Coburn.
Senator COBURN. Thank you, Mr. Chairman, for being here. I appreciate your work.
Just a comment on Senator Warner. The revenue that was
passed was certainly less than what Simpson-Bowles had agreed
to, but I would remind my colleague, Simpson-Bowles revenue was
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used to lower tax rates to stimulate the economy, not to raise taxes
and not stimulate the economy. And what is outrageous is that we
have not done anything to address our long-term problems. And I
know my colleague from Virginia has been very effective in working across the aisle to try to accomplish that.
My questions really have to do with QE. Do you think—is there
a diminishing return on your efforts at quantitative easing, in
terms of its effect?
Mr. BERNANKE. That is a good question when we have debated.
On the one hand, the first round in 2009 had some very substantial
benefits in terms of market functioning. Markets were in turmoil.
Our purchases helped calm markets and set the stage for recovery
in financial markets. Of course, we do not have quite that situation
today.
On the other hand, there are some things working in the other
direction. For example, credit markets are more open today. Banks
are lending more today. And so in some sense, the low interest
rates can pass through more easily today than they could have a
couple years ago.
So that is a good question. We do not know exactly which way
it goes, but I think, as I said in my remarks, I think there is pretty
good evidence that 3.5 percent mortgage rates are one of the reasons why housing looks like it is turning around, low auto rates
one of the reasons why car sales are up. So whether it is bigger
or less, I am not sure, but it does seem to be having some positive
benefits in terms of growth.
Senator COBURN. Now that we have Japan actually pretty well
duplicating some of our efforts in terms of QE to fight deflation,
which I agree is a proper goal for them—they have struggled with
that for 20 years—do you worry at all, now that the European
countries have done a quantitative easing, in effect, Japan has
done it, the Bank of China has done it, we have done it, that the
competitive ratio or the net competitive differences might divert
away and we see this in terms of trade protectionism in terms of
the international markets?
Mr. BERNANKE. Well, first, Senator, you make a good point that
the Fed is not at all extraordinary. In terms of balance sheets, in
terms of long-term interest rates, we are very similar to a lot of
other countries.
As I was saying before, we do not view monetary policy aimed
at domestic goals as being a currency war. It is not like putting
tariffs on your imports so that you can ‘‘beggar thy neighbor’’ to the
benefit of your domestic industries. That is not what we are doing.
If all the major economies that need support provide stimulus and
extra aggregate demand, that is mutually beneficial because, for
example, China depends on the strength of Europe and the U.S. as
their export market, and we, too, depend on other countries, as
well, as a market for our goods. So this is, I think, a positive sum
game, not a zero sum game, that we have here.
Senator COBURN. But there was some concern in the last G20
meeting in terms of this target of the end being at 110 instead of
90—instead of 78, like it was 90 days ago, or maybe longer. But
there is some concern that currencies can get out of balance and
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that will have a significant impact on trade. Would you agree with
that?
Mr. BERNANKE. Well——
Senator COBURN. There was certainly discussion in the press.
Mr. BERNANKE. There was certainly discussion of the issue. The
emerging market economies, which are at full employment in many
cases, are unhappy because low interest rates in the advanced
economies give them a choice they do not like. Either they have to
accept low interest rates, which they feel causes inflation or problems in their own economy, or, alternatively, they have to raise—
let their exchange rate appreciate, which hurts their export market. So they have had some concerns with accommodative monetary policy in advanced economies, in general, but I do not think
Japan really raises a special case, notwithstanding the rhetoric. Of
course, we have not seen what they are going to do yet. I mean,
they have not even officially appointed the new Governor. But, presumably, what they are going to do is monetary policy aimed at domestic objectives and not specifically at the exchange rate.
Senator COBURN. One final, and you do not have to answer this,
but if you would give me your thoughts. A recent paper, ‘‘Crunch
Time: Fiscal Crises and the Role of Monetary Policy,’’ would you
mind at some point in time giving me your thoughts on that? I
think you have seen that.
Mr. BERNANKE. I will, but I think the main thing I would say is
that—and I want to be very clear—the CBO agrees that the Federal Reserve’s balance sheet policies are with very high probability
going to be a very significant boom to the taxpayer in terms of returns to the Treasury.
Chairman JOHNSON. Senator Merkley.
Senator MERKLEY. Thank you, Mr. Chair, and thank you for your
testimony.
I wanted to start with too big to jail. We had the situation with
Hong Kong-Shanghai Bank Corporation, HSBC, where the United
States decided not only not to investigate any individual, but not
to investigate the bank as a whole, related to money laundering or
related to terrorist organizations and drug organizations. It is no
small thing, no small thing. Drug organizations in Northern Mexico
are responsible for 40,000 deaths. Terrorist organizations, obviously, are a threat to the United States. And the too big to jail
echoes the fact that we still have banks that are so large that we
are concerned about creating any ripples. In this case, it sends a
message, as well, about future behavior. If current behavior, be it
manipulation of the LIBOR rate, which have had fines associated
with it but not criminal prosecutions, I do not believe, or too big
to jail for money laundering, does this not kind of undermine in a
way our international regulatory structure for financial institutions?
Mr. BERNANKE. Well, I agree that no individual and no institution should be exempt from paying for crimes that they commit. On
this particular case, we worked very closely with the Department
of Justice. We cooperated in every possible way to give them information. In the end, the company paid a $2 billion fine. If it relates
to the bigger issue you are thinking of, of too big to fail, we also
agree that that is something that really needs to be addressed and
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that many of the parts of Dodd-Frank are intended to address that
and we are pushing those as hard as we can.
Senator MERKLEY. Thank you. And I think it does certainly say
to us we are a long ways from getting there if we are that concerned about any form of shakiness in these large banks.
But there is another aspect of this, too, and that it continues to
tell folks that it is safer to invest, if you will, in large banks than,
say, community banks. A community bank would have been shut
down or at least investigated thoroughly. And in what I see in the
economy in Oregon is often it is the community banks that are willing to lend into the local economies because they understand it better. They are more comfortable with it. They understand they may
have relationships to know the competency of any individual companies and so forth. And is this sort of bias kind of counterproductive to our overall health of our economy?
Mr. BERNANKE. Absolutely. It means the playing field is not
level. It means that there is not market discipline, so there is too
much risk taking. So getting rid of too big to fail is, I think, an incredibly important objective and we are working in that direction.
Senator MERKLEY. Thank you. I want to turn now to the fiscal
cliff. We had a drop in GDP in the fourth quarter of last year. Do
you share the view somehow that that was, in part, attributable to
the December 31 fiscal cliff?
Mr. BERNANKE. Only incidentally. One of the factors that happened to contribute to the fourth quarter was a 22 percent annual
rate drop in defense spending, and it is possible that in anticipation of the sequester, for example, there may have been some
changes in spending patterns. But, as I said in my remarks, I think
the fourth quarter was really a combination of transitory factors.
I do not think it really signaled any real change in the pace of
growth of the economy. On the other hand, the pace of growth of
the economy remains around 2 percent, which is positive, but it is
not as strong as we would like.
Senator MERKLEY. So now we are looking at the different items
that you mentioned, the debt ceiling, continuing resolution, the sequester, which does convey a feeling of lurching from crisis to crisis. We have heard many companies have put substantial money
aside, that they have not reinvested. They have had some very
profitable years. Is this style that we seem to have adopted, of
being unable to get our act together and plan a year at a time, if
you will, in the traditional sense, really kind of shooting ourselves
in the foot?
Mr. BERNANKE. I think so, Senator. We have not been able to
identify with accuracy the quantitative impact of uncertainty about
policy, but we certainly, around the FOMC table, hear many anecdotes from businesses about their reluctance to expand or hire,
given that they are not sure what the fiscal situation is going to
be.
Senator MERKLEY. Switching gears, the Volcker Rule, or Volcker
firewall between hedge fund -style activities and banks that take
deposits and make loans, still has not—the rulemaking has not
been completed. We are well past the 2-year mark headed toward
3 years. Does this need to get done so that institutions know what
the appropriate boundaries are and also so that here, we can dem-
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onstrate that we actually have the ability to pass laws and the
rules that go with them and operate as a competent society?
Mr. BERNANKE. We would like to get it done and we have made
a lot of progress on it. The issue at this point is that there really—
the Volcker Rule is really three or four different rules. The CFTC,
the SEC, and the banking agencies each has a Volcker Rule which
applies to the institutions that they supervise and there is a strong
sense that we have that we would be much better served if those
rules were closely coordinated and as close to being identical as
possible. So I think the issues at this point are not the work that
we have done at the Federal Reserve, for example, the issues are
finding agreement and closure among the different agencies who
are working on the rule.
Senator MERKLEY. Thank you.
Chairman JOHNSON. Senator Heller.
Senator HELLER. Thank you, Mr. Chairman, and Mr. Chairman,
thank you for being here today. I have not had a chance to raise
some questions since 2008 on the Financial Services Committee on
the other side, so it is good to have you in front of me and thanks
for taking time.
Mr. BERNANKE. Sure.
Senator HELLER. You know, we ask a lot of questions a lot of different ways, and I am probably not going to be any different, but
let us give it a shot.
You know, we have not passed a budget around here in 4 years.
Are you optimistic that sometime in your lifetime we may pass another budget around here in Washington, DC? For that matter, let
me ask you another question, and you can answer them together.
Do you think we will ever balance a budget, have a balanced budget in your lifetime?
Mr. BERNANKE. Well, I would settle for stabilization of the ratio
of debt-to-GDP, which is a slightly less tough level.
Senator HELLER. It sounds like a ‘‘no.’’
Mr. BERNANKE. I have—you know, it is easy to criticize, but the
politics is very difficult. I understand that there are a lot of very
different views and strongly held views and it is not easy to come
to an agreement. So I do not think Congress is not trying. I know
you are trying, and I hope that you can find the agreement to see
these important objectives.
Senator HELLER. Well, the reason I raise the question, I think
the sequestration issue that we have in front of us on Friday is a
result of our lack of budgeting and effort to budget. I am from Nevada, so if I am putting money down, I am putting $100 down that
sequestration comes and goes on Friday. Then as soon as that occurs, we get into our Budget Committee markups that are supposed to happen on March 11 through the 15th. I am putting another $100 down that that does not happen.
Then we are supposed to bring those bills down to the floor sometime on March 18, and then March 27, Government funding expires because we do not budget, and I am arguing that that day
comes and goes and we have a big argument. All I am talking
about is the instability that we have and how difficult does that
make your job?
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Mr. BERNANKE. Well, it makes my job difficult, but it also makes
the economy’s job difficult. Again, as Senator Merkley mentioned,
the uncertainty associated with not knowing how policy is going to
be developed and what tax rates will be and what spending will be
and what programs will be and which contractors will be receiving
funding, et cetera, those are important concerns.
Senator HELLER. And I know your policies are based on monetary policy and also unemployment and employment, and I have to
believe that our indecisiveness and inability to get things done is
causing a lot of consternation.
You made a comment, and you have actually repeated this in
this hearing, that you will continue—I want to go to quantitative
easing, that is your purchasing of these assets—will continue until
substantial improvements in the outlook of the labor market in the
context of price stability. Will you explain to me a little bit more
in depth what that means?
Mr. BERNANKE. Well, sure. We are going to be looking at a variety of variables. We will be looking at payroll employment, is it
strengthening, is it sustainably strengthening? Is the unemployment rate coming down? So those are indications——
Senator HELLER. Do you have a target?
Mr. BERNANKE. We do not have a specific target. We have given
thresholds for our rate policy. We have not extended those to our
asset purchases, and there are a couple of reasons. One is, as you
mentioned, there are a lot of other things happening in our economy, like the fiscal issues that you referred to. But in addition, we
are paying very close attention, as a number of you have mentioned, to the efficacy and cost of these policies and that makes it
very difficult to say this is the number we are going to achieve.
So we are doing our best to communicate the criteria for action,
but we have not been able to come to a specific number which encapsulates both the change in outlook for the labor market and the
assessment of costs and efficacy, which is another part of the decision process.
Senator HELLER. Do you believe that your asset purchases are
causing any kind of an equity bubble?
Mr. BERNANKE. I do not see much evidence of an equity bubble.
Earnings are very high. As I said, the equity risk premium is above
normal. That is, in other words, equity holders are still being somewhat risk averse in their behavior.
But again, we have a two-part plan. First is to monitor these different asset markets. The second is to try to understand what
would be the implications if we are wrong. What would happen?
Who would be hurt? What would happen to financial institutions?
Would there be broad knock-on effects if, in fact, some particular
asset turned out to be in a bubble? So we are trying to do both of
those things and we do not rule out that if these problems become
sufficiently worrisome, that they would be taken into account in
our monetary policy.
Senator HELLER. Mr. Chairman, thank you.
Mr. Chairman, thank you.
Chairman JOHNSON. Senator Warren.
Senator WARREN. Thank you, Mr. Chairman, and I also want to
say thank you, Mr. Chairman. This has been my first chance to say
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in public how grateful I am for your help in setting up the consumer agency and how helpful all the people were at the Fed during the time of transition of the consumer function, so thank you
very much.
I would like to go to the question about too big to fail, that we
have not gotten rid of it yet, and so now we have a double problem
and that is that the big banks, big at the time that they were
bailed out the first time, have gotten bigger, and at the same time
that investors believe with too big to fail out there that it is safer
to put your money into the big banks and not the little banks, in
effect creating an insurance policy for the big banks, that the Government is creating this insurance policy not there for the small
banks.
And now some economists, including an economist at the IMF,
have started to document exactly how much that subsidy is worth.
Last week, Bloomberg did the math on it and came up with the
number $83 billion that the big banks get in what is essentially a
free insurance policy. They borrow cheaper than the small banks
do.
So I understand that we are all trying to get to the end of too
big to fail, but my question, Mr. Chairman, is, until we do, should
those biggest financial institutions be repaying the American taxpayer that $83 billion subsidy that they are getting?
Mr. BERNANKE. Well, the subsidy is coming because of market
expectations that the Government would bail out these firms if
they failed. Those expectations are incorrect. We have an orderly
liquidation authority. And even in the crisis, in the cases of AIG,
for example, we wiped out the shareholders——
Senator WARREN. Excuse me, Mr. Chairman. You did not wipe
out the shareholders of the largest financial institutions, did you,
the big banks?
Mr. BERNANKE. Because we did not have the tools. Now, we
could.
Senator WARREN. Well, but the——
Mr. BERNANKE. Now we have the tools.
Senator WARNER. Eighty-three billion dollars says that whatever
you are saying, Mr. Chairman, $83 billion says that there really
will be a bailout for the largest financial institutions if they fail.
Mr. BERNANKE. No, that is the expectation of markets, but that
does not mean that we have to do it. I think what we have to do
is solve the problem, Senator. I think we are really in agreement
on this. Too big to fail is not absolute. There are spreads. The credit default swaps say there is some probability of failure. Moody’s
and others have downgraded these firms. They have taken down
some of their Government support ratings, as you know. But we
have a lot more to do, I agree, and I think that is a good debate
to have, but we are in complete agreement that we need to stop
too big to fail.
Senator WARREN. But I do not understand. It is working like an
insurance policy. Ordinary folks pay for homeowners’ insurance.
Ordinary folks pay for car insurance. And these big financial institutions are getting cheaper borrowing to the tune of $83 billion in
a single year simply because people believe that the Government
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would step in and bail them out. And I am just saying, if they are
getting it, why should they not pay for it?
Mr. BERNANKE. I think we should get rid of it.
Senator WARREN. Well, all right, then I will ask the other question. You were here in July and you said that you were—you commended Dodd-Frank for providing a blueprint to get rid of too big
to fail. We have now understood this problem for nearly 5 years.
So when are we going to get rid of too big to fail?
Mr. BERNANKE. Well, as we have been discussing, some of these
rules take time to develop. The orderly liquidation authority, I
think we made a lot of progress on that. We have got the living
wills. I think we are moving in the right direction. If additional
steps are needed, then Congress obviously can discuss those. But
we do have a plan and I think it is moving in the right direction.
Senator WARREN. Any idea about when we are going to arrive in
the right direction?
Mr. BERNANKE. It is not a zero, one kind of thing. It is over time
you will see increasing market expectations that these institutions
can fail. And I would make another prediction, and predictions are
always dangerous, that the benefits of being large are going to decline over time, which means that some banks are going to voluntarily begin to reduce their size because they are not getting the
benefit that they used to get.
Senator WARREN. I read you on this. I read your predictions on
this in your earlier testimony. But so far, it looks like they are getting $83 billion for staying big.
Mr. BERNANKE. Well, that is one study, Senator. You do not
know whether that is an accurate number or——
Senator WARREN. Well, OK. We will go back and look at it again
if you think there is a problem with it. But does it worry you?
Mr. BERNANKE. Of course. I think this is very important, and we
are putting a lot of effort into this. It is a problem that we have
had for a very long time and I do not think we can solve it immediately, but I assure that, as somebody who has spent a lot of late
nights trying to deal with these problems and the crisis, I would
very much like to have the confidence that we could close down a
large institution without causing damage to the rest of the economy.
Senator WARREN. Fair enough. I know we are both trying to go
in the same direction. I am just pointing out that in all that space
in between, what is happening is the big banks are getting a terrific break and the little banks are just getting smashed on this.
They are not getting that kind of break, and that has long-term impact for all of the financial system.
Mr. BERNANKE. I agree with you 100 percent.
Senator WARREN. Thank you.
Chairman JOHNSON. Senator Vitter.
Senator VITTER. Thank you, Mr. Chairman, and thank you, Mr.
Chairman, for being here.
My top concern is actually exactly the same as Ms. Warren’s, and
I think that is a statement in and of itself that there is growing
bipartisan concern across the whole political spectrum about the
fact—I believe it is a fact—that too big to fail is alive and well.
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First of all, in terms of the study, Ms. Warren cited the
Bloomberg calculations, but that is clearly not the only thing out
there. There is an FDIC study released in September that concludes that, quote, ‘‘The largest banks do, in fact, pay less for comparable deposits. Furthermore, we show that some of the difference
in the cost of funding cannot be attributed to either differences in
balance sheet risk or any non- risk-related factors. The remaining
unexplained risk premium gap is on the order of 45 basis points.
Such a gap is consistent with an economically significant too big to
fail subsidy paid to the largest banks,’’ close quote.
In addition, an IMF working paper has attempted to quantify
this subsidy and it said the subsidy, quote, ‘‘was already sizable,
60 basis points, as of the end of 2007, before the crisis. It increased
to 80 basis points by the end of 2009,’’ close quote.
Then we have the Bloomberg quantification which was working
off that IMF work that was mentioned, and also a Board member,
Daniel Tarullo, who says, quote, ‘‘To the extent that a growing systemic footprint increases perceptions of at least some residual too
big to fail quality in such a firm, notwithstanding the panoply of
measures in Dodd-Frank and our regulations, there may be funding advantages for the firm which reinforces the impulse to grow,’’
close quote.
So my first point is it is not just one outlier study. Given all of
that, what specifically is in process in terms of regulations or
should be put in process to counteract that, because my concern is
even if this problem is solved 2 years from now, the entire landscape of American banking will be different by then, including a lot
of solid smaller firms gone, and I think that is a real loss to our
financial system.
Mr. BERNANKE. There is a three-part plan under Dodd-Frank.
Part number one is to impose costs on large institutions that offset
the benefits they get in the funding markets, for example, capital
surcharges, activity restrictions, liquidity requirements, living
wills, a whole bunch of other things that impose greater cost and
force the largest firms to take into account their systemic footprint.
That is number one.
Number two is the orderly liquidation authority, which we are
working closely with the FDIC and with our foreign counterparts
to figure out how we would take down a large institution without
bringing down the system.
And part three is a whole raft of measures to try to strengthen
the overall financial system so that it would be more credible that
we could take down a large institution without bringing down the
system.
That is sort of the three-part plan. It is working to some extent.
For example, even though U.S. banks are stronger financially than
European banks. Frequently, U.S. banks have wider credit default
swap spreads, indicating a higher probability of actual failure, because the differences between U.S. and Europe in terms of Government—perceived Government support. So that is the process. That
is the plan.
There have been additional ideas, such as, essentially reinstating
Glass-Steagall, separating the commercial banking and investment
banking activities. We are doing that to some extent, for example,
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with the Volcker Rule, but I do not think that Glass-Steagall by
itself really would be all that helpful because, after all, in the crisis, some of the firms that failed were straight investment banks
and some of the firms that were in trouble were straight commercial banks.
So I am open to discussing additional measures, but the plan is
to impose costs on the largest banks to make them internalize their
systemic imprint, to develop a liquidation authority, and to
strengthen the overall system. And over time, that ought to improve the situation, but if it does not, I think we ought to consider
alternative and additional steps.
Senator VITTER. Well, in closing, I would really continue to encourage you all doing that now. And again, I think this is a bipartisan concern. I have expressed this concern and several ideas, for
instance, with Senator Brown on the Committee.
The three components you described are understood by the market. In my opinion, they have been digested and valued by the market and the market still says there is too big to fail. In particular,
I would continue to urge you to revisit higher capital requirements
beyond the marginally higher requirements that you have instituted so far for megabanks and I would continue to urge you all
to think of alternatives to Basel III, as well, in the same spirit.
Thank you.
Mr. BERNANKE. Thank you, Senator.
Chairman JOHNSON. Senator Manchin.
Senator MANCHIN. Mr. Chairman, thank you.
Chairman Bernanke, thank you for being here.
First of all, when I first came to the Senate 21⁄2 years ago, I was
in the Armed Services Committee and Admiral Mullins at that
time was asked, what is the greatest threat the United States
faces, and I thought I would hear some military challenge. And he
did not even hesitate by saying that the debt of this Nation is our
greatest threat, and I did not know if you shared that same
thought.
Mr. BERNANKE. It is certainly an important economic risk and I
think it is very important that, over the longer term, that we develop a sustainable fiscal plan, no question about it.
Senator MANCHIN. I mean, his assessment was it was the greatest threat we faced.
Mr. BERNANKE. I do not know. There are many possible candidates for that.
Senator MANCHIN. Also, I know they talked a lot about sequestering today, and we were talking back and forth the consequences
if we do and if we do not. The bottom line, sequestering came into
being because in 2011, the summer of 2011, we thought we put a
supercommittee together that had a goal of $1.5 trillion. If they did
not reach that goal, they had a minimum penalty of $1.2 trillion
across the board in defense and nondefense. We voted on that as
a body. Now, we are looking for every way to get out of that, saying
it was too draconian. We should never have done it.
But we did it. And what we were saying is if we do not do it at
all and negate that responsibility and promise of a vote that we
made for the public, what effect would that have on the market?
I know I have heard everything about the effects that it would
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have if we do it. What effects would it have on the market if we
do not do it?
Mr. BERNANKE. Well, my recommendation, and, of course, I can
only recommend to you——
Senator MANCHIN. Sure. I agree.
Mr. BERNANKE. ——it is obviously Congress’s decision how to
proceed—is a two-part recommendation. Look at both the short run
and the long run. I think it is true that just canceling the sequester
would not solve the overall problem——
Senator MANCHIN. No——
Mr. BERNANKE. ——which is the long-term fiscal issue. So if you
cut the sequester or delay it, however you modify it——
Senator MANCHIN. Right.
Mr. BERNANKE. ——you ought to compensate for that with, in my
recommendation, by looking at measures that address the longerterm fiscal concerns, which is what the CBO shows to be the point
where the debt really begins to explode. And that is the trade-off
I would suggest.
Senator MANCHIN. It would be irresponsible for us not to do
something. We have two alternatives, two paths to take here. Either fix the financial problems in a longer-term, bigger fix, or do
something with sequestering that we punished ourself basically because we have been unable as a body to come together. So I think
that was also said. If we are going to do a sequestering, should it
not be done in a more or smarter way to where there is more flexibility?
Mr. BERNANKE. Well, as you point out, it was done to be sort of
like Dr. Strangelove——
Senator MANCHIN. Right. Right.
Mr. BERNANKE. ——you know, the bomb that goes off. So obviously, if you can find a way to, in a bipartisan way, to make it
more effective and better prioritized, that would be a good thing.
Senator MANCHIN. OK.
Mr. BERNANKE. And people disagree on the second point, but
again, what I suggested today is trying to make some tradeoff between the effects on the near-term recovery and aligning the policy
with the timing. The timing says that you have made progress in
the very near term as far as the budget is concerned. Where the
problem still remains unaddressed is in the longer term. And so it
does not quite match to be doing tough policies today when the real
problem is a somewhat longer-term problem.
Senator MANCHIN. Sure.
Mr. BERNANKE. That is what I am trying to suggest.
Senator MANCHIN. Well, I am just saying that there are a lot of
us concerned about we keep kicking the can down the road, but
that is a whole another conversation.
My final question would be, sir, how big is our national debt?
Mr. BERNANKE. Well, there are a lot of different measures of it.
The——
Senator MANCHIN. What would be your explanation of it?
Mr. BERNANKE. Well, the basic measure, which is the debt held
by the public, which includes the debt held by the Fed, it is about
$11 trillion——
Senator MANCHIN. Right.
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Mr. BERNANKE. ——about 75 or 73 percent of GDP.
Senator MANCHIN. Correct.
Mr. BERNANKE. That does not include, though, for example, socalled unfunded liabilities, such as the promises that have been
made to future Medicare recipients, for example——
Senator MANCHIN. Well, the average person would understand
that they have a responsibility and their ability to pay back in good
faith. So how much of what is our total national debt that is responsible by the good faith of this country and the people in this
country?
Mr. BERNANKE. It is currently about $11 trillion.
Senator MANCHIN. OK, but if you had everything when you—our
gross Federal debt?
Mr. BERNANKE. Gross Federal debt includes debt owed by parts
of the Government to other parts of the Government, like the Social Security Trust Fund, for example——
Senator MANCHIN. Responsibilities of Fannie and Freddie?
Mr. BERNANKE. So that is another element. That is guarantees.
That is not direct debt. That is a potential liability. So it is complicated.
Senator MANCHIN. Yes.
Mr. BERNANKE. As I said at the beginning, it is hard to——
Senator MANCHIN. If you looked at all of the——
Mr. BERNANKE. ——get a single number.
Senator MANCHIN. ——the worst case scenario, the faith and full
credit of this country, what would you say it would be?
Mr. BERNANKE. Well, I saw the article I think you are referring
to and it included the possibility that——
Senator MANCHIN. Is it accurate?
Mr. BERNANKE. It included the possibility that the Government
would have to pay off every deposit in the United States through
the FDIC——
Senator MANCHIN. Yes.
Mr. BERNANKE. ——which is not a realistic possibility. There are
some alternative measures which are certainly bigger than $11 trillion——
Senator MANCHIN. I think they were saying——
Mr. BERNANKE. ——but I do not have those numbers——
Senator MANCHIN. They said as much as $30 trillion it could be,
total exposure.
Mr. BERNANKE. If you include all of the Medicare and——
Senator MANCHIN. But it is definitely higher than $16 trillion.
Mr. BERNANKE. Yes, I would say that is fair.
Senator MANCHIN. Thank you.
Chairman JOHNSON. There is a vote pending, but does the Senator from Tennessee care to make a brief——
Senator CORKER. Just one very quick question, and I was interested—I went back to the office and did not expect to come back,
but listening to the exchange with Senator Warren and Senator
Vitter, it reminded me of—the questioning was Tarullo, who was
in last, who you served with on the Fed Board, and just—he had
mentioned—I asked him about systemic risk, and I know that the
Fed is obviously a member of the FSOC and your goal is to identify
systemic risk and deal with that. And that was much like the an-
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swer that you gave to Senator Warren a minute ago. It is kind of,
we are on this journey.
But I would ask the question. Is there any entity in our country
that if it failed would create systemic risk, and if so, why is that
still the case after the creation of Dodd-Frank? I mean, why have
we not moved more quickly? Why are we taking so long on this
journey? And is there an institution that if it failed would pose systemic risk to our country? And if so, would you identify it?
Mr. BERNANKE. The only answer I can give you is that DoddFrank is a complicated bill. Many of the rules are not——
Senator CORKER. But that piece of it is not very complicated. It
is only about eight words, and so that is not complicated. It is a
directive to you, and you are a big part of this and you came out
a big winner in Dodd-Frank. And I guess I would just ask the question, why would you not go ahead and identify that, and if there
is an entity that is in our Nation, if it failed, something that poses
systemic risk, you would know that. Why do we not go ahead and
move to deal with that?
Mr. BERNANKE. Well, the FSOC actually has the authority to
designate nonbank firms that it views as systemic and they come
under the oversight of the Fed.
Senator CORKER. Well, let me ask you, if we have firms, though,
are we going to—is it your thought that under this power that you
have been given, is it your thought that we could continue to have
firms operating in our country that if they failed, they would pose
systemic risk, or are we going to try to mitigate that in some other
way? I would just be curious.
Mr. BERNANKE. The goal of the powers that you gave to the Fed
and other agencies is to, as much as possible, eliminate that problem over time. Additional steps, I think, would require Congressional action beyond what we have implemented.
Senator CORKER. I do not think so. I am going to follow up with
a letter. I thank you for your testimony——
Mr. BERNANKE. Sure.
Senator CORKER. And I do not think that is the case.
Chairman JOHNSON. Thank you again, Chairman Bernanke, for
your testimony and for being here with us today.
This hearing is adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and additional material supplied for the record follow:]
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PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
The Committee will come to order.
Today’s hearing is with Chairman Bernanke on the Federal Reserve’s Monetary
Policy Report to Congress. While progress toward maximum employment has been
slow, it has been positive and steady thanks in part to the Fed’s thoughtful and
well-measured monetary actions. Our economy has added private sector jobs for 35
straight months. During that time, over 6 million new jobs have been created, but
we should not sacrifice those gains by slamming on the brakes now.
Without a fix, automatic spending cuts will take effect in just a few days, and
could send our economy into reverse at a time we should continue moving forward
on creating jobs. Projections suggest the sequester will cost us 750,000 jobs this
year. In addition to layoffs for cops, fire fighters, and teachers that could devastate
our communities, these cuts will impact many of our Nation’s most vulnerable citizens including children, seniors, and the disabled. At a time when the U.S. faces
an array of national security threats, the sequester will affect our military readiness.
It is unacceptable that we are lurching from one manufactured crisis to the next,
and Americans have had enough. These fights are bad for the economy and are
making it harder for families to make ends meet.
The steep drops in consumer confidence during the fights over the debt limit and
the fiscal cliff rival the fallout after Lehman Brothers’ failure and 9/11. This has
consequences. If consumers do not spend, businesses will not prosper and hire more
workers. If businesses are not hiring, our economy will not grow. It is that simple.
We must do all we can to restore confidence in not only our financial system, but
also in our ability as a country to tackle long-term challenges in a responsible, bipartisan manner. In addition to Congress acting on a deficit reduction plan that is
balanced and promotes job creation, there are things this Committee can do to help
achieve these goals. From rigorous oversight, to confirming well-qualified nominees,
to reauthorizing expiring laws, to reaching consensus on the future of housing finance, there are steps this Committee can take to promote consumer confidence,
provide businesses clarity to move forward with long-term plans, and strengthen our
economic recovery.
Chairman Bernanke, I look forward to hearing your views as both the Fed and
the Congress pursue policies supporting our Nation’s economic recovery.
PREPARED STATEMENT OF BEN S. BERNANKE
CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FEBRUARY 26, 2013
Chairman Johnson, Ranking Member Crapo, and other Members of the Committee, I am pleased to present the Federal Reserve’s Semiannual Monetary Policy
Report. I will begin with a short summary of current economic conditions and then
discuss aspects of monetary and fiscal policy.
Current Economic Conditions
Since I last reported to this Committee in mid-2012, economic activity in the
United States has continued to expand at a moderate if somewhat uneven pace. In
particular, real gross domestic product (GDP) is estimated to have risen at an annual rate of about 3 percent in the third quarter but to have been essentially flat
in the fourth quarter. 1 The pause in real GDP growth last quarter does not appear
to reflect a stalling-out of the recovery. Rather, economic activity was temporarily
restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending, even as demand by U.S. households and businesses continued to expand. Available information suggests that economic growth has picked
up again this year.
Consistent with the moderate pace of economic growth, conditions in the labor
market have been improving gradually. Since July, nonfarm payroll employment
has increased by 175,000 jobs per month on average, and the unemployment rate
declined 0.3 percentage point to 7.9 percent over the same period. Cumulatively, private-sector payrolls have now grown by about 6.1 million jobs since their low point
in early 2010, and the unemployment rate has fallen a bit more than 2 percentage
points since its cyclical peak in late 2009. Despite these gains, however, the job market remains generally weak, with the unemployment rate well above its longer-run
1 Data for the fourth quarter of 2012 from the national income and product accounts reflect
the advance estimate released on January 30, 2013.
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normal level. About 4.7 million of the unemployed have been without a job for 6
months or more, and millions more would like full-time employment but are able
to find only part-time work. High unemployment has substantial costs, including not
only the hardship faced by the unemployed and their families, but also the harm
done to the vitality and productive potential of our economy as a whole. Lengthy
periods of unemployment and underemployment can erode workers’ skills and attachment to the labor force or prevent young people from gaining skills and experience in the first place—developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and earnings associated
with high unemployment also reduces Government revenues and increases spending, thereby leading to larger deficits and higher levels of debt.
The recent increase in gasoline prices, which reflects both higher crude oil prices
and wider refining margins, is hitting family budgets. However, overall inflation remains low. Over the second half of 2012, the price index for personal consumption
expenditures rose at an annual rate of 11⁄2 percent, similar to the rate of increase
in the first half of the year. Measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years. Against this backdrop, the Federal Open Market Committee (FOMC) anticipates that inflation over
the medium term likely will run at or below its 2 percent objective.
Monetary Policy
With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price
stability has required a highly accommodative monetary policy. Under normal circumstances, policy accommodation would be provided through reductions in the
FOMC’s target for the Federal funds rate—the interest rate on overnight loans between banks. However, as this rate has been close to zero since December 2008, the
Federal Reserve has had to use alternative policy tools.
These alternative tools have fallen into two categories. The first is ‘‘forward guidance’’ regarding the FOMC’s anticipated path for the Federal funds rate. Since
longer-term interest rates reflect market expectations for shorter-term rates over
time, our guidance influences longer-term rates and thus supports a stronger recovery. The formulation of this guidance has evolved over time. Between August 2011
and December 2012, the Committee used calendar dates to indicate how long it expected economic conditions to warrant exceptionally low levels for the Federal funds
rate. At its December 2012 meeting, the FOMC agreed to shift to providing more
explicit guidance on how it expects the policy rate to respond to economic developments. Specifically, the December postmeeting statement indicated that the current
exceptionally low range for the Federal funds rate ‘‘will be appropriate at least as
long as the unemployment rate remains above 61⁄2 percent, inflation between 1 and
2 years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.’’ 2 An advantage of the new formulation, relative to the
previous date-based guidance, is that it allows market participants and the public
to update their monetary policy expectations more accurately in response to new information about the economic outlook. The new guidance also serves to underscore
the Committee’s intention to maintain accommodation as long as needed to promote
a stronger economic recovery with stable prices. 3
The second type of nontraditional policy tool employed by the FOMC is large-scale
purchases of longer-term securities, which, like our forward guidance, are intended
to support economic growth by putting downward pressure on longer-term interest
rates. The Federal Reserve has engaged in several rounds of such purchases since
late 2008. Last September the FOMC announced that it would purchase agency
mortgage-backed securities at a pace of $40 billion per month, and in December the
Committee stated that, in addition, beginning in January it would purchase longer2 See, Board of Governors of the Federal Reserve System (2012), ‘‘Federal Reserve Issues
FOMC Statement’’, press release, December 12, www.federalreserve.gov/newsevents/press/monetary/20121212a.htm.
3 The numerical values for unemployment and inflation included in the guidance are thresholds, not triggers; that is, depending on economic circumstances at the time, the Committee may
judge that it is not appropriate to begin raising its target for the Federal funds rate as soon
as one or both of the thresholds is reached. The 61⁄2 percent threshold for the unemployment
rate should not be interpreted as the Committee’s longer-term objective for unemployment; because monetary policy affects the economy with a lag, the first increase in the target for the
funds rate will likely have to occur when the unemployment rate is still above its longer-run
normal level. Likewise, the Committee has not altered its longer-run goal for inflation of 2 percent, and it neither seeks nor expects a persistent increase in inflation above that target.
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term Treasury securities at an initial pace of $45 billion per month. 4 These additional purchases of longer-term Treasury securities replace the purchases we were
conducting under our now-completed maturity extension program, which lengthened
the maturity of our securities portfolio without increasing its size. The FOMC has
indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.
The Committee also stated that in determining the size, pace, and composition of
its asset purchases, it will take appropriate account of their likely efficacy and costs.
In other words, as with all of its policy decisions, the Committee continues to assess
its program of asset purchases within a cost-benefit framework. In the current economic environment, the benefits of asset purchases, and of policy accommodation
more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC’s 2 percent objective. Notably,
keeping longer-term interest rates low has helped spark recovery in the housing
market and led to increased sales and production of automobiles and other durable
goods. By raising employment and household wealth—for example, through higher
home prices—these developments have in turn supported consumer sentiment and
spending.
Highly accommodative monetary policy also has several potential costs and risks,
which the Committee is monitoring closely. For example, if further expansion of the
Federal Reserve’s balance sheet were to undermine public confidence in our ability
to exit smoothly from our accommodative policies at the appropriate time, inflation
expectations could rise, putting the FOMC’s price-stability objective at risk. However, the Committee remains confident that it has the tools necessary to tighten
monetary policy when the time comes to do so. As I noted, inflation is currently subdued, and inflation expectations appear well anchored; neither the FOMC nor private forecasters are projecting the development of significant inflation pressures.
Another potential cost that the Committee takes very seriously is the possibility
that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may
‘‘reach for yield’’ by taking on more credit risk, duration risk, or leverage. On the
other hand, some risk-taking—such as when an entrepreneur takes out a loan to
start a new business or an existing firm expands capacity—is a necessary element
of a healthy economic recovery. Moreover, although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they
also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longerterm funding, and by reducing debt service costs for households and businesses. In
any case, the Federal Reserve is responding actively to financial stability concerns
through substantially expanded monitoring of emerging risks in the financial system, an approach to the supervision of financial firms that takes a more systemic
perspective, and the ongoing implementation of reforms to make the financial system more transparent and resilient. Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments
is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation. 5
Another aspect of the Federal Reserve’s policies that has been discussed is their
implications for the Federal budget. The Federal Reserve earns substantial interest
on the assets it holds in its portfolio, and, other than the amount needed to fund
our cost of operations, all net income is remitted to the Treasury. With the expansion of the Federal Reserve’s balance sheet, yearly remittances have roughly tripled
in recent years, with payments to the Treasury totaling approximately $290 billion
between 2009 and 2012. 6 However, if the economy continues to strengthen, as we
anticipate, and policy accommodation is accordingly reduced, these remittances
would likely decline in coming years. Federal Reserve analysis shows that remittances to the Treasury could be quite low for a time in some scenarios, particularly
4 See, Board of Governors of the Federal Reserve System (2012), ‘‘Federal Reserve Issues
FOMC Statement’’, press release, September 13, www.federalreserve.gov/newsevents/press/monetary/20120913a.htm; and Board of Governors, ‘‘FOMC Statement’’, December 12, in n. 2.
5 The Federal Reserve is also monitoring financial markets to ensure that asset purchases do
not impair their functioning.
6 See, Board of Governors of the Federal Reserve System (2013), ‘‘Reserve Bank Income and
Expense Data and Transfers to the Treasury for 2012’’, press release, January 10,
www.federalreserve.gov/newsevents/press/other/20130110a.htm.
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if interest rates were to rise quickly. 7 However, even in such scenarios, it is highly
likely that average annual remittances over the period affected by the Federal Reserve’s purchases will remain higher than the precrisis norm, perhaps substantially
so. Moreover, to the extent that monetary policy promotes growth and job creation,
the resulting reduction in the Federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.
Thoughts on Fiscal Policy
Although monetary policy is working to promote a more robust recovery, it cannot
carry the entire burden of ensuring a speedier return to economic health. The economy’s performance both over the near term and in the longer run will depend importantly on the course of fiscal policy. The challenge for the Congress and the Administration is to put the Federal budget on a sustainable long-run path that promotes
economic growth and stability without unnecessarily impeding the current recovery.
Significant progress has been made recently toward reducing the Federal budget
deficit over the next few years. The projections released earlier this month by the
Congressional Budget Office (CBO) indicate that, under current law, the Federal
deficit will narrow from 7 percent of GDP last year to 21⁄2 percent in fiscal year
2015. 8 As a result, the Federal debt held by the public (including that held by the
Federal Reserve) is projected to remain roughly 75 percent of GDP through much
of the current decade.
However, a substantial portion of the recent progress in lowering the deficit has
been concentrated in near-term budget changes, which, taken together, could create
a significant headwind for the economic recovery. The CBO estimates that deficitreduction policies in current law will slow the pace of real GDP growth by about
11⁄2 percentage points this year, relative to what it would have been otherwise. A
significant portion of this effect is related to the automatic spending sequestration
that is scheduled to begin on March 1, which, according to the CBO’s estimates, will
contribute about 0.6 percentage point to the fiscal drag on economic growth this
year. Given the still-moderate underlying pace of economic growth, this additional
near-term burden on the recovery is significant. Moreover, besides having adverse
effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.
At the same time, and despite progress in reducing near-term budget deficits, the
difficult process of addressing longer-term fiscal imbalances has only begun. Indeed,
the CBO projects that the Federal deficit and debt as a percentage of GDP will
begin rising again in the latter part of this decade, reflecting in large part the aging
of the population and fast-rising health care costs. To promote economic growth in
the longer term, and to preserve economic and financial stability, fiscal policy makers will have to put the Federal budget on a sustainable long-run path that first
stabilizes the ratio of Federal debt to GDP and, given the current elevated level of
debt, eventually places that ratio on a downward trajectory. Between 1960 and the
onset of the financial crisis, Federal debt averaged less than 40 percent of GDP.
This relatively low level of debt provided the Nation much-needed flexibility to meet
the economic challenges of the past few years. Replenishing this fiscal capacity will
give future Congresses and Administrations greater scope to deal with unforeseen
events.
To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by
the sequestration with policies that reduce the Federal deficit more gradually in the
near term but more substantially in the longer run. Such an approach could lessen
the near-term fiscal headwinds facing the recovery while more effectively addressing
the longer-term imbalances in the Federal budget.
The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policy
makers should not lose sight of the need for Federal tax and spending policies that
increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide
necessary and productive public infrastructure. Although economic growth alone
cannot eliminate Federal budget imbalances, in either the short or longer term, a
more rapidly expanding economic pie will ease the difficult choices we face.
7 See, Carpenter, Seth B., Jane E. Ihrig, Elizabeth C. Klee, Daniel W. Quinn, and Alexander
H. Boote (2013), ‘‘The Federal Reserve’s Balance Sheet and Earnings: A Primer and Projections’’,
Finance and Economics Discussion Series 2013-01 (Washington: Federal Reserve Board, January), available at http://www.federalreserve.gov/pubs/feds/2013/201301/201301pap.pdf.
8 See, Congressional Budget Office (2013), ‘‘The Budget and Economic Outlook: Fiscal Years
2013 to 2023’’ (Washington: CBO, February), available at www.cbo.gov/publication/43907.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM BEN S. BERNANKE
Q.1. The United Kingdom has had a Financial Transactions Tax
(FTT), in the form of stamp duty on stock purchases, for more than
300 years. It does not seem to have hindered London’s financial development. And now 11 European countries are about to impose a
new FTT of 10 basis points on trading. They say it will discourage
certain kinds of quick in-and-out transactions that benefit traders
but not investors—and pull in about $41B in revenue. Today, there
is widespread belief in this country that a lot of trading activity is
unproductive, and we also have a serious deficit problem. My colleague Senator Tom Harkin has a bill for a FTT that would be 3
basis points and that the Joint Tax Committee has scored at $350
billion in revenue.
Do you think that this tax would succeed at raising revenue
while making our stock markets less about flash trading and more
about real value investing?
A.1. Existing studies present mixed evidence on the net effect of
FTTs on revenues. A 2011 European Commission working paper
presents evidence that, despite a relatively low tax rate, the U.K.
stamp duty has generated substantial revenue over the last decade.
However, a different academic study found that when Sweden implemented an FTT in the 1980s, the country experienced a net loss
in revenue as investors, in an effort to avoid the tax, moved trades
offshore.
While an FTT likely would discourage high frequency trading in
financial markets that are subject to the tax, studies of the effect
of FTTs on asset market price volatility show mixed results. One
study by staff at the International Monetary Fund found that FTTs
are associated with an increase in volatility, possibly resulting from
lower trading volume and reduced liquidity caused by FTTs. Another study of the U.K. stamp tax found no significant effect of the
tax on the volatility of U.K. equity prices, though intermediaries
like broker-dealers are exempt from the U.K. stamp duty (but
would not be under the European FTT). A study by Federal Reserve staff of the 2010 U.S. ‘‘flash crash,’’ a day in which U.S. equity markets exhibited extremely high volatility, found that although high frequency trading did not cause or prevent the ‘‘flash
crash,’’ it did exacerbate volatility on that day. 1
Further considerations of the FTT may include its impact on
market efficiency, security valuation, and the cost of capital for corporations. Some academic studies have suggested that if FTTs result in reduced trading volume and diminished market liquidity,
then they may hamper the price discovery process in financial markets, so that asset prices are less able to quickly reflect changes in
economic and financial market conditions. Other studies have
found that the implementation of FTTs is associated with lower equity prices, and thus higher costs of capital for domestic firms,
which may discourage investment.
1 Kirilenko, Andrei A., Kyle, Albert S., Samadi, Mehrdad, and Tuzun, Tugkan, ‘‘The Flash
Crash’’, The Impact of High Frequency Trading on an Electronic Market (May 26, 2011). Available at SSNR: http://ssrn.com/abstract=1686004 or http://dx.doi.org/10.2139/ssrn.1686004.
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Q.2. What do you think the impact will be on the markets of the
FTT taking affect across Europe?
A.2. The impact is very difficult to assess at this stage. The FTT
proposal is still at a relatively early stage, with many important
details yet to be determined, and the details matter to its impact.
Moreover, as noted previously, existing evidence about the impact
of FTTs is inconclusive.
As with any tax, market participants will try to avoid it, and in
the case of trading may try to do so by locating their trading activity elsewhere in the world. Their ability and willingness to do so
is likely to depend greatly on the details of the tax and on the details of transaction taxes in other jurisdictions. At the margin,
trading activity is likely to migrate to jurisdictions without such
taxes, especially in the case of over-the-counter trading that does
not require an exchange.
Q.3. It has been exactly a century since Congress designed the Fed
structure that is still to a large extent in place today, and a lot of
people might be surprised to know that bankers get to select the
Class A and Class B boards of directors of the regional Federal Reserve banks. That means, of course, that oftentimes they select
themselves. So, for example, when the New York Federal Reserve
Bank played a central role in the 2008 bank bailouts, it had big
bank CEOs on its boards at that time. There are real advantages
of Federal Reserve officials consulting with banks to understand
what is going on, but, at the same time, a lot of people worry about
the influence the biggest banks have on our Government.
Do you think it still makes sense for bank executives to be able
to select Class A and Class B directors at the regional Feds?
A.3. Congress designed the structure of the Federal Reserve System to give it a broad perspective on the economy and on economic
activity in all parts of the Nation and to provide the Reserve
Banks, as the operational arms of the central bank, with banking
experience on their boards of directors. The public–private structure of a Government agency composed of presidentially appointed
and Senate-confirmed members that oversee 12 banks with stock
ownership and some directors chosen by member banks also allowed Congress to fund the Federal Reserve System with capital
paid-in by member banks rather than the taxpayer. Congress chose
also to include a two-thirds majority of representatives of other
parts of the economy, including representatives from agriculture,
commerce, industry, services, labor, and consumers, including three
nonbankers chosen by the Board of Governors.
The Federal Reserve recognizes the potential conflicts of interest
that could arise from the statutory requirement that the boards of
directors of Reserve Banks be comprised of the presence of bankers
and other private citizens. As a result, the Federal Reserve has
long had policies in place that prevent members of the Reserve
Bank boards of directors (from any class of directors) from participating in any lending decisions involving the discount window or
an emergency credit facility, having access to confidential supervisory information, or participating in setting regulatory or supervisory policies.
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The GAO, in its Report No. 12-18 regarding Federal Reserve
Bank governance, confirmed that the Federal Reserve has policies
in place that are effective in addressing these conflicts of interest.
The GAO also noted in that report that, in choosing Class C directors, the Federal Reserve Board makes it a priority to encourage
selection of directors that represent broad and diverse perspectives.
Q.4. What would be the advantages and disadvantages of Congress
taking action to make the regional Fed boards more independent
of the bankers they regulate?
A.4. As explained above, the Federal Reserve has taken important
steps to ensure that the boards of directors of Reserve Banks are
not involved in supervision or regulation of banking entities. Moreover, Congress in the Dodd-Frank Act reinforced these policies by
eliminating the role of Class A directors in the selection of the Reserve Bank presidents. The GAO recognized that the Federal Reserve Board and Reserve Banks have been sensitive to avoid both
potential and perceived conflicts of interest associated with a statutorily mandated governance structure that includes bankers on the
boards of Reserve Banks. For example, the report confirmed that
Reserve Bank directors are not involved in supervision and regulation activities, such as examinations and enforcement actions. The
GAO also confirmed that Reserve Bank directors took no part in
approving loans extended to banks through the discount window or
other emergency liquidity facilities, and that institutions with representatives on Reserve Bank boards were not given special treatment at the discount window or at emergency liquidity facilities.
The Federal Reserve Board believes that representation on Reserve Bank boards of directors by local bankers, as well as participants in other aspects of the real economy helps provide a broad
perspective on the economy in various Reserve Bank districts. Reducing this avenue of information would weaken that insight without providing any significant advantage to Federal Reserve supervision or regulation of banks.
Q.5. In the wake of Canning v. NLRB, some commentators have
questioned whether CFPB Director Rich Cordray’s recess appointment in 2011 was a valid use of the President’s executive powers.
While there is abundant evidence that Director Cordray’s appointment was valid and that assertions to the contrary are based on
flawed legal reasoning, the ongoing assault on the President’s attempts to nominate a Director to the CFPB has nonetheless created
additional anxiety in the marketplace. In particular, some commentators have argued that, if the Director’s recess appointment
was invalid, then the CFPB’s recently issued mortgage rules are
also invalid, and thus various Dodd-Frank default mortgage requirements in Title IV were instead operative as of January 21,
2013. While I disagree strongly with that view, some have expressed concern that many financial institutions would be out of
compliance with the law if the Dodd-Frank rules are in fact in effect.
Can you reassure investors or others who are concerned about
mortgage issuers’ potential legal exposure from noncompliance with
the Dodd-Frank automatic rules that the risks are not sufficient to
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pose a safety and soundness threat to individual banks or systemic
threat to the economy?
A.5. We expect banking organizations and other entities that are
subject to oversight by the prudential regulators to assess the legal
and other applicable risks in connection with their mortgage lending activities and to properly manage these risks, which includes
using prudent underwriting standards. It is not clear how courts
might eventually rule in determining whether the Dodd-Frank
Act’s default effective date applies, or the potential liabilities that
might stem from any court decision.
Q.6. What do you believe is the cost to the ongoing uncertainty
about CFPB’s future?
A.6. The Federal Reserve has not conducted any qualitative or
quantitative analysis regarding the cost of any uncertainty about
the CFPB’s future and thus has no estimates as to any such cost.
Q.7. Has the Federal Reserve conducted any analysis regarding the
ongoing cost of uncertainty about CFPB’s future? If so, can you
share it with the Committee?
A.7. Please see response for [Question 6].
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
FROM BEN S. BERNANKE
Q.1. Are there any individual financial institutions whose failure
would pose a systemic risk to the United States? Are there currently any financial institutions so large or so complex that their
failure would threaten the financial stability of the United States?
If so, how do you plan to resolve this issue?
A.1. The Dodd-Frank Act contemplates three types of financial institution whose failure could potentially pose a systemic risk to the
United States. These include bank holding companies with greater
than $50 billion in assets, nonbank financial companies designated
by the Financial Stability Oversight Council (‘‘FSOC’’ or ‘‘Council’’),
and financial market utilities (FMUs) designated by the Council. In
accordance with the Dodd-Frank Act, the Federal Reserve has developed enhanced prudential standards under Section 165 and 166
to reduce the risk posed by the first two of these categories of institutions, including regular stress tests, capital requirements,
counterparty credit limits, and more. Bank holding companies with
$50 billion or greater in assets have been identified and are subject
to these standards. In addition, the Council has issued a final rule
and interpretive guidance pursuant to which the Council is considering nonbank financial companies for designation. The Council
also designated eight FMUs under its Dodd-Frank authority, and
those firms are now subject to the enhanced standards issued by
the relevant supervisory agencies, including the Federal Reserve.
As a supervisory agency, the Federal Reserve has also instituted
a merger screen that considers the financial stability implications
of mergers or acquisitions proposed by its largest firms, and, as a
member of the Basel Committee on Banking Supervision and the
Financial Stability Board, has supported additional capital requirements for firms that are found to be systemically important internationally. While these measures have not eliminated the risk
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posed by these firms, measures such as the capital requirements
and surcharges on the largest financial institutions will help to
equalize their cost of funding with other banks and make them
safer so that the risk of their failure is more limited.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS
FROM BEN S. BERNANKE
Q.1. Mr. Chairman, as you know, numerous Senators have weighed
in with the Board of Governors that, in enacting Dodd-Frank, Congress intended to utilize State-risk based capital rules governing
capital for insurance-based SLHCs. As you have heard in your recent appearances before the House Financial Services and Senate
Banking Committees, many of us remain deeply troubled by the
Federal Reserve’s insistence in applying bank-centric standards to
such companies. In particular, Senator Collins has written to you
pointing out that ‘‘it was not Congress’ intent that Federal regulators supplant prudential State-based insurance regulation with a
bank-centric capital regime.’’ In your recent appearance before the
House Financial Services Committee, however, you indicated the
Board of Governors was constrained by the Collins Amendment in
addressing the insurance-banking distinction.
Given that the statute does not preclude utilizing insurance capital standards to satisfy minimum capital requirements that are
equivalent to Basel standards, and that congressional intent is now
clear on permitting the use of such insurance standards, will the
Board continue to insist that the Collins Amendment mandates the
use of bank-centric standards for insurance-based SLHCs and
grants the Board no flexibility or discretion in this area? If so,
could you provide the legal rationale as to why the Board of Governors believes it has no such flexibility and discretion?
A.1. Section 171 of the Dodd-Frank Act, by its terms, requires the
appropriate Federal banking agencies to establish minimum capital
requirements for bank holding companies (BHCs) and savings and
loan holding companies (SLHCs) that ‘‘shall not be less than’’ ‘‘nor
quantitatively lower than’’ the generally applicable capital requirements for insured depository institutions. Section 171 does not contain an exception from these requirements for an insurance company that is a BHC or an SLHC, or for a BHC or an SLHC that
controls an insurance company.
To allow the Board an additional opportunity to consider prudent
approaches to establish capital requirements for SLHCs that engage substantially in insurance activities within the requirements
of the terms of section 171, the Board, on July 2, 2013, determined
to defer application of the new Basel III capital framework to
SLHCs with significant insurance activities (i.e., those with more
than 25 percent of their assets derived from insurance underwriting activities other than credit insurance) and to SLHCs that
are themselves state regulated insurance companies. After considering the concerns raised by commenters regarding the proposed
application of the proposed regulatory capital rules to SLHCs with
significant insurance activities, the Board concluded that it would
be appropriate to take additional time to evaluate the appropriate
capital requirements for these companies in light of their business
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models and risks. Among other issues, commenters argued that the
final capital rules should take into account insurance company liabilities and asset-liability matching practices, the risks associated
with separate accounts, the interaction of consolidated capital requirements with the capital requirements of State insurance regulators, and differences in accounting practices for banks and insurance companies. The Board is carefully considering these issues in
determining how to move forward in developing a capital framework for these SLHCs, consistent with section 171 of the DoddFrank Act.
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ADDITIONAL MATERIAL SUPPLIED
FOR THE
RECORD
LETTER OF TRANSMITTAL
BOARD OF GOVERNORS OF THE
F EDERAL R ESERVE SYSTEM
Washington, D.c., February 26, 2013
THE PRESIDENT OF THE SENATE
THE SPEAKER OF THE HOUSE OF REPRESENTATIVES
The Board of Governors is pleased to submit its Monelary Policy Report pursuant to
section 2B of the Federal Reserve Act.
Sincerely,
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CONTENTS
Summary ........... ................................................. ... .
Part 1
Recent Economic and Financial Developments .
5
Domestic Developments.
5
Financial Developments .................................................. 22
International Developments ............................................... 29
Part 2
Monetary Policy ..... ........ . .. .. .. .
. . . . . . . . . . . . . . . . . . ........... 37
Part 3
Summary of Economic Projections .
. .... 43
The Outlook for Economic Activity .........................................
The Outlook for Inflation.
. ...
Appropriate Monetary Policy ..............................................
Uncertainty and Risks. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . ...........
Abbreviations .............. ... .. .. .. .
45
47
52
53
. .......... 59
List of Boxes
The Federa l Reserve's Acti ons to Foster Financia l Stability ......... .
An Update on the European Fiscal and Banking Crisis ..
Efficacy and Costs of Large-Sca le Asset Purchases . . .. . . ...... .•
Forecast Uncerta inty .. . .. . .................. . .. . ...... . • .
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8
. .... JO
. J2
. .. . . 39
. .... 57
22613002.eps
Statement on Longer-Run Goals and Monetary Policy Strategy ........ .
Assessing Conditions in the Labor Market .
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
49
SUMMARY
Conditions in the labor market gradually
improved. Employment increased at an
average monthly pace of 175,00J in the
second half of the year, about the same as in
the first half. The unemployment rate moved
down from 8~ percent last summer to a
linle below 8 percent in January. Even so,
the unemployment rate ....-as still well above
levels observed prior to the recent recession.
Moreover, it remained the case that a large
share of the unemployed had been out of
work for more than six months, and that a
significant ponion of the employed had pantime jobs because they were unable to find fulltime employment. Meanwhile, consumer price
inflation remained subdued amid stable longterm inflation expectations and persistent slack
in labor markets. Over the second half of the
year, the price index for personal consumption
expenditures increased at an annual rate of
I\Ii percent.
During the summer and fal l, the Federal Open
Market Comminee (FOMC) judged that the
economic recovery would strengthen only
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gradually over time, as some of the factors
restraining activity- including restrictive credit
for some borrowers, continuing concerns about
the domestic and international economic
environments, and the ongoing shift to ....-ard
tighter federal fiscal policy-were thought
likely to recede only slowly. Moreover, the
Commil1ee judged that the possibility of an
escalation of the financial crisis in Europe and
uncenainty about the course of fiscal policy in
the United States posed significant downside
risks to the outlook for economic activity.
However, the Committee expected that,
with appropriate monetary accommodation,
economic growth would proceed at a moderate
pace, with the unemployment rate gradually
declining to ....-ard levels consistent with
the FOMes dual mandate of maximum
employment and price stability. Against
this backdrop, and with long-run inflation
expectations well anchored, the FOMC
projected that inflation would remain at or
below the rate consistent with the Committee's
dual mandate.
Accordingly, to promote its objectives,
the FOMC provided additional monetary
accommodation during the second half
of 2012 by both Strengthening its for ....-ard
guidance regarding the federal funds rate
and initiating additional asset purchases. In
September, the Comminee announced that
it would continue its program to extend the
average maturity of its Treasury holdings and
would begin purchasing additional agencyguaranteed mortgage-backed securities (MBS)
at a pace of $40 billion per month. The
Commil1ee also stated its intention to continue
its purchases of agency MBS, undertake
additional asset purchases, and employ
its other policy tools as appropriate until
the outlook for the labor market improves
substantially in a context of price stability. The
Commil1ee agreed that in determining tbe size,
pace, and composition of its asset purchases,
Sfmt 6621
22613003.eps
The u.s. economy continued to expand at a
moderate rate, on average, over the second half
of 2012. The housing recovery appeared 10
gain additional traction, consumer spending
rose moderately, and business investment
advanced further. Financial conditions eased
over the period but credit remained tight for
many households and businesses, and concerns
about the course of federal fiscal policy
and the ongoing European situation likely
restrained private-sector demand. In addition,
total government purchases continued to
move lower in an environment of budget
restraint, while export growth was held back
by slow foreign economic growth. All told, real
gross domestic product (GDP) is estimated
to have increased at an average annual rale
of 1Y2percent in the second half of the year,
similar to the pace in the first half.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
50
SUMW\ RY
it would, as always, take account of the likely
efficacy and costs of such purchases. The
Committee also modified its forward guidance
regarding the federal funds rate at the
September meeting, noting that exceptionally
low levels for the federal funds rate were
likely to be warranted at least through mid2015, longer than had been indicated in
previous FOMC statements. Moreover, the
Committee stated its expectation that a highly
accommodative stance of monetary policy
would remain appropriate for a considerable
time aft er the economic recovery strengthens.
In December, the Committee announced
that in addition to continuing its purchases
of agency MBS, it would purchase longerterm Treasury securities, initially at a pace
of $45 billion per month, starting after the
completion at the end of the year of its
program to extend the maturity of its Treasury
holdings. It also further modified its forward
rate guidance, replacing the earlier date-based
guidance with numerical thresholds for the
unemployment rate and projected inflation.
In particular, the Committee indicated that it
expected the exceptionally low range for the
federal funds rate would remain appropriate
at least as long as the unemployment rate
remains above 6Y2 percent, inflation between
one and two years ahead is projected 10 be
no more than Y2 percentage point above the
Committee's 2 percent longer -run goal, and
longer-term inflation expectations continue to
be ".ell anchored.
Partly in response to this additional monetary
accommodation, as ....ell as to improved
sentiment regarding the situation in Europe,
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broad financial conditions eased over the
second half of 2012. Although yields on
nominal Treasury securities rose, on net, yields
on inflation-protected Treasury securities
declined, and longer-term interest rates
paid by households and firms generally fel l.
Yields on agency MBS and investment- and
speculative-grade corporate bonds touched
record lows, and broad equity price indexes
rose. Conditions in short-term dollar funding
markets eased over the summer and remained
stable thereafter, and market sentiment tovo>ard
the banking industry improved. Nonetheless,
credit remained tight for borrowers with lower
credit scores, and borrowing conditions for
small businesses continued to improve more
gradually than for large firms.
At the time of the most recent FOMC
meeting in January, Committee panicipants
S3\\' the economic outlook as little changed
or modestly improved from the time of their
December meeting, when the most recent
Summary of Economic Projections (SEP) was
compiled. (The December SEP is included as
Part 3 of this reporL) Participants generally
judged that strains in global financial markets
had eased somewhat, and that the downside
risks to the economic outlook had lessened.
Under the assumption of appropriate
monetary policy- that is, policy consistem
with the Comminee's Statemem on LongerRun Goals and Monetary Policy Strategy
(see box)- FOMC participants expected the
economy to expand at a moderate pace, with
the unemployment rate gradually declining
and inflation remaining at or below the
Committee's 2 percem longer-run goal.
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2
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
51
MONETARY POLICY R[PORT: FEBRUARY 2013
3
Statement on Longer-Run Goals and Monetary Policy Strategy
As amended effective on January 29, 2013
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The maximum level of errployment is largely
deternined by nonmonetary factors that affect the
structure and dynamics of the laoor market. These
factors may cha nge over time and may not be
directly measurable. Consequentl y, it would not be
appropriate to specify a fixed goal for errployment;
rather, the Corrmittee's policy decisions rTI.Ist be
informed by assessments of the maximum level of
employment, recognizing that such assessments are
necessarily uncertain and subject to revision. The
Committee considers a wide range of indicators
in making these assessments. Information about
Committee participants' estimates of the longer-run
normal rates of output )y'(1.vth and unemployment is
published four times per year in the FOMC's Summary
of Economic Projections. For example, in the most
recent projections, fOMC participants' e;timates of the
longer-run normal rate of unemployment had a central
tendency 01 5.2 percent to 6.0 percent, unchanged
from one yea r ago but substantia lly higher than the
corresponding inter.'al sel'eral years earlier.
In setting monetary policy, the Committee seeks
to mitigate deviatiorJS of inflation from its longerrun goal and deviations of empjoyment from the
Committee's assessments of its maximum level. These
objectives are generally complementary. However,
under circumstances in which the Committee judges
that the obj€O:til'eS are not complementa ry, it fol lows
a balanced approach in promoting them, taking
into account the magnitude c4 the deviations and
the potentially different tim: horizons over which
employment and inflation are projected to return to
levels judged consistent with its mandate.
The Conrnittee intends to reaffirm these principles
and to make adjustments as appropriate at its annual
organizational meeting each January.
Sfmt 6621
22613005.eps
The Federal Open Market Committee (FOMC)
is firmly committed to fulfilling its statutory
mandate from the Congress of promoting maximum
employment, stable prices, and moderate long-term
intere5t rate;. The Comnittee seeks to explain its
monetary policy decisions to the public as clearly
as possible. Such clarity faci litates well-informed
decisionmaking by households and busine;ses,
reduces €O:ononic and financial uncertainty, increases
the effectiveness 01 monetary policy, and enhance;
transparency and accountability, which are essential in
a democratic society.
Inflation, employment, and long-term interest
rates fluctuate over time in response to economic and
financial disturbances. Moroover, monetary policy
actions tend to influence economic activity and prices
with a lag. Therefore, the ComniUee's p:lIicy decisions
reflect its longer-run goals, its medium-term outlook,
and its assessments of the balance of risks, including
risks to the financial system that could impede the
attainment of the Committee's goals.
The inflation rate over the longer run is primarily
deternined by monetary policy, and hence the
Committee has the ability to specify a longer-run
goal for inflation. The Committee judges that inflation
at the rate of 2 percent, as measured by the annual
change in the price index for personal consurrption
expenditures, is most consistent over the longer
run with the Federal Reserve's statutory mandate.
Communicating this inflation goal clearly to the
public helps keep longer-term inflation expectations
firmy anchored, thereby fostering price stability
and moderate long-term interest rates and enhancing
the Committee's ability to promote maximum
employment in the face of significant economic
disturbances.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
52
5
PART
1
RECENT ECONOMIC AND FINANCIAL DEVElOPMENTS
Real gross domestic product (COP) increased at a moderate annual rate of I V2 percent, on average,
in the second half of 20 12 -similar to the rale of increase in the first half-as various headwinds
continued 10 restrain grolVth. Financial conditions eased over the second half in response to the
additional monetary accommodation provided by the Federal Open Markel Committee (FOMe)
and to improved sentiment regarding the crisis in Europe. However, credit availability remained light
for many households and businesses. In addition, declines in real government purchases continued
/0 weigh on economic activity, as did household and business concerns aboullhe economic
outlook, while \veak foreign demand restrained exports. In/his environment, conditions in the labor
market continued 10 improve gradually but remained \veak. At a little under 8 percent in January,
the unemployment rale was still lvell above levels prevailing prior to the recent recession. Inflation
remained subdued at the end of last year, Ivith consumer prices rising at about a 1V2 percent annual
rate in the second half, and measures of longer-run inflation expectations remained in the narrow
ranges seen over the past several years
Domestic Developments
GOP increased moderately but continued
to be restrained by various headwinds
Real GOP is estimated to have increased
at an annual rate of 3 percent in the third
quarter but to have been essentially flat in the
fourth, as economic activity was temporarily
restrained by weather-related disruptions and
declines in some erratic categories of spending,
including inventory investmem and federal
defense spending. l On average, real GOP
expanded at an annual rate of 1Y2 percent in
the second half of 2012, similar to the pace of
increase in the first half of the year (figure 1).
The housing recovery gained additional
traction, consumer spending continued to
increase moderately, and business iIwestment
rose further. Hov."f\"er, a severe drought
in much of the country held down farm
production, and disruptions from Hurricane
Sandy also likely held back economic activity
somewhat in the fourth quarter. More
fundamentally, some of the same factors
that restrained grov.'1h in the first half of last
year likely continued to weigh on activity.
Although financial conditions continued to
OIange in rcal gross dOOlestic product, 2006-12
-II
11
200Ii
1001
"'
I
200&
I ilir;
-,
11
2009
2010
2011
21112
....
NOll: Hm on<l in subseque::l flglJmo, =<pt . no:ed, chc:g, for . g;'e::
""':00 i,,,,,,..,,,..,;! to ... f,::oI gUM« Ihn th, ft:al <rartor ofth'JI",,,,rli:lc
SoolcE DopIrtmec.lofCcm......c' ,BurnuofEc.,.""" Acaly>i~
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Sfmt 6621
22613006.eps
I. Data for the fourth quarter of 2012 from the
national income and product acoowl ts reflect the ad\'ance
estimate released on January 30, 20 13.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
53
PART 1: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
2. Net change in pa}roll employment, 2006-13
- ~
-
,.,
,.,
- ""
- oro
- ..,
-
1 I
I
I
I
I
I
I
I
I I
lOO6 W07 :!llO> ltlO9 2010 ))11 2012 2013
NO'll: 111< data ... . thffl,·"""lth movi::g t m1ll\" t:JI ,rt<:>i tlwugh
)0'"1>1),2013
Soula: Deparunetil. ofLcb<r, Bure", ofLebor SlItisti".
1 Civilian l.lI1employment rate, 1979-2013
--------------------------~~~
-n
11 11 1111" 11"111" 1111 11 111 11" 11111 I
1~1
1989
1997
;!OOS
2013
NO'll; 11I<dalaottm<r:lhIy .. dall!ndthroughJan""Y2013
Soula: Depan:ncl ofLtbor, Bureau ofLcb<r Stati01ic •.
4. Loog·tenn Ullemployed, 1979-21)13
____________________________-".d
- ~
- w
1 "1]1"11 " 11"1 11111]1 " 11"1]1 " "
19&1
19&9
t997
200S
1
201l
NO'll: 111< data ott lDOllthly m! e=d1lJrou&!l )""UL"y 20tl. 11I<..no.
sl:0WlI i. th. ~. of total ~Ioyed pe:'SOllO who have b=.
~loyoclf<r27w ..""''''''
SoottE Dqlartmtn1 ofLebor, Bureou O(LIbor Sail1;""
VerDate Nov 24 2008
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improve overall, the financial system has not
fully recovered from the financial crisis, and
banks remained cautious in their lending to
many housebolds and businesses. In particular,
restricted financing for home mongages
and new-home construction projects, along
with the depressing effects on bousing
demand of an uncenain outlook for bouse
prices and jobs, kept the level of activity in
the housing sector well below longer-run
norms. Budgetary pressures at all levels of
government also continued to ..veigh on GDP
growth. Moreover, businesses and households
remained C{)ncerned about many aspects of
the economic environment, including the
uncertain course of u.s. fiscal policy al the
turn of the year as well as the still-worrisome
European situation and the slow recovery
more generally.
The labor market improved somewhat,
but the unemployment rate remained
high
In this economic environment, firms increased
their workforces moderately. Over the second
half of last year, nonfarm payroll employment
rose an average of about 175,0IXl per month,
similar to the average increase in the first
half (figure 2). These job gains helped lo....-er
the unemployment rate from 8.2 percent in
the second quaner of last year to 7.9 percent
in January (figure 3). Nen:rtheless, the
unemployment rate remained much higher
than it was prior to the recent recession,
and long-term unemployment continued to
be widespread. In the fourth quarter, about
40 percent of the unemployed had been out
of work for more than six months (figure 4).
Moreover, the proportion of workers
employed part time because they were unable
to find full-t ime work remained elevated. Some
of the increase in the unemploymem rate since
the beginning of the recem recession could
reflect structural changes in the labor marketsuch as a greater mismatch bet ....-een the types
of jobs that are open and the skills of workers
available to fill them- that would reduce the
maximum sustainable level of employment.
Ho....-e'·er, most of the economic analysis
Sfmt 6621
22613007.eps
6
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
54
MONfTARY POLICY REPORT: FEBRUARY 2(lt3
7
on this subject suggests that the bulk of the
increase in unemployment probably reflects a
deficiency in labor demand. l As a result, the
unemployment rate likely remains well above
levels consistent .....ith maximum sustainable
employment.
Restrained by the ongoing v.eak conditions
in the labor market, labor compensation
has increased slowly. The employment COSt
index for private industry workers, which
encompasses both wages and the cost 10
employers of providing benefits, increased
only 2 percent over the 12 months of 20 12,
similar to the rate of gain since 2010 (figure 5).
Simi larly, nominal compensation per hour
in the nonfarm business sector~a measure
deri\'ed from the labor compensation data in
the national income and product accounts
(N IPA)~increased 2Y:z percent over the four
quarters of 2012, well below average increases
2. See, for example, Mary C. Daly, Bart Hobijn,
Ay~giil $ahin, and Robert G. Vallet ta (2012), "A
Search and Matching Approach to Labor Market;;:
Did the Natural Rate of Unemployment Rise?» ]Oiuna!
of Economic PerspeCfi~es, \"01. 26 (Swllmer), pp. 3- 26;
Michael W. L. E1;by, Bart Hobijn, A}"~giil $allin, and
Robert G. Valletta (2011), "The Laoor Market in the
Great Recession-An Update to September 2011,"
Brookings Papers on Economic AClirilY, Fall, pp. 353-71;
alld Jesse Rothstein (2012), "The Labor Market Four
Yearn into the Crisis: Assessing Structural Explanatioos,»
lLRReriew, \"01. 65 (July), pp. 467- 500.
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14:21 Aug 30, 2013
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5. Mmures of change ill hourly compensation,
2002- 12
-,
-,
II
I
2002
1
I
2001
1
2006
I
I
21m
2010
I
I
1
2012
NOli: The ,",to..,.. quomty o:xI o;tc<I<llhrou¢ 2012:~. r", """"","
IrJ.in... ~clw>t.i.OVf!tfourqotttm;f",!he"",O>ymem«>JI.
index (ECI), ".,.. i. w ... !he 12 months <n<!q ill the IasI mooth o{ ....h
,.:.o:ter. n-xfarn. ~ ~"",Ia! .. tom.., 11lV'm.....m, """""f~
imtil:llions, wi """,,,hol.U. The ot.cto< ~ by 11:. EO u...:! W II th,
II<InWm Ir.am... O«torplus :lO::.p:of~ i::aitulions.
Some<: o.p..-tment o{lJOOr, B1lUII.u o{lJOOr stotistil"S
n,
Sfmt 6621
22613008.eps
As described in the box "Assessing Conditions
in the Labor Market," the unemployment
rate appears to be a very good indicator of
labor market conditions. That said, other
indicators also provide important perspectives
on the healt h of the labor market, and the
most accurate assessment of labor market
conditions can be obtained by combining the
signals from many such indicators. Aside from
the decline in the unemployment rate, probably
the most important other pieces of evidence
corroborating the gradual improvement in
labor market conditions over the second half
of last year were the gains in nonfarm payrolls
noted earlier and the slight net reduction in
initial claims for unemployment insurance.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
55
8
PART 1: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
Assessing Conditions in the Labor Market
No single statistic can prol'ide a complete picture
of a labor market as large and diverse as that in
the United States. The evidence suggests that the
unemployment rate is probably the most useful
single summary indicator of labor market conditions.
However, other indicators, prominently including but
not limited to nonfarm payroll employment, provide
imjXIrtant additional infOfmation.
The unemployment rate is intended to measure
the extent of the most obvious, and arguabl y the
most important, problem in a slack labor market: the
inability of some people who are looking for work to
find acceptable jobs. The unemployment rate is also
well correlated with, and representative of, a broad set
of labor market indicators that portray many aspects
of the job market. This relationship is demonstrated
in iigure A, which plots the detrended unemployment
rate along with the first principal component from
a lactor rrodel of labor market indicators described
in a paper by Barnes and others.' In addition, other
research suggests that the unemployment rate is
1. The first prirocipal COfIlIO!leru is a sUlllllilry ~tistic
that captures thecommon llDI'emellt among a IIl rie!y of
ind icators. See Michelle Sa,r.es, Ryan Chahrour, GiOI\lnni
Olivei, and Gaoyan Tang(2007), "A Priocipal ConpHlents
Aw'OiIrn w Estimating Lalxx Market Pressure and Its
Illl'lications 100Inllation," Public Policy Briefs 07-2 (Boston:
fedf'lal Res<>I\'E' Bank of Boston, Decerrber), www.bostooled.
orglecorromiclprbnOO7Ippb071.pdf
generally a reliable indicator of the overall state 01 the
businesscycle. 2
Of course, the unefllJloyment rate does not, by
itself, provide a cOfllJlete and full y accurate portrait
of labor market conditions. As with most iro:!icators,
the unemployrrent rate is subject to sampling and
other measurement errors, so month-to-month
movements should be interpreted with some caution.
Even over longer periods, the unefllJloyment rate
may not always characterize the situation in the labor
market altogether accurately. for example, if many
unemplo)'ed indil'iduals cease looking for work (aro:!
so are no longer counted as unemployed) because
they have become discouraged about their job
prospects, the measured unemployment rate could
decline even if the del1l3nd for labor has not improved.
Also, the unemployment rate may not always move
in step with other types of underemployment, such as
2. fOf two ex3lll'les, seeCharlesA. fleischrn.lo aod
John M. Roberts (2011), "From Many Series, One Cycle:
Illl'rOYE'd E,timatl>S 01 the Business Cycle lrom a Muttivariate
Uocbserved COI"JllOnent5 Model: fil\.loceand Ecooomics
Discussion Series 2011-46 (Washi ng\l)n: Boord of
Governors 01 the federal ReserVE' S)'51enl, October), WWW.
ledf'lal reserve.govlpoos/ledsI20 l1f2011461201146pap,
jldf; and Jf'lenl)' J. Nalewaik (2011 ), "Fore.-;asting Recessioos
Using Stall Speeds: Finanre and Economics Diso,J!O,ioo
Series 2011-24 (Washingwn: Boord of Govf'lrlOlS oftne
fedf'lal Res<>I\'E'Systt>m. April), www.federalres<>l\'E'.govl\JlbsI
fooj/2011 n OI1241201124pap.pd!.
A. Detrended unemploymwl rate and principal component, 1%7-2012
-
1
-
,
-
,
-1
,.,
'm
""
""
'"'
""
,.,
,00>
2012
N<m: The ~d tar. i::dra porio<l:l- ofbulil:rll- ="-I»n .. "'fi...,d b)' 0):, Notional BuJ"u of&<l:tllO".io R"",,,,cll
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00059
Fmt 6621
Sfmt 6621
22613009.eps
Sooo.a; : r,dmt~,Bcl.{_'T1ff
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
56
MONfTARY POliCY REPORT: FEBRUARY Xlt3
persons working part time because they cannot find
full-time jobs. For this reason, broader measures of
labor underulilization, such as the Bureau of labor
Statistics' (BlS) U-4, U-S, and U-6 rates, can be usefu l
supplements to the standard unemployment rate. These
measures include the number of discouraged workers
and part· time workers who are unable to find a fu ll·
time job, and they are derived from the same survey
of households as is the offICial unel"lllloyment rate
(figure B).
Other than the unemployment rate, payroll
employment as measured in the BlS survey of
establishments may be the most uselullabor market
indicator. A decline in the unemployment rate that
is accompanied by a roughly prOfXlrtionate increase
in payroll employment is rll:)re likely to truly rellect
improvement in the labor market. Of course, payroll
employment is also an impenect measure, and on
some occasions the initial esti mates of payrolls have
been revised to show a substantial ly different picture
than they originally did. Therefore, it can be usefu l to
also look at a I\.uiety 01 other labor market indicators.
These indicators may be less brood·based than either
the unemployment rate or payroll employment,
but--<;olloctil'ely-they may reduce the uncertai nty
surrounding the message from the primary measures
9
and provide information about some specifiC aspects
01 the labor ma rket.
One set of useful supplementary indicators consists
01 measu res of job losses and hiring. These measures
describe the large gross flows of workers in and out of
employment that underlie the net changes reflected
in the unemployment rate and payroll employment.
For exal"lllle, the improvements in the employment
situation thus far during the current recovery have
been driven fOOre by reductions in job losses than
by increases in hiring. Asecond set d indicators, the
rate of job vacancies and measures 01 firms' hiring
plans, may be informatil'e about the susta inability
01 any increase in hiring. Quit rates, a thi rd set, are
useful because workers hal'e, historically, been much
more likely to quit their jobs when they perceive or
anticipate a strong labor market. In add ition, surveys of
consumers and businesses provide information about
the perceptions d a large number of individuals about
labor market conditions. As with the unemployment
rate and payroll employment, these other indicators
have, lor the most part, improved considerably dur ing
the economic recovery but remain substantially
weaker than would normal ly be associated with a
healthy labor market.
B, Measures of labor underutilization, 2001-13
-p~----------~--,---------~Uoli
_
16
- "
-
10
,.,
,-tl
'""
'""
;00;
"'"
l
I
W"
I
2011
Non: n., <1m"" """'f:Jy lD:!.,,,,,,:d t!noot:I>lamary 201; . U-4 """'C:."LOt2lIl."""'ipioytd P~_>l:M _Urt, "'JI'fC"'l oflh, I...,.. forr t ~
dl<coor>f:'d "",!k<o:~ IliscooIagtd wo!kat ~""I rurrtlIll)' Iootiog for work btOSlllt th'Y btIi... no jobs .:. avail"''' f,.. thm:. u·s mu"" .. l<UJ
1llltlIIpI000M pm.u margin>tl)' .ttclod \0 W
f,..ct ... 'J'fIol1ll ofcbt Iabo, fot<t pm pm<Il' m.a:gina1ly wobtd ", tho labor (orr .. ~.atl)' .ttclM
work ... ", •• 01 " the labor forte. w."tlD:! or, ..... ibbIo {or"",!k. lD:! ha.... ~ fo:.job m m. p."IOf 12 mo:nIII. Uoli
\ollt unempIoytdpb aU
marg .... Uy OIlIclxd w",km p~ 1O:a1 ...,p!oyM pa:1 ti"... fo: <C«I"",k ,..oorl~ " . J'fI=t of lobo: 10"" ph,. all ....."'P»Uy Ol""btd wO!\;m. n., L':ad<d In:<
icdi<n perio<lI 01"""''',<$$ =miOll .. dmO<'d bylhe N";OIlat aw.,., ofEwnotnr Rts..,ch
t...,..
o:e>sWe'
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00060
Fmt 6621
Sfmt 6621
22613010.eps
~ ~,ofl.aM:.BIttl'.,ofL>borSta:ii!iot.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
57
10
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
of close 10 4 percent in the years prior to the
recent recession. As a result of these modest
gains, nominal compensation has increased
only about as fast as consumer prices over the
recovery.
Inflation remained low . ..
Change in the chain-type: price index for pc:rsonal
cons\DllptiOil expenditures, 2006- 12
________________________cc
'-'
-1
-1
,
-
,
I
I
I
2001
200Ii
1008
2009
1010
1011
lj)11
NOli: The elm.,.. """,thtymi exIeod th:"uahDmmber lOt!; cha:ig..
.,.. fro"""' YW""~'"
Soo1c!:: Dtportmtnl ofCOJll:Ilmt, SurtauofEcona:n", Analysi~
7.
As noted, gains in labor compensation have
a.ange inQ\l1pl~perho\lr,'9_l.8__2012
-
I
t94S-
73
I
1974_
95
I
19096-
2000
I
I
200t _ 2008
07
I
I
2010
I
.
-
1
-
1
-
,
-
,
I
2012
Ncm N<mfama bu>io ..... _. Chor.g. for each multiyear pniod i.
"...,.=1 to the fou:lh qua:tcT of th. fmat )_ o,the pciod from the ,o::nh
qUtrttr of th, yw i:n..... dia ..1y
t/:.pniod.
SoolC]t o.par.- «Labor, Burt"" ofLabot sw istil'S
"""ediq
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
been subdued given the weak conditions in
labor markets, and unit labor costs-which
measure the extent to which compensation
rises in excess of productivity- have increased
very little over the recovery. That said,
compensation per hour rose more rapidly
last year, and productivity gro\\'th, which
has averaged IYl percent per year over the
recovery, was relatively low (figure 7). As a
result , unit labor costs rose 2 percent in 2012,
v.-ell above average increases earlier in the
recovery.
Frm 00061
Fmt 6621
Global oil prices rose in early 2012 but
subsequent ly gave up those gains and remained
about fiat through the laler pan of the year
(figure 8). Developments related to Iran,
including a tightening embargo on Iranian oil
exports, likely put upward pressure on prices,
but these pressures were apparently offset
by continued concerns about weak global
demand . However, in recent v.-eeks, global oil
Sfmt 6621
22613011.eps
I
Consumer price inflation was low over the
second half of 2012. With considerable slack
in labor markets and limited increases in labor
coSts, relatively stable prices for commodities
and impons, and well-anchored longer-term
inflation expectations, prices for personal
consumption expenditures (peE) increased
at an annual rate of 1Y:z percent in the second
half of the year, similar to the rate of increase
in the first half (figure 6). Excluding food and
energy prices, consumer prices increased only
I percent in the second half of the year, down
from 2 percent in the first half. A deceleration
in prices of imported goods likely contributed
to the low rate of inflation seen in the second
half, though price increases for non-energy
services were also low.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
58
11
MONETARY POl ICY REPORT: FEBRUARY 2013
prices have increased in restxlnse to generally
positive demand indicators from China and
some reductions in Saudi production. Partly
in response to this rise, retail gasoline prices,
which changed lillie, on net, over 2012, have
moved up appreciably.
Nonfuel commodity prices have remained
relatively flat over the past year despite
significant movements in the prices of a few
specific commodities. Of particular interest,
prices for com and soybeans eased some over
the fall after having risen sharply during the
summer as the scale of the drought at1"ecting
much of the United States became apparent.
Given this easing and the small share of grain
costs in the retail price of food, the effect of
the drought on U.S. consumer food prices is
likely to be modest: Consumer food prices
rose at an annual rate of 2 percent in the
fourth quarter following increases of less than
1 percent in the middle of last year.
S. Prices of oil and oonfuel cO!IUIIodities, 2003-13
[101 ... " , , _
D<_~ - I OO
,. -
-140
140 -
-
120
-
'00
.
120 _
' 00 _
00 !
I
I
200&
2009
U)]O
20ll
2012
I
•
'"
WI)
Ncm: Tho d.ota.,. maolhly. Tho oil price is Ihe 1pOt price ol Bt""! crud.
lastobserVltiol! islheaverogo forFtbnwy 1-2I,2Illl. Th. pri«
"""""""r.ios is !Ill i:da ol 4S primary·cun:nodi!y pri«s ~
oi~ ""'!he
or ..",mol
<'Xttndothrrugh.la::t!ary201J
Sruus:: For oil, Ihe CIIIII:lIOdiIy RtSN<"h BlIrtal!; r", nontu..1
~ilios, l:!omoIional Monetoryfund.
In line with these flat overall commodity
prices, as well as earlier dollar appreciation,
prices for imported goods excluding oil were
about unchanged on average over the last fi\"e
months of 2012 and the early part of 2013 .
Survey measures of longer-term inflat ion
expectations have changed lillIe, on net, since
last summer. Median expected inflation over
the next 5 to 10 years, as reported in the
Thomson ReuterslUniversity of Michigan
Surveys of Consumers, was 3 percent in
early February, within the narrow range of
the past 10 years (figure 9). In the Survey of
Professional Forecasters, conducted by the
Federal Reserve Bank of Philadelphia, the
median expectation for the increase in the
price index for PeE over the next 10 years
was 2 percent in the first quarter of this
year, similar to its level in recent years. A
measure of 5-year inflation compensation
derh"ed from nominal and inflation-protected
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00062
Fmt 6621
9. Median innation expectations, 2001-13
-,
-,
M ;"hipnlUM")"eq>t&tiom
rOf=:lS to 10
"'"
-~
-,
~
f"" ,w IO)"..,.
I!
[
2001
[
[
2003
[
[
2005
[
[
2001
[
!
2009
I
20 11
1
I
-
,
1
20ll
'""0)"
Ncm: Tho Mid:igon
""ta .... monthly and .xtend from January
2001 w.".:gh . prdimi::ary ..~mate fOf Fdm!a:)" lOll. 11>: SPF data ....
quaJ'''''iyar.i ....tndfIO.:Il 2007:Q1 throughlO13:QI
Sroru:J: T1xIm<oo R"'t=lUni....:"ily .fM;"hipn S\ll"W")'"SofC""''''''....
and SurYe}' .fProc... ional F.,... ..1c"o (SP!').
Sfmt 6621
22613012.eps
. , . and longer-term inflation
expectations stayed in their historical
range
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
59
12
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
10. rnflatiOll compensation, 2004---[3
-----------------------=
~
- ,
- ,
,
-,
-
-,
- ,
I
I
.I.
1 .. 01
20() ~
.I.
2007
1 ... 1
.I.
2009
1 11 01
2011
01
I
2013
Ncm; : Tho data ate we<l:Iy 1Vm&" of d&iIy dall ond OXleruilMough
febt=y t5. !Oll. ["notioo CUIlp""...:iou io!be <lifl'=« botwtetl yields
on nominal rr.&S"'Y I«1lriti .. oruI Trtasury d1ation-p:ol"'W """"ti..
(TIPS) « ,~"able maturiti.~ base<! on yield cunrn fitted to olf-lhe--nm
nom;;>! Treasury ....-.mti.. lId on· lId o/r·the-run TIPS. 11::. j .Y'"
"'.... ",.. io O<!j\l<led fer lb. <'if"" of iodao,onlags
Soowi: F..r..I Roserve &:ik .fN"", YOlk; Bacclays; F,clmI R.SCTV<
Boord .... ff.OIiroate1.
11
Change in real pmonal CO!lSIDDptiOll expenditures and
disposable personal incoox:, 2006- 12
-.
• Chan&< inreal PCB
o Clan&< in re>l DP]
IJ
I I
2006
2007
!008
2009
20]0
2011
201 2
N01t: Th!dall .. quarttrlyondexle!<!Ihrout!t 2012:QoI
Scmci: DepanmetiI ofC=~ .. Bu....u ofEe"""",,, ArooIysiL
Treasury securities has increased 55 basis
points since the end of June, while a similar
measure of inflation compensation for the
period 5 to 10 years ahead has increased about
30 basis points; both measures are within their
respective ranges observed in the several years
before the recent financial crisis (figure 10).
While the increases in these measures could
reflect changes in market participants'
expectations of future inflation, they may
also ha\'e been affected by improved investor
risk sentiment and an associated reduction in
demand for the relatively greater liquidity of
nominal Treasury securities
Consumer spending continued to
increase mod erately
Turning to some important components
of final demand, real PCE increased at a
moderate annual rate of 2 percent over the
second half of 2012, similar to the rate of
increase in the first half (figure 11). Household
v..ealth- buoyed by increases in house prices
and equity values-moved up over the second
half of the year and provided some support
for consumer spending (figu re 12). In addition,
for those households with access to credit ,
low interest rates spurred spending on motor
vehicles and other consumer durables, which
increased at an annual rate of 11 percent over
the second half of last year. But increases in
real wages and salaries were modest over the
second half of the year, and overall grol,l:th in
consumer spending continued to be held back
by concerns about the economic outlook and
limited access to credit for some households.
After rising earlier in the year, consumer
sentiment- which reflects household views
on their own financial situations as well as
broader economic conditions-fell back at the
end of the year and stood well below Iongerrun norms (figure 13).
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00063
Fmt 6621
Sfmt 6621
22613013.eps
Real disposable personal income (DPI) rose at
an annual rate of 3Y2percent over the second
half of 2012. HOI,I,'Cvcf, much of this increase
was a result of unusually large increases in
dividends and employee bonuses, as many
firms apparently shifted income disbursements
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
60
13
MONETARY POlICY REPORT: FEBRUARY 2013
into 2012 in anticipation of an increase in
marginal ta.x rates for high-income households
at the beginning of this year. Excluding these
special payments, real DP! is estimated to
have increased at a modest annual rate of
1Y. percent over the second half of the year,
similar to the average pace of increase over
the recovery. The surge in dividend and bonus
payments also led the personal saving rate to
jump from 3.8 percent in the second quarter
to 4.7 percent in the fourth quarter (figure 14).
In their absence, the saving rate would have
likely been [il1[e changed over the second half
of the year.
12. Weahh-to-income mlio, 1989-2012
______________________
-C
~o
-,
-,
1 I I I I I I I I , I I I I , I I I I I I I I I "
1992
1996
2000
~
2000:
I
2012
NOl"I: The c!ala.,. qUIMIy and =d Ihrough 2012:QJ. Th • .....,.;,
lh'rlIi>ofh~lJnot".. :tb!ll~.pmon1l""""'"
Household debt- the sum of mortgage
and consumer debt-edged down further
in the third quarter of 2012 as a continued
contraction in mortgage debt more than offset
a solid expansion in consumer credit. With
the reduction in household debt, [ow levels
of most interest rates, and modest income
growth, the household debt service ratiothe ratio of required principal and interest
pa}wents on outstanding household debt to
DPI-decreased further and, at the end of the
third quarter, stood at a level last seen in 1983
(figc.re 15).
Consumer credit expanded at an annual
rate of about 5Y. percent in the second half
of 2012. Nonrevolvingcredit (mostly auto
loans and student loans), which accounts for
about two-thirds of total consumer credit
outstanding, drove the increase. Revolving
consumer credit (primari ly credit card
lending) was about flat on net. Overall, the
increase in nonrevolving consumer credit is
consistent with banks' recent responses to the
Senior Loan Officer Opinion Sun'eY on Bank
Lending Practices (SLOOS), which indicated
that demand had strengthened and standards
eased, on net, for auto loans (figure \6).l
3. The S100S is 2I'ailable on the Federal Reser..-e
Board's website at www.federaJresen·e.glJlilboarddocsl
SnLoanSuney.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00064
Fmt 6621
Soomi: For not "mIh, FodmJ P.o.""" Boarrl, no... of f.J>ld1 <!ota; for
inro:l>o, Dc-partm",\ <Ie.""",.,..,., B::r<"" ofEoo::o:n;; Alla~~;,
13. Consumer sentiment indexes, 1999- 2013
'00
I I I I I I I I I I I I I I I I I I
2001
2001
2001
2010
2~lJ
Non:: Tho: C,,:If<,..,.;. B....-d d.Ia, illllo;.d!ll 100 i:a t985, II"< mOtithly
and ,>.:tl>d Ihrough JI!I. 2011. Tho M;;h. survey dola, indt",d ,,, 100 "'
1966, 1I"<!IlOtIIhIy and.lI<IId tIIrouzh . !"<I..,i:wy Feb. 1013 ati.'DI!e.
Soot.a;; The Co:lfm:>ee &ard and
R!IlI<rSIUni,·.,.ily "f
Mi.;:hip:l Surv<),ofCo=m.
Tho:n'' "
14. Personals3vingmle, 1989-2012
-.
I1 1 11 1 1 1 11 1 1 1 11 1 1111 1 1 1 111
1992
1996
2000
2000
200>
2012
Thed>ru ..eqU1rt<r1y and<':ln!\luDugh2Q 12:Ql
Saru::r; : Dc-partmon,ofC""""",,,,,. Bumn "fEcOtl""'" A<.o~'is
NOli:
Sfmt 6621
22613014.eps
Households contin ue to pay down debt
and gain access to cred it
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
61
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
15 HQllSehold debt service, 1980 21)12
-B
-B
-H
' 11 I1111 11 I1111 11 I1111 11I1111 1111 11 I
19&0 1984
1 ~&8
1992 19% 2000 2004 2008 2012
'eM""
Ncm: 1M <!ata .:. quonaty and <Xttnd!hrrugh 2011:03. Debt
poy:n<w """,iot or nWio:oi .. ",~oi pa)n><:rts QtI outN:l!iug~.
ando"",u:nerdebt.
Soo.acI: F.~aol R........ Boord, '1Imaehold D<bl Servk< m! FiI=oial
Qblig,ti""" Rati ..; .~ti$ti"" .. I<>$<.
16
Change in standards and demand for alrto loons.,
21)11 12
)1,,1""""
- w
Ql
OJ
Q2
01
Q4
2011
Q2
QJ
2012
0'
NCf1I: lkdatamfro:n''''"''"Y!''''''' Iy<:<ltl<!::,ted4Unospo!"yeor;
tho Iut obsorudion j. fro::n d:. Jan. 2011 "'"""Y, wl'.icll '"""" 2012:Q4
&:h ..nos rqnoens the DOt perunt of ourveyed ba:ks that reported ~
tigl::.oiug or .~I.> ""
o<:nWl f", O11to I""", over tba
,...t
;.""'" Fedaal R....... "'''''Il''''
Board,
Soo1a:
BODklr..JlitlgPtu!m
14:21 Aug 30, 2013
The housing market recovery gained
traction ...
The housing market has continued to recover.
Housing starts, sales of new and existing
homes, and builder and realtor sentiment all
increased over the second half of last year,
and residential investment rose at an annual
rate of nearly 15 percent. Combined, single·
family and multifamily housing starts rose
from an average annual rate of 740,CKXl in the
second quaner of last year to 9C(),OOO in the
fourth quarter (figure 17). Activity increased
most noticeably in the smaller multifamily
sector-where starts have nearly reached pre·
recession lewis- as demand for new housing
has apparently shifted toward smaller rental
units and away from larger, typically owner·
occupied single·family units.
... as mortgage interest rates reached
record lows and house prices rose ...
I I
VerDate Nov 24 2008
Changes in interest rates on consumer loans
v,ere mixed over the second half of 2012.
Interest rates on auto loans declined a bit, as
did most measures of the spreads of rates on
these loans over yields on Treasury securities
of comparable maturity. Interest rates on
credit card debt quoted by banks generally
declined slightly, while rates observed in credit
card offer mailings continued 10 increase.
Jkt 048080
S<nior Loon Oill ... O(Rtlion Surv<y"
PO 00000
Frm 00065
Fmt 6621
Mortgage interest rates declined to
historically lowlevels toward the end of
20l2- importantly reflecting Federal Reserve
policy actions-making housing quite
affordable for households v,~th good credit
ratings (figure 18). However, the spread
between mortgage rates and yields on agency·
guaranteed mortgage·backed securities (M13S)
remained elevated by historical standards.
This unusually wide spread probably reflects
still-elevated risk aversion and some capacity
constraints among mortgage originators.
Overall, refinance activity increased briskly
om the second half of 20l2- though it was
still less than might have been expected, given
the level of interest rates- while the pace of
mortgage applications for home purchases
Sfmt 6621
22613015.eps
14
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
62
MONETARY POlICY REPORT: FEBRUARY 2013
House prices., as measured by several national
indexes, continued to increase in the second
half of 2012. For example, the Core Logic
repeal-sales index rose 3~ percent (nol an
annual rate) over the lasl six months of
the year 10 reach ils highest le\'el since late
2008 (figure 20). This recent improvement
notwithstanding, this measure of house prices
remained 27 percent below its peak in early
2006.
... but the level of new construction
remained low, and mortgage
delinquencies remained elevated
Despite the improvements seen over the second
half of 2012, housing starts remained well
below the 1960-2000 average of 1.5 million
per year, as concerns about the job market
and tight mortgage credit for less-creditworthy households continued to restrain
demand for housing. In addition, although the
number of vacant homes for sale has declined
significantly, the stock of vacant homes held
otT the market remained quite elevated. Once
put on the market, this "shadow" inventory,
which likely includes many bank-owned
properties., may redirect some demand a\vay
from new homes and toward attractively priced
existing homes. With home values depressed
and unemployment still high, measures of
late-stage mortgage delinquency, such as
the im·entory of properties in foreclosure,
remained elevated, keeping high the risk of
homes transitioning to vacant bank-owned
properties (figure 21).
Growth of business investment has
slowed since earlier in the recovery
After increasing at double-digit rates in 2010
and 20 II, business expenditures on equipment
and software (E&S) decelerated in 2012
(figure 22). Pent-up demand for capital goods,
an important contribulor to earlier increases
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00066
Fmt 6621
17 Private housing starts, 1999-2013
I! ,
1m
!
I
!
2001
!
))(IJ
I ' , ,
!
2005
2009
2007
,
t
!
2011
-
1.8
-
l.4
-
l.0
-
,
,
20ll
NOll: Th. data .,. <I>lIlthly anda:el:d Ihrou&b )."ua:y2013.
Soo.acI: [)eponrnontmC"""""",., Bum.u<ith< C=u
18. Mortgage intmst rates., 1995-2013
-,
I I I I I I
1!I'll
1998
!
I I I I I I I I I I I
))(11
201.).:
2007
2010
Ncm: lbt data, "'hio!! L....~.tdy and rom! thmJgb. FeImwy lG, lOt;,
... "",,1rI;;t!l1<'OIIJO-)'tIl"IlIO:I8I1&<' .
$(mo . r.&r.lHo:uo[.oo.nMOItglgtCo.:p"":I.ion
19. Mortgage Bankers Association purchase and refinance
indexes, 19%-2013
_'~'990 - 1 QO
M.-:I>'~'91".1 - 'OO
-
;00 -
..,
10,00:1
-
,,00
'00 -
,oro
' ,oro
'00 -
,,,,
'00 -
1111!!!! !!I IIIIIII !!I!!!1 I
1992 1995
1m
Ncm: Th: data, w~"h II<
2001 201.).: lim 2010 201l
. . l><Ially
O<!r~w,
.", I f"""·...... k movin,
avmte and rom! ~ Fdnwy 15, 2013.
SOOlCl! . M<r.glll.&tik<:-sAssoci.tiOll-
Sfmt 6621
22613016.eps
remained sluggish (figure 19). Recent responses
to the SLOOS indicate that banks' lending
standards for residential mortgage loans were
litt le changed over the second half of 2012.
15
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
63
20
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
..
Prices of existing single-family houses, 2002- 12
----------------------~ ~.
S&P,C...·Sh'" ..
2O.",ty i:>!ox
I I
I
'00'
,.,.I
I
,.,I
I
I
I
I I
2012
NOTi: ThedallmlJlO::'.hlyand=c!in101011:Qo:. Eachindoxhasb«n
""""oliud .. tbt it. "'" is 100. Both
C_L>gi< ~ io<kx and the
FHFA ""'" inobl. puro.... tt=aclioru only_ The S&PiCu.·ShiU", iode:<
r<I-...ruollum'.-Ie::&th .. le>tmIJaCti"""iIIsdettc<llllOlrOpOiitao L.....
SoI.ru:E: F.. Co:-d.ogi<, C_Logic; (" f1IFA, F.dmI Housillj; FWce
A~"''Y; for S&PiCaOI!.shilkr, Sa!>lanI & Poo!'~
u..
21. Current prinx: mortgages becoming delinquent
and foreclosure inventory, 2000- 12
r..-,l·_ _ _
15 _
1.4 _
IJ -
-15
12l.l-
1.0 -
-1.0
.. -
.,2(1(10
-,
2002
!(!O.!
2006
lllOO
20 10
2011
NO'!!! Thedmf"lli:nelD<l:lg.,..l>e«tDi:l,:do6"""""tmlllO:ltl:!yand
"",-"", thrO'.:gh n",.".,.,. 2012 The data rqmstnl tho pettentage <i:
mo:\iIi" thIl trIImitiw !Mn bei:lc CIIITe::l to beiog .1 1...1 30 da)--.
&'Iioq\l<ll\ ",hmon\h.
dlTl for fw"lw..,. ",V<llto:y ... qusrtmy and
"",-"", tbrou!h 2011:QJ. The shadtd bon clii:Ole ,....;cw or busi:l<oi
rtC<S.ion .. defm<d by the Nati..,.1 B.....u ofB:<wo:ni, R...... h.
s.oo.c.; For ptirD!- OI<rtgag1S, LPS App6"" k.!Iyti..; for f"""I0._
inVttlcry, F!:danl R...,.. Boord IW1 ,olculatiol:s lw!:d on <Iota !Mn
MOIIpg' &Ilk.,. A.ooeiolion.
n.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00067
Fmt 6621
in E&S spending, has likely diminished as
the recovery has aged. In addition, concerns
about possible threats to economic growth
and stability from U.S. fiscal policy and the
situation in Europe may have contributed
to soft investment spending in the middle
of last year. As a result, despite a pickup
in the pace of gains toward the end of the
year, E&S investment increased at an annual
rate of 5 percem in the second half of the
year, similar to the first-half pace. As for
business investment in structures, a sustained
recovery has yet to take hold, as high vacancy
rates, tight credit for new construction,
and low prices for commercial real estate
(eRE) are still hampering investment in new
buildings. However, in the drilling and mining
sector, elevated oil prices and new drilling
technologies have kept investment in structures
at a relat ively high leveL
Inventory investment remained at a moderate
le\'el in the second half of last year, as limited
gro\,\'1h in final sales and the uncertain
economic environment continued to limit
firms' incentives to accumulate inventories.
Census Bureau measures of book-value
inventorY-lo-sales ratios, as well as SUf\'eys
of private inventory satisfaction and plans,
generally suggest that stocks were fairly well
aligned with sales at the end of 2012.
Corporate earnings growth slowed, but
firms' balance sheets remained strong
After having risen 6 percent over the fi rSI half
of 2012, aggregate operating earnings per
share for S&P 500 firms were about Bat on a
seasonally adjusted basis in the second half
of 2012, held down, in part, by weak demand
from Europe and some emerging market
economies (EMEs). However, Ihe ratio of
corporate profits to gross national product in
the second half of 2012 hovered around its
historical high, and cash Bow remained solid.
In addition, the ratio of liquid assets to total
assets for nonfinancial corporations was close
to its highest level in more than 20 years, and
the aggregate debt-to-asset ratio remained low
by historical standards (figure 23).
Sfmt 6621
22613017.eps
16
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
64
17
MONETARY POlICY REPORT: FEBRUARY 2013
With corporate credit quality remaining robust
and interest rates at historically low levels,
nonfinancial firms continued to raise funds at
a strong pace in the second half of 2012, Bond
issuance by both investment- and speculativegrade nonfinancial firms was extraordinarily
strong, although much of the proceeds from
bond issuance appeared to be earmarked for
the refinancing of existing debt (figure 24).
Meanwhile, nonfinancial commercial paper
(CP) outstanding ....'aS about unchanged.
Issuance in the institutional segment of
the syndicated le\"eraged loan market
accelerated in the second half of the year,
boosted by rapid growth of newly established
collateralized loan obligations. Commercial
and industrial (C&l) loans outstanding at
commercial banking organizations in the
United States continued to expand at a brisk
pace in the second half of 2012, Moreover,
according to the SLOOS, modest net fractions
of banks continued to report having eased
their lending standards on C&I loans over the
second half of the year, and large net fractions
of banks indicated having reduced the spread
of rates on C&I loans over their cost of funds,
largely in response to increased competition
from other banks or nonbank lenders
(figurd5).
22
Change in real business fixed investment, 2006--[2
-w
IcI ~IH2-1O
1~
c
2001
~IO
- w
-w
- w
1 I
[ 1
2006
2007
2009
~ll
1012
23. Financial ratios for nonfinancial cocporations.
1990-2012
. .C-______________________
..-
;;
-
W
-
-.ll
-.
-
"
""-
- .m
D.t.t.,.."
- .0
tow .......
1""""""""""",,1
1992
1996
2000
XII)4
2008
2012
No,.., n. dall are..""".] thm:gh 1995, quuterly th"",.n.:, and",ttlOl!
thrvuch2!l11:QJ.
SooJcE : C."..,....tat.
24. Selected cOOlpooents of net fmancing foc noofmancia l
businesses, 2005- 12
D C=:rt.lI'Oi!lp&p<r
."""
.- W
. &nkll)&;1$
Borrowing conditions for small
businesses continued to improve, albeit
more gradually than for large firms
Borrowing conditions for small businesses
continued to improve over the second half of
2012, but as has been the case in recent years,
the improvement was mOfe gradual than
for larger firms. Moreover, the demand for
credit from small firms apparent ly remained
subdued. C&I loans with original amounts
14:21 Aug 30, 2013
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Frm 00068
Fmt 6621
-w
- s"",
- w
- w
-~
I
I
I , I
2005 2(106 2001 lOOS ,009 2010 lOll
I
:on
Non: Th! d..to for Ih< '''''p<lrI<Il~ .;tc<:ptbonds m "!I$():>llty tdj..to:d
ScmcJ; From! R<S<JV<Boa:d,!low offunds clall.
Sfmt 6621
22613018.eps
Gross public equity issuance by nonfinancial
firms slowed a bit in the second half of 2012,
held down by a moderate pace of initial
public offerings. Meanwhile, data for the
third quarter of 2012 indicate that net equity
issuance remained deeply negative, as share
repurchases and cash-financed mergers by
nonfinancial firms remained robust (figure 26).
VerDate Nov 24 2008
..
~
L'quidWOlSov<:<
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
65
18
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
25
of $1million or less-a large share of which
likely consist of loans to small businessesfose slightly in the second half of 2012, at
about the same rate that prevailed in the
first half. Recent readings from the Survey
of Terms of Business Lending indicate that
the spreads charged by commercial banks
on newly originated C&I loans v.;th original
amounts less than $1 million, while still quite
elevated, continued to decline. 4
Change in standards and spreads nf1nan rates nvcr
banks' cns! nf fimds fm cntruneTCial and industrial
lOOIls, 1991-2012
....
19'92
N<YIII:
1996
2000
2004
2000
2012
Thod.m"",cI:a""'fm:n."",~yttnmllyoondt!cttdf<llrtimes ptr
~
i. from tho JIID.ua:y 20ll '\ItVt')', whi:h rovm
2012;Qo1, E",b
f<PI""':I/. the 00\ P<=I of.~ bcl. tbot
ttpIImd. tighttnint or.taJ>latds '" inm..ioj: <pruds
ra! .. 11m the
ba::k's C<IOlor I'und1 rMcllllllllm'iai ond industrial I""" over the past1hm
mo::~ Tho Ih>dNI bars ioili,.,t< l""iodI. oi h.uiool.l "",,"ion '" d<of",,,,,- by
theNO!i.o::l.aIllIlfflw.oi~'R".."",!t.
SooJi:'J;;: F"rloral R,Il't'.', Boord, Sf:lio:r u.n orii"", OpiniM SuMy OJ>
&Ilk Lendq
ym; the last
..n..
of,.,..
rr..:u:...
26. Cnmponents of net equity issuance, 2006-12
Financial conditions in the commercial
real estate secto r ease d but remain ed
relative ly tight
30
- I Public issumc<
I
- I
-
PriYatoil$"""'o
Rqrnro!w/S
,,.
o_ Mergers
and acquisitions
Total
I I
I
2006
I I I I
2007
2008
2009
2010
201l
20\2
NOT>; Net eqJ.ity ;"",noo is the diITmnco b<two." <qcity i'o.Jod by
domesli<: eo"",ani .. ill public II" pri ....:. mllk<'.s and equity mimi tbrougb
share "V.crcr...... dom....i. <:I.1b·Iinanc.d mergm, II" fmtign:aktovtrs of
U.s. rl:!DS. Eq-.:ity iSiS'"""'" i:>::b... ftwdo ilI",s:od by prival' <qt:ily
partI><:1hil"and ,took "I".ion p:=t<h
SOOAC!::
n.o:."",
According to surveys conducted by the
National Federation of Independent Business
during the second half of 2012, the fraction of
small businesses with borrowing needs stayed
low. The net percentage of respondents that
found credit more difficult to obtain than three
months prior edged up, on balance, over this
period, as did the net percentage that expected
tighter credit conditions over the next three
months; both measures remained at relatively
high levels in the January survey.
Rtulers Fm:.:iol, llIvestrn<Il1 8t!>:.h:Ilck RtpOIl;
and NotioOll V<Iltc.'< C~ital Al$OOiOlion.
I'ricewtt~~
M""oyTrt.R<pon.
Financial conditions in the e RE sector
continued to ease but remained relatively
tight amid weak fundamentals. According to
the SLOOS, a modest net fraction of banks
reported having eased standards on e RE
loans oyer the second half of last year, and
a significant net fraction of banks reported
increased demand for such loans. Consistent
with these readings, the multiyear contraction
in banks' holdings of CRE loans continued
to slow and, indeed, came roughly to a halt
as banks' holdings of CRE loans were about
flat over the last quarter of 2012. Issuance
of commercial mortgage-backed securities
(CMBS) continued to increase over the second
half of 2012 from the low levels observed in
2011 . Nonetheless., the delinquency rate on
loans in CM BS pools remained extremely
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22613019.eps
4. Data releases for the Survey ofTenns of Business
Lendingare available on the Federal Re:;en'e Board's
website at wwwJedera1reserve.gov/releasesle2ldefault.
him.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
66
MONETARY POlICY REPORT: FEBRUARY 201 3
19
high, as some borrowers with five-year loans
issued in 2007 were unable to refinance upon
the maturity of those loans because of high
loan-to-value ratios. While delinquency
rates for e RE loans at commercial banks
continued to decline, they remained somewhat
elevated, especially for construction and land
development loans.
Budget strains for state and local
governments eased, bul federal purchases
continued 10 declin e
Strains on state and local government
budgets appear to have lessened some since
earlier in the recovery. Although fede ral
grants provided to state governments in the
American Recovery and Reinvestment Act
have essentially pbased out, state and local
tax receipts, which have been increasing since
2010, rose moderately further o\'er the second
half of last year. Accordingly, after declining
at an annual rate of IViz percent in the first
half of last year, real government purchases
at the state and local level changed little in tbe
second half (figure 27). Similarly, employment
levels at states and municipalities, which had
been declining since 2009, changed little, on
balance, over the second half of last year.
Federal purchases continued to decline over
the second half of 2012, reflecting ongoing
efforts to reduce the budget deficit and tbe
scaling back of overseas military activities.
As measured in the NIPA, real federal
expenditures on consumption and gross
investment- the part of federal spending
included in the calculation of GDP- fell at
an annual rate of 3Viz percent over the second
half of 2012. Real defense spending fell at an
annual rate of a little over 6 percent, while
nondefense purchases increased al an annual
rate of 2 percent.
27
Change in real gOI'erJUIItllt e,;:pendirures
011 consumption and investment, 2006-12
o f edm.1
-,
-,
• Stot.l!:ld
""
•
-,
I I
I I
2006
Soo.ruJj:
2007
2008
2IXl9
2010
21111
2011
D!partmtnt ofCom:n"" ., Bum.u ofEo"",:"i< Analysi~
VerDate Nov 24 2008
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22613020.eps
The deficit in the federal unified budget
remains high. The budget deficit for fiscal
year 2012 was SI.1 trillion, or 7 percent of
nominal GDP, down from the deficit recorded
in 2011 but still sharply higher than tbe
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
67
20
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
28
Federnl receipts IlIXI aperxlitures, 1992 2012
- n
Rectipts
I "
111 " ' 11 ' ' ' ' ' 111''111 I
1992
19915
200l
nJO
101.
2OOl!
NDTI: n.-rec.ipts .. d....,.....ditu.... data aro.., . ""if.. d.budgellwi.oru!
an! for f=l )'tat:I (Octobtr throu&h Sq:r."",ber~ 1:"'" d<rn ..tio ~
(OOP) is for tl:. four ",=oro endm; io QJ.
s.c..tacJ;: Ofil,.ofM.nag,""""tandBudt<!t.
29
deficits recorded prior to the onset of the last
recession. The narrowing of the budget deficit
relative to fiscal 20 II reflected an increase in
ta,\ revenues that largely stemmed from the
gradual increase in economic activity as well
as a decline in spending. Despite the rise in
tax revenues, the ratio of federal receipts to
national income, at 16 percent in fiscal 2012,
remained near the low end of the range for
this ratio over the past 60 years (figure 28).
The ratio of federal outlays to GOP declined
but was still high by historical standards, at
23 percent. With deficits still large, federal
debt held by the public rose to 73 percent of
nominal GDP in the fourth quarter of 2012,
5 percentage points higher than at the end of
2011 (5gur<29) .
Federal govcnunent debt heM by the public, 196IJ-2012
Net exports added modestly to real GOP
growth
Real imports of goods and services contracted
at an annual rate of nearly 2 percent over the
second half of 2012, held back by the sluggish
pace of U.S. demand (figure 30). The decline
in imports was fairly broad based across major
trading partners and categories of trade.
,.,
I 1II II IIt' lllI ltllt ltll l!tll ltll ll 'lIt lllt l'l ll lt!t lllt I
,m
1m
_.
N<"I11 : no da!a for dtbt
1992
2002
2012
tI:too&h
1011 art 11 of ym.end, and tho
C<msp<l:ilin3 vW. f... "",. WmtsIr product (GDp) art for Q4 JI II:!
all:,,!.''':'' ~"~"""",,!JO.MI~ .. ~:.<>ffedml~
Soom::I!: Bur= of Eronom>:F=.. IM""",,,..otS<,,,,,,..
30
AllaIY"~
D<partmrllI of tho Treasury.
Change in real imports and exports of goods
and services, 2007- 12
.J
D I~
- w
Real exports of goods and services also fell at
an annual rate of about 2 percent in the second
half despite continued expansion in demand
from EM&. Exports v.'Cfe dragged down by
a steep falloff in demand from the euro area
and declining export sales to Japan, consistent
with weak economic conditions in those areas.
In contrast, exports to Canada remained
essentially flal. Across the major categories
of exports, industrial supplies, automoti\'e
products, and agricultural goodscomributed
to the overall decrease.
Overall, real net exports added an estimated
0.1 percentage point to real GOP growth in
the second half of 2012, according to the
advance estimate of GOP from the Bureau
of Economic Analysis, but data received
since then suggest a somewhat larger positive
contribution.
I I
I I
1JJfJ7
200lI
))1)9
20 10
lOll
2012
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22613021.eps
Soola: Depa!1ml<llofC"""" ..... Bure", .fEronornioAWysiL
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
68
21
MONETARY POlICY REPORT: FEBRUARY 2013
The nominal trade deficit shrank, on net,
o\'er the second half of 2012, contributing to
the narrowing of the current account deficit
to 2* percent of GOP in the third quarter
(figure 3\). The trade deficit as a share of GOP
narrowed substantially in late 2008 and early
2009 when U.S. imports dropped sharply, in
part reflecting the steep decline in oil prices.
Since then, the lrade deficit as a share of GOP
has remained close to its 20091e\'el: Although
imports recovered from their earlier drop,
exports strengthened as well.
3t US
-
I!
The current account deficit in the third
quarter was financed by strong inflo\\'$ from
foreign official institutions and by foreign
private purchases of Treasury securities
and equities (figure 32). More-recent data
suggest continued strong foreign purchases of
Treasury securities and equities in the fourth
quaner of 2012. Consistent with improved
market sentiment over the third quaner, U.S.
investors also increased lheir holdings of
foreign assets, as shown in figure 32.
track and currml 3c\:Oll!lt balances, 2004-12
!
''''Th< ",.quanerly
I
I
I
200s
,
,
,
•
,
, ,I
I
1010
,•
WI>
Non:
<!ala.,..
o:d ex!<":Id !hrou&h2012:QJ for!ht CUIml!
aro>UIl! ond 2012:Q4 for!Ilde. GD? i. groo. Wmc-oti, pro<!::OI.
Soot",: o,.p..-w.n! "'C~B""..."of&o""",;" A:>aly>i~
32. US net financial inflows, 200S-l2
o U.S. p:;\*(iodudi:gbcl.irI&)
".,
...
...
• FmiY'P:;\':!!. (indlldintN.ol:t:.g)
• U.SolT.d.1
• FmiY'0ff" ial
'00
National saving is very low
'00
VerDate Nov 24 2008
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Jkt 048080
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Frm 00072
Fmt 6621
'00
' 00
I I
I I
'"
2009
1010
""
2012
a::d ....",nd !hrou&h 2012:Q3. Negative
numbon indica'" • babnce of p.)metlts OUIO"... ~ whOII u.s.
midMns, on n.t, ~ romgn .."" orwh", forIoigt ~ onn<l,
0<11 u.s . ...!IS. ThmiOrt,' "'got;...• number r,.. ·U.s. privot." or ·U.S.
•ff"ior i::.~",.toJ "" i:t=ue;, r....:", jrniuoao. u.s.•ff,,;.] a",,~ itd.
!ht f...ign =""1' ."quirN ... !.-n f<I-,;Y' "':~ t.cl1 drow on I!><ir...-.p
lioIs"·i\hlheF<dmIR........
Sooru:1: ~"'C"""".r... B""'.uofEoono:ni"~I)'>i~
NOli: Th< dJIa
Sfmt 6621
art C[IWI<rIy
22613022.eps
Total U.S. net national saving-that is, the
saving of U.S. households, businesses, and
governments, net of depreciation chargesremains extremely low by historical standards
(figure 33). In the third quarter of last year, net
national saving as a percent of nominal GDP
was close to zero. The relative flatness of the
national saving rate over the past few years
reflects the ofTsening efTects of a narrowing
in the federal budget deficit as a share of
nominal GOP and a downward movement
in the private saving rate. National saving
will likely remain low this year, in light of the
still-large federal budget deficit. A ponion
of the decline in federal savings relative to
pre-recession levels is cyclical and would be
expected to reverse as the economy recovers.
If low levels of national sa'~ng persist over the
longer run, they \\~ll l ikely be associated \\~th
both low rates of capital formation and heavy
borrowing from abroad, limiting the rise in the
standard of living for U.S. residents over time.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
69
22
PART I: RECENT ECONOMICAND f iNANCIAL DEVElOPMENTS
33. Net saving, 1992- 2(112
Financial Developments
l'tt:<o, oI _ r n p
I I I I I I I I I I I I I I I I I I I I ' II I
t!l9!
1996
!ooo
! 004
!008
!On
NOlI n. dst.a.,.. """,my o::d ",to<,d ~ 2Il12 :Ql N,,::f<:drn.1
,.,..;"gi, Ih. """, ~ ~m:lnO! bu$ io"'I&>ing""" tMIl<'t .. vi:og of
state and 10<01 l<N<mmelltJ. GDP io VO"1lomt"", product.
SooJa: Depon:n",' "f COOlIllOTC<, Bum.u "fEcotJ>mi, Anal},>".
34. Interest rates on Treasury securities at selected
ma.turities, 2004- 13
,I {).~"'''''''''!III
-,
\, ""w' - ,
V", )~ -,
I I
'''' '''' '''' "" ."
n.
-f~
I I
~I-~v,,,,
-.-- ,,
Nom:
dati. n daityand exte:od throoch Febnwy 21,2011. Trwwy
u:/bti(l:.prolfl"ttd "l'Iln~" (TIPS) . ,. ...... '" yield <1m'" frtW. II)'
f.r.ml R."",••tl.fft<>on· and oCf·fht.run nps
SoulcE Dtpart::IeIl! ~ lb. TmsuI)': BL."Ia)'l; F.r.ml R,,,,,,. Bolrd
,uff ..!CWe<.
Expectations rega rding the future
stance of mon etary policy reflected the
additi onal accommodati on provid ed by
th e Federal Open Market Co mmittee ...
In response to the steps taken by the FOMe
to provide additional monetary policy
accommodation over the second half of
2012, market participants pushed out the
date when they expect the federal funds rate
to first rise atxwe its current target range of
oto ~ percent. In particular, interest rates on
overnight index ~aps indicate that investors
currently ant icipate that the effective federal
funds rate will rise above its curremtarget
range around the fourth quarter of 2014,
roughly four quarters later than they expected
at the end of June 2012. Meanwhile, the modal
target rate path-the most likely values for
future federal funds rates derived from interest
rate options-suggests that invest ors think
the rate is most likely to remain in its current
range through the first quarter of 2016. In
addition, recent readings from the Survey
of Primary Dealers conducted by the Open
Market Desk at the Federal Reserve Bank of
New York suggest that market participams
expect the Federal Reserve to hold about
$3.75 trillion of Treasury and agency securities
at the end of 2014, roughly $1 trillion more
than was expected in the middle of 2012.1
... and held yields on longe r-term
Treasury securities and agency mortgagebacked securities nea r histori c lows
Yields on nominal and inflation-protected
Treasury securities remained near historic
10....'S over the second half of 2012 and
into 2013. Yields on longer-term nominal
Treasury securities rose, on balance, over this
period, while yields on inflation-protected
securities fell (figure 34). These changes likely
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22613023.eps
5. The Sur;·ey of Primary Dealers is available on
the Federal Reser;·e Balik of New York's website at
www.newyorkfed.org/marketslprimarydealeuumy_
questiolls.html.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
70
MONETARY POl ICY REPORT: FEBRUARY 1Q13
23
reftect the effects of additional monetary
accommodation, a substantial improvement
in sentiment regarding the crisis in Europe
that reduced demand for the relative safety
and liquidity of nominal Treasury securities.,
and increases in the prices of key commodities
since the end of June 2012. On balance,
yields on 5-, 10-, and 3D-year nominal
Treasury securities increased roughly 15 basis
points, 30 basis points, and 40 basis points,
respectively, from their levels at the end of
June 2012, while yields on 5- and IO-year
inflation-protected securities decreased
roughly 55 basis points and 15 basis points,
respectively. Treasury auctions generally
continued to be ""'ell received by im'estors, and
the Desk's outright purchases and sales of
Treasury securities did not appear to have a
material adverse effect on liquidity or market
functioning.
Yields on agency MBS were lin Ie changed,
on net, o\·er the second half of 2012 and
into 2013. They fell sharply following the
FOMe's announcement of additional agency
MBS purcbases in September but retraced
o\"er subsequent months. Spreads of yields
on agency MBS over yields on nominal
Treasury securities narrowed, largely reflecting
the effects of tbe additional monetary
accommodation (figure 35). The Desk's
outright purcbases of agency MBS did nOI
appear to have a material adverse effect on
liquidity or market functioning, although
implied financing rates for some securities in
the MBS dollar roll market declined in the
second half of 2012, and tbe Desk responded
by postponing senlement of some purchases
using dollar rolliransaciions. 6
35. Current-coupon yield and spread fOf agencyguaranteed mortgage-backed securities, 2009-13
'-:,-------------=m
-
,.
- m
I
I
I
"
I
"
I
Jon July JOil. My Jan. July Jan. kly JOil.
2009
~10
2011
2012
lOll
N<m The do!>. 1ft d>ily and <'Xtrnd throu#t Fobrtwy 21, ~IJ Yiot.!
shown is Cor Iho fotci. M1t 3O_yur =111 OO"flOO, tho «q>OlI ralt at
which • .,. !IIOt\p!.-bock<d so:uriti .. WlrJd bo pi.:odat par, or r",., vaIu<.
Spreod shown is to tho 0"""3' of tho l · wllQ.y""~T'"""wyyield&
~ !)qwtmom oltho TrtlIS1l/Y; 1latt1a)'S.
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22613024.eps
6. Dollar roO transactioos consist of a purchase or sale
of agency MRS with the simultaneous agreemen t to sell
or purchase substantially similar securities on a specified
future date. The Conuuittee dim:ts the Desk to engage in
these transactions as necessary to facilitate settlement of
the federa l Reserve's agency MRS purchases.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
71
24
36
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
Yields on corporate bonds reached record
lows, and equity prices increased
Spreads ofcOJporate bond yields over comparable
ofI·tbe·nDJ Treasury yields, by securities rating,
1997 2013
ti t I I I I I I I
!
I I
!
I I I tit
1997 1999 1001 2003 ZOOS 1007 2009 20ll 2013
NOTt: 1M dIIIa m daily and .xtend through F!bruary 11, 1013. Th.
!p!uds sh""",m th< yiolds on to-ytar bonds 10.. tit. to-yea< T'"""'Y
)'io!d.
&.ru:i:: D!:tived fm:n s:nooth.d oO!pO!ll. yidd
<:sing, Me:riIt
LytclIboc:dda:a.
=
37. S&P500index,199'>-2013
-/
jlvY
I I I I "
t995
1998
"
1 I I II 1 I I I "
200t
2004
2007
2010
-
"
,~
I
1013
NOTli: Thtdall "" daily ooda:e::dlhnrJgb February 21,201J.
Sovm:: StaI&rd & l'ooI'l
Yields on in\'estmem- and speculative-grade
bonds reached record 10v.'S in the second
half of 2012 and early 2013, respectively,
partly reflecting the effects of the FOMe's
additional monetary policy accommodation
and increased il1\'estor appetite for bearing
risk. Spreads to comparable-maturity Treasury
securities also narrowed substamially but
remained above the narrowest levels that they
reached prior to the financial crisis (figure 36).
Prices in the secondary market for syndicated
leveraged loans have increased, on balance,
since the middle of 2012.
Broad equity price indexes have increased
about 10 percent since the end of June 2012,
boosted by the same factors that comributed
10 the narrowing in bond spreads (figure 37).
Nevertheless, the spread between the 12-month
forward earnings-price ratio fo r the S&P 500
and a long-run real Treasury yield- a rough
gauge of the equity risk premium-remained
at the high end of its historical range
(figure 38). Implied volatility for the S&P 500
index, as calculated from option prices, spiked
at times but is currently neaf the bottom end
of the range it has occupied since the onset of
the financial crisis (figure 39).
Conditions in short-term dollar funding
markets improved some in the third
quarter and remained stable thereafter
Measures of stress in unsecured dollar funding
markets eased somewhat in the third quarter
of 2012 and remained stable at relatively low
le\'els thereafter, reflecting impro\'ed semimem
regarding the crisis in Europe. For example,
the average maturity of unsecured financial CP
issued by institutions with European parents
increased, on nel, to around the same length
as such CP issued by institutions with U.S.
parents.
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Jkt 048080
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22613025.eps
Signs of stre~ were largely absent in secured
short-term dollar funding markets. In the
market for repurchase agreements (repos),
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
72
MONETARY POl ICY REPORT: FEBRUARY 2013
25
bid-asked spreads and haircuts for most
collateral types have changed little since the
middle of 2012. Howen:r, repo rates continued
to edge up over the second half of 2012, likely
reflecting in part the financing of the increase
in dealers' inventories of shorter-term Treasury
securities that resulted from the maturity
extension program (MEP). Following yearend, repo rates fell back as the MEP came
to an end and the level of reserve balances
began to increase. In asset-backed commercial
paper (ABCP) markets, volumes outstanding
declined a bit for programs with European and
U.S. sponsors, while spreads on ABCPwith
European bank sponsors remained slightly
above those on ABCP with U.S. bank sponsors.
38
Year-end pressures in short-term funding
markets were generally modest and roughly
in line with the experiences during other years
since the financial crisis.
SWm: S~ &: P(Wli~ Th>:n$<ll) R<U!rn Fin.a:rio1;F<dm.1 R~
B=d; FtdmI R".,... Bank ofPhilodtljrnL
Real lOf1g·nuJ Treasury yiekl and 12·month forward
earnings-price ratio for the S&P 500, 1995-2013
------------------------~,--
-w
1 I I I 11 1 I I I I 1 I I 1 I I 1 I 111
19'1:S
1m
2001
2(1(14
2007
2010
lOll
N01I!: Th. data .... IIIOllthly cd ..tend lhrou&!> .ianill:)' 2011. lb<
"'I"""I<dral y;.ld on 10.1""' fItMIll)' ~ Mfrntd .. tht o(f·tht·"", 10"1""'
Trtuury y;.1d Ie" tbt F<dml R.oerve Bank of Philadtlrtia', IO·ynr
~il:fIolion.
39
Implied S&P 500 volatiliry, 1995 2013
Market sentiment toward th e banking
industry improved as the profitability of
banks increased
The profitability of BHCs increased in the
second half of 2012 but continued to run
well below the levels that prevailed before
the financial crisis (figure 41). Measures of
asset quality generally improved further, as
delinquency and charge-otT rates decreased for
almost all major loan categories, although the
recent improvement in delinquency rates for
consumer credit in part reflects a compositional
shift of credit supply toward higber-creditquality borrowers. Loan loss provisions were
flat at around the slightly elevated levels seen
prior to the crisis., though they continued
\0 be outpaced by charge-otTs. Regulatory
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00076
Fmt 6621
-
,"
-
~
- ,.
-~
-,.
-w
-w
, I I 1 11 I 1 1 I 1 1 1 I 1 1 I 1 1 I 1 I
1m
1998
2001
200<
2007
2010
lOll
N01I! : The dato "" weekly aM <'XtrruI througb tht w..o: rn.!i",
F<'bruary 15, 2Il13. Th. w:rits sl»wn--tht VLX_ is tbt imp~td )O.doy
wlQilily of tbt S&P 500 0I<>d: I'ri<,< io<!O< .. ,o1cu1l1e1l from , " .. iglmd
'¥mg' rI. opions Iri:<~
Sool£i: Chi:a&" BoudOp;imIs Exohar!&"
Sfmt 6621
22613026.eps
Market sentiment toward the banking
industry improved in the second half of 2012,
reportedly driven in large part by perceptions
of reduced downside risks stemming from the
European crisis. Equity prices for bank holding
companies (BHCs) increased, outpacing
the increases in broad equity price indexes,
and BHC credit default swap (CDS) spreads
declined (figure 40).
- w
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
73
26
PART I: RECENT ECONOMICAND fiNANCIAL DEVElOPMENTS
4<l. Spreads 011 credit default swaps for selected
U.S. bankingorganizatioM, 2007- 13
B_,_
I
~~
ho\ruojJ""""o"...
~,\ ~
".L v ~
2001
200&
1009
2010
20 11
lOtl
-
'00
-
'"
-
' 00
-
'"
-
' 00
'"
'00
"
2013
NO'JII : n.. dA:a 1ft daily ood a ttnd Ihrou&h FdIruary 21, 2013. M«!ia:I
'f't<Ids fOlIi>; Iq< bonk holdiq , ornpW<> oed oW< oll:<r bcls.
Soolc>;, Ma:kit
41. Profitability of bank holding companies, 1997 2012
l.l -
1.0 -
1.0 l.l -
I
!
I I I I
t!)97
100)
!
I II I I I I I I II I
»)3
1006
1009
1012
NOT!' Th. dat>., whiob .,.. " """,Dy uljusttd, L... qUOrlrny and <l1<::o
tbrou# 1012Q4.
Scoc:i: FodmI R•..,.... &ord, FR Y-9C, COIISOUo.t<d Fin.o:!oiaJ
S:o.t""",(sfor&:il<Hoidi", C"",,,,,,,i ...
capital ratios remained at high levels based
on current standards., but the implementation
of generally more stringent Basel III capital
requirements will likely lead to some decline in
reported regulatory capital ratios at the largest
banks. Overall, banks remain well funded
with deposits., and their reliance on short-term
wholesale funding stayed near its low levels
seen in re<:em quarters. The expiration of
the Federal Deposit Insurance Corporation'S
Transaction Account Guarantee program
on December 31, 2012, does not appear to
have caused any significant change in the
availability of deposit funding for banks.
Credit provided by commercial banking
organizations in the United Slates increased
in the second half of 2012 at about the same
moderate pace as in the first half of the year.
Core loans- the sum of C&I loans, real
estate loans, and consumer loans-expanded
modestly, with strong growth in C&I loans
offsetting l,I:eakness in real estate and credit
card loans (figure 42). Banks' holdings of
securities continued to rise moderately overall,
as strong growth in holdings of Treasury and
municipal securities more than offset modest
declines in holdings of agency MBS.
Despite continued improvements in
market conditions, risks to the stability of
financial markets remain
While conditions in short-term dollar funding
markets have improved, these markets remain
vulnerable to potential stresses. Money market
funds (MMFs) han! sharply reduced their
overall exposures to Europe since the middle
of 2011 , but prime fund exposures to Europe
continue to be substantial. MMFs also remain
susceptible to the risk of investor runs due
to structural vulnerabilities posed by the
rounding of net asset values and the absence
of loss-absorbing capital. )
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22613027.eps
7. In November 2012, the Financial Stability O..-eroigbt
CoWlcil proposed reconunendations for structural
refonns of U.S. MM Fs to reduce their vulnerability to
runs and mitigate as:!OCiated risks to the financial system.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
74
MONETARY POl ICY REPORT: FEBRUARY 1Q13
Dealer firms have reduced their wholesale
short -term funding ratios and have increased
their liquidity butTers in recent years, but
they still heavily rely on wholesale short -term
funding. As a result, they remain susceptible
to swings in market confidence and a possible
resurgence of anxiety regarding counterparty
credit risk. Respondents to the Senior Credit
Officer Opinion Survey on Dealer Financing
Terms indicated that credit terms applicable to
important classes of counterparties were lillie
changed over the second half of 20 12.8 Dealers
reported increased demand for funding of
securitized products and indicated that the use
of financial leverage among trading real estate
investment trusts, or REITs, had increased
somewhat. Hov.'ever, respondents cont inued
to note an increase in the amount of resources
and allention devoted to the management
of concentrated exposures 10 Central
counterparties and other financial utilities as
well as, to a smaller extent, dealers and other
financial intermediaries.
27
42 Change in commercial811d industrial loans and core
loans, 1990-2012
w
-w
-
I I I I I I I I I I II I I I I I I I I I I I I I I
t991
1'194
1!m
2000
1003
2006
100\1
'"
1012
cla,.,
NOlI: The
which.", ,etI<IlII.lly adj".:st«I, .... quorteIly and ",n~
!hn>ugb :!012:Q4.COf< ""'" =si_Qf'O:o:q,ml lo::d iwiustrioll_ .. , I
..tate k>o::s, o.nd 0""'''''''''' k>a:u. Data hove """" adjUJll:d for bo:W"
inl>l<memation Qfe<r!lin ",,=tiog 11lI. dlongt< (i:1'~.Idio& tho Finan..-iol
A"' ...:::!i:1,S~Il<>&nf. Stat""'<C.ti QfFi=iol~ su:.lOO
Noo. 160 aru:l167jandf<Itho.ffe<Uo>flq.nort.clir.stitntion!«>nmliog
toro:n:n~iol DaW O:!IIOT!in3 ..;thl""""",~iol h:lk.
Soolt::i ; F<dmI Rfiervo JkIo.--d, SlItist.,.1 R...... H.S, "AWtl aru:l
Liahi~ti .. o>fC"""",mol Bcl:s "' tho U.....ed Swos:
With prospective returns on safe assets
remaining low, some financial market
participants appeared willing to take on more
duration and credit risk to boost returns. The
pace of speculative-grade corporate bond
issuance has been rapid in recent months, and
while most of this issuance appears to have
been earmarked for the refinancing of existing
debt, there has also been an increase in debt
to facilitate transactions involving significant
risks. In particular, in bonds issued to finance
private equity transactions, there has been a
reemergence of payment-in-kind options that
permit the issuer to increase the face value of
debt in lieu of a cash interest payment, and
anecdotal reports indicate that bond covenants
are becoming less restricti\'e. Similarly,
issuance of bank loans \0 finance dividend
recapitalization deals as \\'ell as covenant -lite
loans was robust over the second half of the
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22613028.eps
8. The Senior Credit Officer Opinion Sumy on Dealer
Financing Term;; is available en the Federal Rese!'\'e
Board's website at wwwJederairesen·e.gOllleconresdatal
releaseslscoos.htm.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
75
28 PART I: RECENTECONOMIC AND fiNANCIAL DEVElOPMENTS
Table I. Selected components of the Federal Resen'e balance sheet, 2012- 13
;\l i!li"",ofdolJars
~b.22,
"""
WB
""
T...I .... t<" ..
1 .9~.149
1.S6S,ms
107,959
27,059
7,679
,m
J.Il9Ii.801
Selo:ltJ u .. tI
Crodi! e:<~ lori.:ponMl 'Im·r.JJWnJ rM dealen
Primlryortdit...
Crodi! tx~IOC'!JD".".Wparri~"
Term AoseI·BaobJ Securities Loilo Facilily (TAL!'). .. .
N<I portfolio boidioy ofTALF LLC
S~pon b/ ctiN,,1
N<t portfolio boldi""of Maiden La.. LLC, Maiden La ... II LLC, and Maiden La.. III LLC' ..
5.192
'OS
'"
>0,822
15, 031
1,4S1
1,656,581
100,817
353,M5
1,666,530
91,41
854,9j9
1,136,456
'"'"''
2.8 11.019
J.{).I1.8W
1.{I48,00I
1,061,91 1
1,12l,l2J
'"
itI,i/w'""
"
~,
SmI~""IoddOUlrit;Jt'
U.s,Tr",u'Y9l!Cllrilieo.. .
AlJOIICYdobt...:urit;.., .. .
Ayo<y""'rt~"""Bl9l!Clllilieo (MBSJ ....
T...n , WiriH
Selo:"" liabilities
IW:ral RneM AQ(t< ill cimJlatioo ...
Re...... rep"rcb""'~.u ..
bol.l bot do"""it"')' i .. tiulli"", ..
o.po.it<
S9,S~
Sl,nJ
!n,ll)
1,622,800
1,491,988
1,668,381
•
•
or ..'bib:Ttrmdoposiu
U.s. T"~''"'Y, I:''""raIO<X:<)"nl
>6,033
U.s, T,u,u'll S"~pltrutolil'Y Finfin<illt A""'""l ....
m.m•
•
"'" "'"
TOIll copill1
;4,613
1,031,112
•
•
40)03
5-4.982
N""" LlC. , 'i""d I"bilily """'1"l'
1 n. Fedml Ro""" buut..ded mdil to,"",,,1
""jUlleoo, witll ,rr.."., "'I'P"" .,."~'" ;, ,"rooo,. Maid" lAo. UC ... . f<rOled '0 "'l";" """~ ...,~ of
n, it" S~."'. eoOlp>.>itl 1>0. M..,,, Wo' nLLC .... f<rmol '" ptltOlut "oiJ,,';"llI>Ortg'tl!'·b«h4 '""""~. I"" ,he US. """',., k'di'l "'~mtot'" ponfoJiool
JuWid,uiuor AIIl",~ ... I>~",""'''' Orou~ "'~ (Ala), Maid" La, m LlC .... formed to pur<l> .....oIti_r ",It.<mliz<d d.bt oliiptiou oo. ...,io\. Ib, Fi.. oci~ I'rod""b
,,,,,!,ol AIO •• d ..ntt" -=I. d,bul, '"'I'eoOl,,",,"
~ "'~d" "'I)' MRS purlOb .... "''' .""
,mb:!
Scola; Fed.,,1 R<""", lloanl,S,,"=!C>I R,• ..., H~ I, "F"" .. A!I;,,"'i R,,,,,,, lIo.1u<to of Dtp«;,'1)' 1....",_ .. d eo.d.". St~''''''' of Fe4",1 R,,,,,,, 11>,1:0.'
u.c."
year. (For a discussion of regulatory steps
taken related to financial stability, see the
box "The Federal Reserve's Actions to Foster
Financial Stability.")
Total assets of the Federal Reserve increased
to $3,097 billion as of February 20, 2013,
$231 billion more than attbe end of
June 2012 (table 1). The increase primarily
reflects growth in Federal Reserve holdings
of Treasury securities and agency MBS as a
result of the purchase programs initiated at the
September 2012 and December 2012 FOMC
meetings. As of February 20, 2013, the par
value of Treasury securities and agency MBS
held by the Federal Reserve had increased
$70 billion and $178 billion, respectively,
since the end of June 2012. The composition
of Treasury securities holdings also changed
over the second half of 2012 as a result
of the continuation of the MEP, which was
announced at the June 2012 FOMC meeting.
Under this program, betv.een July and
December, the Desk purchased $267 billion in
Treasury securities \\'ith remaining maturities
of 6 to 30 years and sold or redeemed an
equal par value of Treasury securities with
maturities of 3 years or less. As a result, the
average maturity of the Federal Reserve's
Treasury holdings increased 1.7 years over the
second half of 2012 and into 2013 and, as of
February 2013, stood at 10.5 years.
Jkt 048080
Sfmt 6621
Federal Reserve assets increased, and the
average matu rity of its Treasury holdings
lengthened, . ,
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"''''''Y
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
76
MONETARY POl ICY REPORT: FEBRUARY 2Ot3
In the second half of 2012, the Federal
Reserve continued to reduce its exposure to
facilities established during the financial crisis
to support specific institutions. The portfolio
holdings of Maiden Lane LLC and Maiden
Lane III LLC-entities that were created
during the crisis to acquire certain assets
from The Bear Steams Companies, Inc., and
American International Group, Inc., to avoid
the disorderly failures of those institutionsdeclined $14 billion to approximately
$1 billion, primarily reflecting the sale of the
remaining securities in Maiden Lane III LLC
that was announced in August 2012. These
sales resulted in a net gain of $6.6 billion for
the benefit of the U.S. public. The Federal
Reserve's loans to Maiden Lane LLC
and Maiden Lane III LLC had been fully
repaid, with interest, as of June 2012. Loans
outstanding under the Term Asset-Backed
Securities Loan Facility (TALF) decreased
$4 billion to under 51 billion because of
prepayments and maturities of TALF loans.
With accumulated fees collected through
TALF exceeding the amount of TALF
loans outstanding, the Federal Reserve and
the Treasury agreed in January to end the
backstop for TALF provided by the Troubled
Asset Relief Program.
The improvement in ofTshore U.S. dollar
funding markets over the second half of 2012
led to a decline in the outstanding amount
of dollars provided through the temporary
U.S. dollar liquidity swap arrangements
with other central banks. As of February 20,
2013, drav.--s on the liquidity swap lines "'ere
$5 billion, down from $27 billion at the end of
June 2012. On December 13, 2012, the Federal
Resef\'e announced the extension of these
arrangements through February 1, 2014.
On tbe liability side of the Federal Resen'e's
balance sheet, deposits held by depository
institutions increased $176 billion since
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June 2012, while Federal Reserve notes in
circulation rose $60 billion, reflecting solid
demand botb at home and abroad. M2
bas increased at an annual rate of about
8 percent since June 2012. Holdings of M2
assets, including its largest component, liquid
deposits, remain elevated relative to what
would have been expected based on historical
relationships with nominal income and
interest rates, likely due to investors' continued
preference to hold safe and liquid assets.
As pan of its ongoing program to ellsure the
readiness of tools to manage resen'es, the
Federal Reserve conducted a series of smallvalue re\·erse repurchase transactions using
all eligible collateral types with its expanded
list of counter parties, as \\'ell as a few smallvalue repurchase agreements with primary
dealers. In the same vein, the Federal Reserve
continued to otTer small-value term deposits
through the Term Deposit Facility to provide
eligible institutions with an opportunity
to become familiar with term deposit
operations.
International Developments
Foreign financial market stresses
abated ...
Since mid-July, global financial market
conditions ha\·e improved, on balance, in
part reflecting reduced fears of a significant
worsening of the European fiscal and financial
crisis. Market sentiment was bolstered
by a new European Central Bank (ECB)
framework for purchases of sovereign debt
known as Outright Monetary Transactions
(OMT), agreements on continued officialsector support for Greece, progress by Spain
in recapitalizing its troubled banks, and some
steps toward fiscal and financial integration
in Europe. Nevertheless, financial market
stresses in Europe remained elevated, and
policymakers still face significant challenges
(see the bo:< "An Update on the European
Fiscal and Banking Crisis").
Sfmt 6621
22613030.eps
· .. while exposure to facilities
established during the crisis continued to
wind down
29
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
77
30
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
The Federal Reserve's Actions to Foster Financial Stability
Regulation
A core element of the globa l regu latory
comrrunity's efforts to improve banking regulation
has been the d€\felopment 0/ the Basel III capita l
reforms. In June lOll, the Federal ReselVe Board and
the other u.s. banking agencies issued a proposal
to amend the u.s. bank capital rules to implement
these reforms. The Basel III reforms will raise the
quantity of capital that must be held by u.s. banking
firms, improve the quality of regulatory capital 01
those firms, and strengthen the risk.weight framework
of u.s. bank capital rules.
Consistent with the requirements of the DoddFrank Wall Street Re/orm and Consumer Protection
Act r:i 2010 (Dodd- Frank Act), the Board has
also proposed rules to strengthen the oversight 01
the U.S. operations 01 foreign banks. Under the
Board's Decerrber 2012 proposal, foreign banking
organizations (FBOs) with a large U.S. presence
would be required to create an intermediate holding
company (IHC) over their U.S. subsidiaries, which
would help/acilitate cOllSistent and enhanced
supetvision and regulation of the U.S. operations of
these/oreign banks. An IHC 01 a foreign bank would
be required to meet the same U.S. risk·based capital
and leverage ru les as a U.S. bank holding company
(BHC).ln addition, IHCs and the U.S. branches and
agencies of foreign banks lvith a large U.S. presence
would need to meet liquidity requ irements simlaI' to
those imposed on U.S. BHCs.
Progress in regulato!), reform outside 01 the
traditional banking sector has been notable as well.
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For example, as mandated by the Dodd-frank Act,
the n€lv supervisory framework for systemically
important financial market utilities IFMUs}-that
is, lhose entities that provide the infrastructure
to make payments and clear and settle financial
lransactions-has continued to take shape. In
Jul y 2011, the Financial Stability O:ersight Council
IFSOC) designated eight FMUs as systemically
important and thus subject to enhanced risk·
management standards. On Jul y 30, the Federal
Reserve Board approved a final rule establishing
enhaoced risk.management standards for designated
FMUs supervised by the Federal Reserve. The rule
also establishes processes to review and consult with
the Saurities and Exchange Commission (SEC) and
theCorrmxlity Futures Trading Commission (CFTC)
on any proposed changes to the ru les, Il"ocedures,
or opetations of certain des ignated fMUs that could
materially affect the nature or 1€\Iei of their risk.
The FSOC has also continued to make progress in
its work to designate systemica lly important nonbank
financial companies for consolidated supetllision by
the federal Reserve. Relying primarily 011 data from
publicly a\'ailable reports, the fSOC is evaluating
the potential systemic importance of a nurrber 0/
nonbank firms that meet the quantitative criteria
for a flrst.stage review; to date, it has concluded
that some firms warranted further consideration
and has advanced them to the third and final stage
of the determination process. Meanwhile, the
International Association 0/ Insuraoce Supetvisors,
under the oversight of the Financial Stability
Board, has continued to move forward on crafting
a methooology to identify global systemically
important insurers and developing policy measures
that would be applicable to those institutions.
In addition, efforts to increase the resilience
of NshadoY.t banking," which refers to credit
intermediation that occurs at least partly outside
of the traditional banking system, are continuing.
In November 2012, the FSCX: proposed
recommendations for structural reforms of U.S.
money market funds to reduce their vulnerability to
runs and mitigate associated risks to the financia l
system. Another set 0/ reforms has been aimed
at the triparty repurchase agreement markets,
including efforts by the federal Reserve to reduce
the vulnerabilities created by the large amounts of
Fmt 6621
Sfmt 6621
22613031.eps
The Federal Reserve continued to take actions
in Ihe second half of 2012 and ea~y 2013 to me€t
its financial stability responsibil ities. Although
much remains 10 be done, the Federal Reserve
has implemented regulatory reforms to streogthen
the U.S. financial system, and it has taken further
steps to gather in/ormation from the supervisioo of
large banks, market reports, and other aonomic
and financial sources to assess threats to financia l
stability. The Federa l Reserve also has continued
to work closely with its domestic regulatory
counterparts and has taken actions to increase the
resilience of the international financial regulatory
architature.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
78
MONETARY POlICY REPORT: FEBRUARY 2013
Supervision
The Federal Reserve has conlinued to work 10
enDed its superlisory lXactices wilhin a broader
macroprudenlial framework. Annual stress tests.
which assess the internal capilal planning processes
and capilal adequacy of Ihe largesl SHCs, conlinue
to be an i~rtanl element in its strengthened.
cross·firm supervisory approach. The latest
ComlXehensi\l€ Capital Analysis and Review (Co\R
1013), which covers the 18 largest SHCs (and is
being conducted in a modified form for 11 other
large SHCs), is IlOW under way. In O::tober 2012,
the Soard published final stress·testing rules under
the Dodd-frank Act, and it released the economic
and financia l market stress scenarios for CO\R
1013 in November.' Co\R 2013 results wi ll be
released in March of this year.
The Federal Reserve has also been working
to impro\l€ the resolvability of the largest, most
cOITfllex banking firm;. The Dodd-frank Act
created the Orderly Liquidation Authority (OLA) to
improve the prospects for an orderly liquidalion of
a systemic financial fi rm and requi res that al l large
BHes submit resolution plans to their supervisors.
The Federal Deposit Insurance Corporation (FDIC)
has been developing a single-lX!int.of.entry strategy
for resolving systemic financial firm; under OLA,
and the federal Reserve, working closely with the
FDIC, has been carefully revieo.'1ing the resolution
plans (the so·called living wil ls) submilled in the
sUn1ll"'er and fall of 2012 by the largest and most
cOITfllex BHCs and FBOs.
In line with a joint agency report to the Congress
in July 2011, the Federal Reserve has continued
I. Information on the Dodd-FrankAcl >tr~ teSIS
and CO\.R areal\lilable on the Federal Reser"", Board·!
website at www.federalre;erve.govlbankinforeg!stres~
tests<ap i!.ll-planning.htm.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00082
Fmt 6621
to work with the SEC and the CfTC to develop
and implement effective supervisory practices
and techniques for designated fMUs, including
appropriate information.sharing arrangements and
Federal Reserve participalion in SEC and CfTC
examinations of designated FMUs.
Monitoring
The Federal Reserve has continued to pursue
an acti\'€ program of research and data col lection,
often in conjunclion with other u.s. and foreign
regulators and supervisors, and to work on
deo.'eloping a framework and infrastructure for
monitoring risks to financial stability. It continues
to regularly monitor a variety of items that measure
key financial vulnerabilities, such as leverage,
maturity m'smatch, interconnectedness, and
complexity of financ ial institutions, markets, and
products. In a context of ad\'€fS€ shocks, such
IlUlnerabilities could lead to fire sales and an
adverse feedback loop with credit availability,
wh ich could, in turn, inflict harm on the real
economy.
The Federal Reserve pays special attention
to de\l€lopments at the largest, most complex
financial firms, using both information gathered
through supervision and indicators 01 financial
conditions and systemic risk from financia l markets.
It has been analyzing the consequences for firms
and markets resu lting from the ongoing strains
in European financial markets as well as those
associated with the fiscal situation in the Un ited
States. Another issue that the Federal Reserve is
mon itoring closely is the potential incentive for
some investors and institutions to take on excessive
risk- for example, by inaeasing I€'.'€rage, credit
risk, and duration risk- in an allemptto reach for
yield in a susta ined 1(1,'1 interest rate environment.
Moreover, efforts are ongoing, both at the Federal
Reserve and elsewhere, to evaluate and develop
neo.'1 macroprudential tools that could help limit
buildups of systemic risk or increase the resilience
of financial institutions and markets to potential
adverse shocks.
Sfmt 6621
22613032.eps
inlraday credil provided by clearing wnks in these
markels.lnlemaliona l regu lalory groups have also
been addressing the financial slabilily risks of
shadow wnking.
31
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
79
32
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
An Update on the European Fiscal and Banking Crisis
I. See Mario Draghi (20121. 'Verbatim oftoc Remnb
Made by Mario Draghi: speech del ivered at theGkbal
tnves!merlt Confereoce, london, July 26, www.ecb.intl
prew1;ey/datel201 2/html/SP I10726.erJ.htrrl.
2. The EeB's purchases wil l focus ongo~rnment
oonds with maturities of OJlE' tothree years. The ECB will
have fu ll discretion over thesepurchases. A necessary
condition for ECB purchases is that a go'I('fnment reqllt'St
a full or precaution.Jry financial a~sta n cE'program from
the Eurcvean Financial Stability racil i!)' or the European
Stlbility Meo:hanism.A goo.'E'lnment that already has
such a program must r€gain mark€! access. In addition,
gover nments must fulfoll their policycommitmenlS under
thei r programs and the elJro-ared govf>lnancE' framE'WOO:.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00083
generally fulfilling their pol icy comnitments under
Iheir official financial assistance programs. In
Spain, the government secured euro·area official
approval and financing for its bank restructuring and
recapita lization plans. In Greece, the government
reinvigorated its long-stalled austerity and reform
initiatives. In response, European authorities resumed
financia l assistance to the Greek govE'rnment and
look steps to address Greece's public debt burden,
including E'asing thE' terms 01 euro·area official
financing and funding a discounted buyback
of roughly £30 billion in privately hE'ld Greek
government debt. More generally, offICial financial
assistance is continuing to provide vulnerable
countries with brE'athing room to make the difficu lt
adjustments needed to resolve their crises.
European governments have also made some
progress toward a European banking union. After
protracted nE'gotiations, European leaders agreed
in December on key details of a single supervisory
mechanism (SSM) for European banks with the
ECB at its center. The SSM is E.>Xpected to be
established sometime this spring and should enter
into force in early 2014. The ECB will directly
supervise large euro·area banks and will be able
to assume (from national authorities) super~ision
of any euro-arE'a bank whE'n necessary to ensure
consistent application of high supervisory standards.
Establishment 01 the SSM is ~iewed as a necessary
precondition for euro·arE'a governments to share
more directly the fiscal burden of resolVing
national banking crises. In addition, European
governments recently set objecti\l€S to accelerate
the harmonization of national policy frame'lvorks for
bank resolution and deposit insurance and, further
down the road, to create a single mechanism for
bank resolution and recovery.
In part because of the positil'e de~'elopments
highlighted previously, financial stresses facing
yulner.lble European governments and banksthough still elellated-mcxlerated substantially in the
second half of 2012 and E'arly 2013. Sovereign yields
declined signifICantly evE'n as the Italian and Spanish
governments issued substantial armunts 01 debt.
In addition, the Irish and Portuguese governments
began returning to bond markets; elch conducted a
limited, yet successiul, sale of bonds in January.
Fmt 6621
Sfmt 6621
22613033.eps
In the second half of 2012, European
policymakers stepped up efforts 10 supporl
vulnerable euro·area economies, strengthefl
domestic public finances and banking systems,
and reinforce the monetary union. As a result,
European financial stresses have moderated over
the past severa l months. Neverthdess, they remain
elevated, and European policymakers still face
significant challenges as they sed to improve fiscal
positions, implemeflt growth-augmenting structural
reforms, and bolster regional integration in a difficult
economic environment.
A key turning point in the euro·area crisis
occurred in late July, when Mario Draghi, the
European Central Bank (ECB) presideflt, stated,
'Within oUI mandate, the ECB is ready to do
whatever it takes to preser:e the euro."' The ECB
subsequeflily unveiled a frame'lvork for Outright
Monetary Transactions (DM T) to address distortions
in euro·area government bond markets that
underrrine the transmission 01 monetary po1icy.
Under certain conditions, the ECB can purchase
potentially unlimited amounts of government
bonds. 2 To date, the ECB has not purchased any
bonds under the OMT frame\vork. Neverthdess,
the announcement of the framework has rritigated
investors' concerns about the adequacy of financial
backstops for the Italian and Spanish governments
and, more generally, about the integrity of the euro
area.
Vulnerable euro·area countries have made
progress in strengthening their banking systems
and public finances in recent months. The
governments of Ireland and Portugal have been
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
80
MONETARY POl ICY REPORT: FEBRUARY 1Q13
As risk sent imem improved, foreign equity
indexes rose significantly: Over the second half
of 2012 and into early 2013, equity indexes
increased about 10 percent for the United
Kingdom and Canada, about 15 percent in
the eUfO area, and about 25 percent in Japan;
equity indexes in EMEs also moved up across
the board, as shown in figure 43. Likewise,
yields on IO-year government bonds in many
countries increased moderately, though
Japanese yields remained below I percent.
Spreads of peripheral European sovereign
yields over German bond yields of comparable
maturity declined significantly as overall
euro-area financial strains abated (figure 44).
Corporate credit spreads also declined, and
bond issuance picked up.
The U.S. dollar depreciated nearly I percent
against a broad set of currencies over the
second half of 2012 and into early 2013
(figure 45). Some of this depreciation reflected
a reversal of fligh t-to-safety flows, in pan
stemming from the reduction in European
financial stress. Indeed, the dollar depreciated
4 percent against the euro. In contrast, the
dollar appreciated 17 percent against the
Japanese yen. Most of this rise came in recent
months, as Shinzo Abe, the newly elected
prime minister of Japan, called for the Bank
of Japan to employ "unlimited easing" of
monetary policy to overcome deflation.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00084
Fmt 6621
43. Equity indexes for selected foreign ecooomies,
2009 13
_30.bM - lOO
,
I
Nm: Tho dala .,. doily. Tho lui observol .... fOf .."h se:i.. is
fdm:uy 20, 2013. E.....wog "'unto .... Bm;il, Cl:il ,. Chilli, C.. oM;'"
C=h Rq>UbI;". Eg)l'I. Hung&y, Jru!i>, Ic&:.n.<ia. Malay<io. Maim,
M",""""" PmI, til< Phjuppincs, Poland, Russi .. So\llh Afuc: .. Soulh Kom,
nillu, lb!ib::d, and Turk'}"
Sou.CII ; For""'"'Zintroarhu,M.'g" S1anltyE:n<rgingMo.rI:'1S~DEf
C... it&t IIlkx; fo:- th: <UN .,... Dow Jm.. Eu:o sroxx Indo<: for
ouro-atU be.nk:s, Dow Jonn Ell," STOXX Bel: Indo<; ftt I"""" T<i-yo
S1O<'kExcl:ant:o(TOPL\); aUviaBIoo:Ii>trg.
44 Gl:Ivemment debt spreads for peripheral
El.IJopean ~oooomies, 2009-13
----------------~----~~
-n
- u
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- "
."
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,
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20t2
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NOll: Tho dr.. are ..~<ldy. Tho tast ob>.......:ioo. for ...,h se:i.. is
Feb:uaIy IS, 20ll. Tho 'llftods ~n.,. th: yi.l<!> ... 10·y.a: bonds 10"
th: IO.yoa:-Gtrroanbo.:>:ly;..td.
Sow:Ii : For G,...,., ttaly, PmrugaJ, a:.rl SJ-,in. Sloont>trg; for Irdand,
.toft" ..:imateJ \!SCi trad<d bwd Jri..~ Ii"", Ibo:>l"", R",tm II!Id
Bl'">:obtrz.
Sfmt 6621
22613034.eps
Reduced concerns about the European crisis
contributed to an easing of funding conditions
for European banks. Euro-area banks have
relied somewhat less on ECB funding in
recent months, and use of cemral bank dollar
liquidity S\\'ap lines declined significantly.
ReSecting market vie ....-s of the decreased
risk of default, CDS premiums on the debt
of many large banks in Europe dropped
significantly, on net, especially for Italy and
Spain, and euro-area bank stocks increased
about 30 percent since mid-2012 (figure 43).
33
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
81
PART I: RECENT ECONOMIC AND fiNANCIAL DEVElOPMENTS
4S U.S mllar exchange mte against broad index
and selected maj(J£ clUTCllCies, 2010 13
ll«<d>erll,Z009-I00
!
I
2010
."
I
I
I!
2012
2013
Ncm:: Tho daa, whim .... in foreign oum:ry wts perdollar, are d.!ily
Thotal1observatimfQaoc:b..n.." Frilruary2t, 20t3,
Soutc!: fodml Res.,." &oro, Stotist".1 R.I/Z$< H.10, "fo:.ign
El<d:ang.Raus,"
46. Real gross domestic product gro"th in selected
advanced fOKign ecooomies, 2010-12
"
-"
I I
I I
2010
2012
NQll: 1'bo <IOto IIr'Q~lyond.xtrnd thm.Igh101IQ3 forCIII:lI.da on!
2012:Q4forlho __ ...... Jq:u, ondthoUnMlKingdom.
Soma: fill" CIlIOda, S:'l~ti", Caaada; for tho ...:ro ...... Eurosto~ ro:
kpan, Collioot O/f.,. of 1'fllIl; cd f.:tt l!l. Unit", K.i::!¢o.:n, Oflj" fo:
Nlti<m.tStot~ti""
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00085
Fmt 6621
. .. but economic activity in the advanced
foreign economies continued to
weaken . . .
Despite the easing of financial stresses in the
euro area and some improvement in global
financial markets, activity in the advanced
foreign economies (AFEs) continued to lose
stearn in the second half of 2012 (figure 46).
The euro area fell further into recession, as
fiscal austerity, rising unemployment, and
depressed confidence restrained spending,
especially in the countries al the center of the
crisis, Real GOP also contracted in Japan,
reflecting plummeting exports. In the United
Kingdom, real GOP growth resumed in the
third quarter, partly thanks to a temporary
boost to demand from the London Olympics,
but contracted again in the fourth quarter.
Canadian real GOP growth remained positive
but also weakened, largely owing to lower
external demand. Survey indicators suggest
that conditions in the AFEs improved only
marginally around the turn of the year. Amid
this weakness in economic activity and limited
pressures from commodity prices, inflation
readings for most AFEs remained contained.
Several foreign cemral banks expanded their
balance sheets further and took other actions
to support their economies (figure 47). In
addition to its introduction of the OMT, the
EeB lowered its main policy rate. The Bank
of England completed its latest round of asset
purchases, bringing its holdings to £375 billion,
and began the implementation of its Funding
for Lending Scheme, designed to boost lending
to households and firms. The Bank of Japan
took a number of steps. It introduced a new
Stimulating Bank Lending Facility in October
and raised its inflation target from I percent to
2 percent in January. In addition, it increased
the size of its Asset Purchase Program by
¥30 trillion, to ¥lOltrillion, by the end of 2013
and announced tbat purcbases would be open
ended beginning in 2014.
Sfmt 6621
22613035.eps
34
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
82
MONETARY POlICY REPORT: FEBRUARY 2013
· .. even as econ omic growth stabilized in
emerging market economies
47
Central bank assets in selected advanced
I!CrnJ(Jrnies., 200S-12
After slowing earlier in the year, in part
because of headwinds associated with Europe's
troubles, economic growth in EMEs stabilized
in the third quarter and appeared to pick up
in the fourth. This modest pickup in economic
activity in the face of continued v.eakness in
e.xports to advanced economies was supported
by monetary and fiscal policy stimulus.
In China, following slO\>,er growth in the
first half of 2012, stimulus measures helped
boost the pace of real GDP growth in the
second half of the year. Improved economic
conditions in China also provided a lift
to other emerging Asian economies. GDP
accelerated in Hong Kong and Tai\\'<ln in the
third quarter; in the fourth quarter, exports
and purchasing managers indexes moved
higher in most of the region, and GDP growth
rebounded in a number of economies.
35
- w
-"
-"
- ,
I I
,
100&
II
2009
,
,
,
1010
1011
,
I!
' I
1012
NOTIi: Ib, datunqua:urlycdox1Olld1hrougb 2Il12:Q3 forlho""" .....
trullhoUoittd King~"",ond2012Q.\forJ:IpIIIL
s..:mc.:
F"'Iho"""L..... Eutop<anC':O~lBank oodEuro:!to!:forj1pOll,
BalIk of J...." 0!Id Clbe..! Off... of J..,.n; owl for tho u"i".o<l Ki::g~orII,
Bank tiEnglt:>d andOrr.,. for r;.~"",,1 Stlti"-,,,"
After stagnating for about a year, economic
activity in Brazil picked up in the third quarter
to a still-lackluster pace of 2Y:z percent.
Indicators for the fourth quarter suggest
a further modest pickup, supported by
accommodative policies. In contrast, GDP
growth in Mexico continued to fall in the third
quarter as the growth of U.S. manufacturing
production slowed; however, Mexican
gro\\1h picked up to 3 percent in the fourth
quarter, boosted by services and the volatile
agricultural sector.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00086
Fmt 6621
Sfmt 6621
22613036.eps
Despite occasional spikes in food price~
inflation in most emerging Asian economies
remained \\eU contained as moderate output
growth limited broader price pressures. India
was a notable exception, with 12-month
inflation around 10 percent in recent months.
In some Latin American economies., increases
in food prices had a greater effect on inflation
than in Asia, leading to 12-month price
increases of around 5Y:z percent in Brazil and
around 4Y. percent in Mexico over the second
half of last year.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
83
37
2
PART
MONETARY POLICY
To promote the objectives given to it by the Congress, the Federal Open Market CommWee (FOMe)
provided additional monetary accommodation al its September 20 12 and December 20 12 meetings,
by both strengthening its forward gUidance regarding the federal funds rale and initiating additional
asset purchases.
As discussed in Pan 1, incoming economic
data throughout the second half of 2012
and into 2013 indicated that economic
activity was expanding at a moderate pace.
Employment gains v..ere modest, and although
the unemployment rate declined somewhat
over the period, it remained elevated relative to
le\~ls Ihat almost all members of the FOMe
sharper-than-anticipated fiscal contraction in
the United States. With longer-term inflation
expectations stable and still-considerable slack
in resource markets, most members anticipated
that inflation over the medium term would run
at or below the Comminee's longer-run goal of
2 percent.
viev.'ed as consistent with the Committee's dual
Accordingly, to promote the FOMCs objectives
of maximum employment and price stability,
the Comminee maintained a target range
for the federal funds rate of 0 to Y. percent
throughout the second half of 2012 and
provided additional monetary accommodation
at its September and December meetings,
by both strengthening its forward guidance
regarding the federal funds rate and initiating
additional purchases of longer-term securities
(figure 48). The Committee also completed
at year-end the continuation of the program
to extend the average maturity of its holdings
mandate. Inilation remained sutxlued, apan
from some temporary variations that largely
reflected fluctuations in commodities prices.
Members generally anached an unusually
high level of uncenainty to their assessments
of the economic outlook. Moreover, they
continued to judge that the risks to economic
grov.1h were tilted to the downside because
of strains in financial markets stemming from
the sovereign debt and banking situation in
Europe, as well as the potential for a significant
slov.'dov.'n in global economic grov.1h and for a
48.
Sel~lcd
interest rates. 2008- 13
- s
-,
-,
_ _ _ _ _ _ _ _ _ _ _ _ _ _IIIIIIiI_ _ _ _ _ :
, ,
"""""
"
, , , , ,
"
-------------------1IIl
1M9lm
200S
oll2SO
Imll"lm
2009
~
li IOIl~II2I","",l
20tO
"
2011
III.!
II2l
<I2l
lil lM4
2012
Ncm: Th< data ... daity md atml th=gh F.bnwy 2t. 2OtJ. Tho 2-yarmd to-yur rra.."')' lit.. ore tho constant-moruri:), yi.1d!
octivdymd<d .<=iIa. Tho dalai QlI U"lawiw.t:..t .... ore thos. of "gcl.,.1y ",l1<d-.:l.d FedeII1 Op.o M.,\::I:t Cw.:nitt.. m«ti:lp.
So\ru:t:: D<panm<:nofIheT"osurymdtbe Ftdaot R.........
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00087
Fmt 6621
Sfmt 6621
11!O
2013
buod", tho ",..I
22613037.eps
, ,
IOO<M
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
84
PART 2: MONETARY POLICY
of Treasury securities that was announced
in June 2012 and continued its policy of
reinvesting principal payments from its holdings
of agency debt and agency-guaranteed
mortgage-backed securities (MilS) into agency
MBS.
At the September 12- 13 meeting, the
Comminee agreed that the outlook called for
additional monetary accommodation, and
that such accommodation should be provided
by both strengthening its forward guidance
regarding the federal funds rate and initiating
additional purchases of agency MBS at a
pace of $40 billion per month . Along with the
ongoing purchases of $45 billion per month
of longer-term Treasury securities under the
maturity extension program announced in June,
these purchases increased the Committee's
holdings of longer-term securities by about
$85 billion each month through the end of the
year. These actions were taken to put downward
pressure on longer-term interest rates, sllppon
mortgage markets, and help make broader
financial conditions more accommodative (see
the box "Efficacy and Costs of Large-Scale
A&<>et Purchases"). The Committee agreed that
it would closely monitor incoming information
on economic and financial developments in
coming months, and that if the outlook for the
labor market did not improve substantially, it
would continue its purchases of agency MBS,
undenake additional asset purchases, and
employ its other policy tools as appropriate
until such improvement is achieved in a
context of price stability_The Comminee also
agreed that in determining the size, pace, and
composition of its asset purchases, it would,
as alv.ays, take appropriate account of the
likely eflicacy and costs of such purchases.
This llexible approach was seen as allowing
the Committee to tailor its policy o\'er time
in response to incoming information while
clarifying its intention to improve labor market
conditions, thereby enhancing the effectiveness
of the action by helping to bolster business and
consumer confidence.
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
PO 00000
Frm 00088
Fmt 6621
The Comminee also modified its forward
guidance regarding the federal funds rate at the
September meeting, noting that exceptionally
low levels for the federal funds rate were
likely to be v.arranted at least through mid2015, longer than had been indicated in
previous FOMC statements. Moreover, the
Committee stated its expeaation that a highly
accommodative stance of monetary policy
would remain appropriate for a considerable
time after the economic reco\'ery strengthens.
The new language was meant to clarify that
the Committee's anticipation that exceptionally
low levels for the federal funds rate v.-ere likely
to be warranted at least through mid-2015 did
not reflect an expeaation that the economy
would remain weak, but rather reflected the
Committee's determination to suppon a
stronger economic recovery.
At the December 11- 12 meeting, members
judged that continued provision of monetary
accommodation was warranted in order
10 support further progress toward the
Committee's goals of maximum employment
and price stability. TheCommineejudged
that, following the completion of the maturity
e.'{tension program at the end of the year,
such accommodation should be provided in
part by continuing to purchase agency MilS
at a pace of $40 billion per month and by
purchasing longer-term Treasury securities at
a pace initially set at $45 billion per month.
The Comminee also decided that, starting in
January, il would resume rolling o\'er maturing
Treasury securities at auction.
With regard to its forv.ard rate guidance, the
Committee decided to indicate in thestatemem
that it e.xpects the highly accommodative stance
of monetary policy to remain appropriate for
a considerable time after the asset purchase
program ends and the economic recovery
strengthens. In addition, it replaced the
date-based guidance for the federal funds
rate with numerical thresholds linked to the
unemployment rate and projected inflation.
Sfmt 6621
22613038.eps
38
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
85
MONETARY POLICY REPORT: FEBRUARY 2013
39
Efficacy and Costs of large.Scale Asset Purchases
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14:21 Aug 30, 2013
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Fmt 6621
Significantly lowered longer.term Treasury yields.'
More important, the effects of LSAPs do not S€€Il) to be
restricted to Treasury yields. In particular, LSAPs have
been found to be associated with Significant declines
in MBS yields and corporate bond yields as well as
with increases in equity prices.
Continued on nex( page
I. for a selective lislof releJeI1ces regarding theelfect of
the firstlSAp, S€(' thebox "The Effects 04 Federal R(>'.('fVe
AS>e\ Pu rchases' in Board of Go_nors oithe fffiE-ra 1
ReserveSystem {2011), MOl1etary Policy Rfpon (0 rhe
COtlgIl'S5 (\Vashington: Board of Governors, March), "'v.w.
ledera l reserve.gov/monet.lrypolicy/~r_2011 0301_partl .hIm.
For additional references, including lOOse thai ana lyze the
effectol thesecood LSAP as ",eH as the maturity extension
prograrT\. see, forexa~le, Stelania D'Arrico, William
[nglish, David lOpez·Salido, and Edward Nelson (2012), "The
Federal Res-efl'!"s Large-Scale Asset Purchase Progr.tJTJTll>S:
Rationaleaoo Effects,' Economic Joumal, vol. 122
(NOI'eni>et), pp. F415-45; Arvind KrishnalllJMYand Annette
Vissing.JOIJ:leo>en (20111, "The Effec!S of Quantitative Easing
on Interest Rates: Channels and 1~lications for Policy,'
!irookif18S Papers OIl ECOf1(tI1i( AaNity, Fall, pp. 21 5-(;5;
Canlin Li and Min Wei (l012), "Tetm Stwcture Modelling
with S~ly factors and the Federal R(>'.('fVe's la'ge
Scale Asset Purchase PrograJT6: FinallCeand Ecooomi~
Dis.cLlSsion Series 2012·37 (Wash ington: Boord 0/ GOI't'I"nors
of the Federal R(>'.('fVe SysterT\. May), www.lederalreser"",.
gOl',pubsJIedsl101112012371201237pap.pdf; and re/t'I"ences
in those studies. For work that >pe<: ifically eovhasizes the
signaling channel ofLSAPs, S€(', for e)(,)~le, Michael D.
Bauer and Glenn D. RudEtlus.ch (2012). "The Signaling
Channel lor Federal R(>'.('fVe Bond Purcha>e-i,' Working P.!Pt'l"
Series 2011·21 (San Francisro: Federal Reserve Bank ofSan
FrallCis.co, Auguw, \\wwJlbsf.orglptblications/economicsi
papersl2Olllwpll.2Ibk.pdl. For work that focuseson
theelfec!S 00 credit delault ris.k. see. for exarrple, Simon
Gilchrist and [goo Zakraj~{lOll), "The Irrpact 0/ the
Federal Reser"",'s large-Scale Asset Purchase Progr.tJT6 on
Df'lault Risk: paper presented at 'Macroeconomics and
FinallCiallntemlediation: Di rections sillC€ theCrisis,' a
conference held at theNational Bank 04 Belgium, B'ussels,
Decf.>lTber 9-10. 2011.Although the rn.Jjority of rese.Jrch
on the effec!S 0/ LSAPs appears to s~ort a signifICant
innuence OIl asset prices, theo\'f'fall resultol sllCh prograJT6
is generally difficu lt to estirn.Jte precisely: [1If'()\ studies can
rn.Jkeonly \.harp predictions on theelfec!S \I"itllin a relatively
short ti1l"E! horizon, where.J\ approaches based on time·
series models tend 10 face challenges in i§Oiating theelf~
of theprograJT6 from other economic develcprren!S. for a
more skEPtical \~ew 00 the f'lfecl 04 LSAPs, see, for e)(,)~le,
Daniell. Thornton (l012), 'Evi~llCe on the Portfolio BalallCe
Channel of Quantitati"", [a,iog.' Working P.!per Selies 2012015A (St loui,: federa l Reser"", Bank 04 St lou is, October),
http://research.stiouisfed.orgNipl2012nOI2-015.pdf.
Sfmt 6621
22613039.eps
In order to provide additional monetary stimulus
when short-term interest rates are near zero, the
Federal Reserve has undertakeo a series of largescale asset purchase (lSAP) programs. Between late
2008 and early 2010, the Federal Reserve purchased
approximately $1.7 trillion in longer.term Treasury
S€<urities, agency deb~ and ageocy mortgage-backed
S€<urities (MBS). From late 2010 to mid·10l1, a
S€<ond round of LSAPs was implemented, consisting
of purchases of S600 billion in longer-term Treasury
S€<urities. Bet\",een September 2011 and the end of
2012, the Federal Reserve implemented the maturity
extension program and its continuation, under which
it purchased approximately $700 billion in longer.
term Treasury securities and sold or allowed to run off
an equal amount of shorter·term Treasury securities.
And in September and December 2012, the Federal
Reserve announced flow·based purchases of agency
MBS and longer-term Treasury securities at initial paces
of $40 billion and S45 billion per m::mth, respectively.
These purchases were undertaken in order to put
downward pressure on longer.term interest rates,
support mortgage markets, and help to make broader
financial conditions more accommodative, thereby
supporting the economic recovery. One mechanism
through which asset purchases can affect financial
conditions is the "portfolio balance channel: which
is based on the premise that different financial assets
may be reasonably close but imperfect substitutes
in im'€Slors' portfolios. Th is assumption implies that
changes in the supplies of various assets available
to private investors may affect the prices or yields
of those assets and tne prices of assets that may be
reasonab ly close substitutes. As a resu lt, the Federal
Reserve's asset purchases can push up the prices
and lower the yields on the securities purchased
and influence other asset prices as we ll. As investors
furtner rebalance their portfolios, overall financial
conditions should ease more generally, stirrulating
economic activity through channels similar to those
for conventional monetary policy. In addition, asset
purchases could also Signal that the central bank
intends to pursue a more accomrmdative policy
stance than previously thought, thereby lowering
investor expectations about the future path of the
federal funds rate and putting additional dC1.vnwa rd
pressure on longer-term yields..
A substantial body of empirical research finds that
the Federal Reserve's asset purchase programs have
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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40 PART 2: MONETARY POLICY
Efficacy and Costs of Large-Scale Asset Purchases, continued
2. These resullS are discussed further in Hess Chung.
JE'.ln-l'Ililippe laforte, David Reifschneider, andJohn C.
William; (2012), "Hal'eWe UnderestiITLlted the ti~elillOOd
and SeverityofZero LOII-er Boond Evenl5?' Journalol Moo€')',
Credit and 8Jnking, voL 44 (fEbruaryso..wlemenO,
pp.47---{12.
3. For studies reponingsignificantmacroecooomic effeclS
from asset purchases, see, lor e~fIlIle, Jeffrey C. Fuhrer and
Giov.m ni P. Olivei (2011), "The Es~ITLlted Macroeconomic
E/feclS of the Federal Reserve's Large-Scale TrE'.lsury Purchas.e
Prograll\" Public Policy Brie(s 11-{)2 (Boston: Federal Reserve
Bankol Boston,April), lIWoI'.bosJrb.orgiecooomidppMOlll
f'Pbl I 2.pdf; and Christiane Baumeister and luca Benati
(2012), ' Unconventional Monetary Policy and the Greal
Recession: EstiITLlting the Macroeconomic EffeclS of a Spread
Compression at the Zero Lower Boond: Working ""pers
2012-21 (Ol\awa: Bank of Canada, July), www.b.Jnkofcanada.
calwp·conteOOuploads!2012107/lIp2012-21.pd1. Also, the
Bankor Eng1and has ifllliemeoted LSAPs similar to those
undertaken by the Federal Reserve, and its stafl research finds
that the effeclS appear to he quantitatively similar to thas<> in
the United States.
fur ~tudies reporting smaller elleclSlrom asset
purchases, see, for exaflllle, Michael T. Kiley (2012),
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a balanced reading of the evidence supports the
conclusion that LSAPs have prol'ided meaningful
support to the econorric recovery while rritigating
deflationary risks.
The potential benefits of lSAPs fTlJst be considered
alongside their possible costs. One potential cost of
conducting additional LSAPs is that the operatiof"6
coold lead to a deterioration in market functioning
or liquid ity in markets where the Federal Reserve
is eflgaged in purchasing. More specifical ly, if the
Federal Resefl'e becomes too dom inant a bu)'er in
a certain market, trading among private participants
coold decrease eflough that market liquidity and
price discovery become irrpaired. As the global
financial system relies on deep and liquid markets
for U.S. Treasury securities, significant impairment of
this market would be especia lly costly; impairment
of this market could also impede the transmission of
monetary policy. Although the large volume of the
Federal Resefl,€'s purchases relative to the size of
the markets for Treasury or agency securities could
ultimately become an issue, few if any problems have
been observed in those markets thus far.
Asecond potential cost of LSAPs is that they may
undernine public confidence in the Federal Reserve's
ability to exit smoothly from its accommodative
policies at the appropriate ti~. Such a reduction
in confidence might increase the risk that long-term
inflation expeclJlions beco~ unanchored. The
Federal Resefl'€ is certainly aware 01 these concems
and accordingly has placed great emphasis on
developing the necessary tools to ef"6ure that policy
accommodation can be removed when appropriate.
For example, the Federal Reserve will be able to
put upward pressure on short-term interest rates at
the appropriate time by raising the interest rate it
pays on resel"l'€s, using draining tools like reverse
repurchase agreements or term deposits with
depository institutions, or selling securities from the
Federal Resefl,€'s portfoliO. To date, the expansion of
the balance sheet does not appear to have materially
affected long-term inflation expeclJlions.
A third cost to be weighed is that of risks to
financial stability. for example, some observers have
"TheAggregale Demilnd Effects of Short- and Loog-Term
Interest Rates,' Financeand Economics Discus>ion Series
2012-54 (\Vashington: Boo rd of Governors of the Federal
Resefl'e System, August), www.federalreserve.govlpubsl
fedsl2012n012541201254pap.pdi; and Han Chen, Vasco
Curdia, and AndrE'.l Ferrero (2012), "The Macroeconomic
ElfeclS of large-Scale Asset Purchase Prograrrrnes: Economic
Journal, vol. I n (Noverrber), pp. F289-31S.
Sfmt 6621
22613040.eps
While there seems to be substlntial evidence that
lSAPs have 10IVered longer-term yields and eased
broader financial conditions, obtaining accurate
estimates 01 the effects 01 LSAPs on the macroewnomy
is inherently difficul t, as the counteriactual case-holV
the economy would have performed without LSAPscannot be directly observed. However, econometric
models can be used to estimate the effects 01 lSAPs
on the economy under the aSSUfTlltion that the
economic effects of the easier finandal conditions
that are induced by LSAPs are simila r to those that
are induced by conventional m:metary policy easing.
Model simulations conducted at the Federal Reserve
have geflerally found that asset purchases provide
a signifICant boost to the economy. For example,
a $\udy based on the Federal Reserve Boord's
FRBlUS model estimated that, as of 2012, the first
two rounds of LSAPs had raised real gross domestic
product almost 3 percent and increased fXivate pa)lfoH
efTllloyment by about 3 million jobs, while 1000ering
the unem~oy~nt rate about 1.5 percentage points,
relative 10 what would have been expected other.vise.
These simulations also sLJgg€St that the program
materially reduced the risk of deflation.'
Of course, all model-based es~mates of the
macroeconomic effects of LSAPs are subject to
coosiderable statistical and modeling uncertainty
and thus should be treated with caution. Indeed,
while some other stooies also report signifICant
macroewnomic effects from asset purchases,
other research finds smaller effects.' Nonetheless,
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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MONETARY POlICY REPORT: FEBRUARY 2013
4, For additional detail" see the box "The Federal Reserve',
ActiorD to Foster Finaocial Stability" in f'.ln L
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decline in coming years. Indeed, in some scenarios,
particularly if interest rates were to rise quickly,
remittances to the Treasury could be quite low for
a time. ~ EVe!1 in such scenarios, however, average
annual remittances Oller the period affected by the
federal Reserve's purchases are high ly li ke ly to be
greater than the pre-crisis nOfm, perhaps substantially
so. Moreover, if monetary policy promotes a stronger
recOliery, the associated reduction in the federa l
defIC it would fa r exceed any variation in the Federal
Reserve's rem ittances to the Treasury. That said, the
Federal Reserve conducts monetary policy to rreeI
its congressionally mandated objectil'eS of maximum
employment and price stabil ity and nol primarily for
the purpose of turning a prof~ for the U.S. Department
of the Treasury.
5. For add itional detail" see Seth B. Ca rpenter, Jane E.
Ih rig. Elizabeth C. Klee, Daniel W. Quinn, aooAlexandef
H. Boote (2013), "The federa l Reserve', Balance Sheet and
Earnings: A Primer and Projection>: Finaoce and [Conomi03
Oi5(u55lon Series 1013·01 (Washington: Boo rd 01 Governors
01 the Federal ReserveSystem, January), www.federal reseIW.
govlpwslleds!2013120 13011201301 ab,.html.
Sfmt 6621
22613041.eps
raised concerns that, by dril'ing longer.term yields
lower, nontraditional policies could induce imprudent
risk.taking by some investors. 0/ course, some risk·
taking is a necessary element 01 a hea lthy economic
recovery, and accommodative moneta!)' policies
could el'€11 se"'e to reduce the risk in the system
by strengthe!1ing the overa ll economy. Nonetheless,
the federal Reserve has substantial ly expanded its
monitoring of the financial s)'stem and modified
its supelVisory approach to take a more systenlc
perspective.
There has been limited evidence so far of excessil'e
buildups of duration, credit risk, or leverage, but the
Federal ReselVe wi ll continue both its careful oversight
and its implementation of financial regulatory reforms
designed to reduce systemic risk.'
The Federal Reserve has remitted substantial
income to the Treasury from its earnings on securities,
totali ng some $290 billion since 2009. However,
if the economy continues to strengthen and policy
accorrmodation is withdrawn, remittances will likely
41
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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PART 2: MONETARY POLICY
In panicular, the Commil1ee indicated that it
expected that the exceptionally low range for
the federal funds rate \\'Ould be appropriate
at least as long as the unemployment rate
remains above 6Y;. percent, inflation between
one and 1\.\'0 years ahead is projected to be
no more than Y2 percentage point abo\'e the
Comminee's 2 percent longer-run goal, and
longer-term inflation f.'ipectations continue to
be well anchored, These thresholds were seen as
helping the public to more readily understand
how the likely timing of an eventual increase in
the federal funds rate would shift in response to
unanticipated changes in economic conditions
and the outlook. Accordingly, thresholds could
increase the probability that market reactions
to economic developments \.\'Ould move longerterm interest rates m a manner consIstent
with the Comminee's assessment of the likely
future path of shon -term interest rates. The
Comminee indicated in its December statement
that il viewed the economic thresholds, at
least initially, as consistent with its earlier,
date-based guidance. The new language noted
that the Committee would also consider other
information when determining how long to
maintain the highly accommodative stance of
monetary policy, including additional measures
of labor market conditions, indicators of
inflation pre~ures and inflation expectations,
and reading<; on financial developments.
Jkt 048080
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At the conclusion of its January 29-30 meeting,
the Committee made no changes to its target
range for the federal funds rate, its asset
purchase program, or its forward guidance for
the federal funds rate. The Committee stated
that, with appropriate policy accommodation, it
expected that economic gro\.l/th would proceed
at a moderate pace and the unemployment
rate would gradually decline toward levels
the Committee judges consistent with its
dual mandate. It noted that strains in global
financial markets had eased somewhat, but
that it continued to see downside risks to the
economic outlook. The Committee continued
to anticipate that inflation over the medium
term likely would run at or below its 2 percent
objective.
22613042.eps
42
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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43
PART
3
SUMMARY OF ECONOMIC PROJECTIONS
The {ollowing malerial appeared as an addendum to the minutes of the December 11- 12,2012,
meeting of the Federal Open Market Commillee.
most likely to foster outcomes for economic
activily and inflation that best satisfy his or
her individual interpretation of the Federal
Reserve's objecti,·es of maximum employment
and stable prices.
In conjunction wilh the December 11-12,
2012, Federal Open Market Committee
(FOMq meeting, meeting participants-the
7 members of the Board of Governors and the
12 presidents of the Federal Reserve Banks,
all of whom participate in the deliberations of
the FOMC-submined their assessments of
real output gro\\'th, the unemployment rate,
inflation, and the target federal funds rale for
each year from 2012 through 2015 and over
the longer run. Each participant'S assessment
was based on information available at the time
of the meeting plus his Of her judgment of
appropriate monetary policy and assumptions
about the factors likely to affect economic
outcomes. The longer-run projections
represent each participant'S judgment of the
value to which each variable would be expected
to converge, over time, under appropriate
monetary policy and in the absence of
further shocks to the economy. "Appropriate
monetary policy" is defined as the future
path of policy that each participant deems
Overall, the assessments submitted in
December indicated that FOMe participants
projected that, under appropriate monetary
policy, the pace of economic recovery would
gradually pick up over the 2012- 15 period
and inflation would remain subdued (table I
and figure 1). Participants anticipated that the
growth rate of real gross domestic product
(ODP) would increase somewhat in 2013 and
again in 2014, and that economic gro\l:th in
2014 and 2015 would exceed their est imates
of the longer -run sustainable rate of growth,
while the unemployment rate would decline
gradually through 2015. Participants projected
that each year's inflation, as measured by the
annual change in the price index for personal
consumption expenditures (PCE), would run
Table I. Eoonomk projections of Federal Resent Board members and Federal Resen-e Bank presidents, December 2012
~~.
I
lO ll
lOll
I
2014
I
2015
I Lo~r
2012
! 2.31025
1.6IOU
2Jt025
1.61020
lJto15
2.1 104 1
52106_0
1.1108 0
8.0108.3
6911>18
1.0108.0
6.11014
6.3101.5
1.61Ol.8
15101.9
UiolO
151021
1.41022
1.6102.2
2.3103.0
2.510>.0
3.O1~3.5
Stp .. rnbtr projoctio.
1.1101.8
1.7102.0
>.Olo1.8
3.0103.1
>.01I>H
U... mploj.",.nlrlltt
Stp,"rnbtr projoctio •...
7.810 7.9
8.0108.2
7.410 1.1
7.610 1.9
6.8t~13
6.0106.6
6.110J.>
PCE i.ll:olio.
1.6 to l.l
1.1101.8
1.311>20
1.61020
1.S102.0
1.6102.0
1.6101.7
1.7101.9
1.6101.9
1.71020
l.61~2.0
,i
1.8102.0 !
I.8t~2.0
1.911>20
Cbant"'in .. aIGDP ...
Stp,"rnbtrprojoctiol ...
eo.. PCE mllalio.' ...
Stptrmbtr projection
!
i
5
:.::::: 1 .2::6.0
1.8102.0
20
I
lOll
UIOU
1.61Ol.8
L61020
i
I
R.,.,
))14
UtoU
1.5102.0
1.61022
I
:!(lIS
I
Lonter Rln
UIO~IUIo3.0
25104.21 U lolO
15lo2.2l
,i
1.1102.2 !
1.8102.l
18102.3
20
20
i
NoT-!; Pro)<CIK>U of~." "oJ groadoD<~~ prod"" (GN') .. d P"'J"' .... fu, botl .. """" of "lI>oo• • ~ fro., the ~ q.. ~,,~f Il>.. p''''''''y''' '" Il>.. fu .. 1l>. q... _
,,, of '1.'),,11 ;'d""o:1. PC!! ~I1>,,,
d "''' PC!! "lI>t"" .... Il>.. pert<Dtage "'" of
'''P'~""Iy. ,b. pr'" i.d", fu, P""""""""""P'''' "I'''dLlIlJU (pcE)lOd ,I..
ptic< ild", fu, PC!! _d~a Jood U<I
l'rojoot" .. fu, II., ""'''P~''I ,u. "" f>' ,b,
<i>ilil.
i.lb, f>iltl b q...... , of ". )Ur ild~,lOd . £0..
PO~ "'poa'-'
b",d •• bil " bOT . . - , , ' of 'PPIOj>, .... "''''''l'poIi'l'. Lo'ge '~"" !'fOP' ....
pl1tiapu'-' _".... I of til,
I.""'~b ....
..n.bk ""Ill:! '" .. pe<1«l to
\lid" 'Pproprio" .... ""YpoJi'l' .. d,, ,h. , l.sa«of f",tII.,.bod.,.,b. '''''0"", Th.
P"joctio .......... d.,. ",.ju"""'... !II lb. "'''~iI of lU Fool .... Ope. ",.. rIoot eo,,"'tt .... s.p~,,"" 11.-1l. 1011
J. Th. "",,,,J,,.d,,oyoxd"",,l., ,b~.l.ip •• U<I!II", _p/"O!"'i> .. fi>' ...... "obloi •• oobl""
l. n. ""ge fu, • ..,,&1>1< i• • gift. )'n, lI<b:I"ol po~iap"'''' P"'I''' .... froID t-~ '" kigl.,,~ fu, til .. "';"b~ in "''' ,....
1. Lo'l" -I\III proj",,,,,fu, "'"' PC!!
",i",o:!
....
proj,."......
"''''go ;,.
"''il'-
''"'''S'
""'"''B'
""'rep,,,,,,.&011
"i»>Y»'' ""
Sop""""
It"
VerDate Nov 24 2008
14:21 Aug 30, 2013
Jkt 048080
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Frm 00093
Fmt 6621
Sfmt 6621
22613043.eps
i.II>'"..... .."
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
90
44
PART 3: SUMM.I,RY OF ECONOMIC PROJEalONS
figure 1. Central tendencies and range. of economic projections, 2012-15 and over the longer run
,.-
_ OJaDge in real GDP
_
• Ctnlrlllttndcocy<>fprojoctiollI
I Rrmge{)fprt;ectiooi
--
Aclual
""
2008
",.
iiiiI!ii
~
ii!ii
;;.I;;
~14
WIS
too",
II
~10
Wll
W12
2M3
,~
UnempJ~nt
rale
-
.....
""
2008
,-
",.
~
~ iiijiii
ll
!I!II!!
II
WIO
Wll
~12
2013
~14
WIS
too",
,~
,--
PCEinHatioll
~
=
11
""
2008
""
WIO
Wll
2012
•
2J)1J
Ii
iIijiii
2014
2015
I
I
too~,
,~
,-
Core PCE iutlalion
~ =
I
iiiiI!ii
~
2013
2014
~
I
I
2001
2008
""
WI.
2J)1l
2012
2015
I
Longer
,~
VerDate Nov 24 2008
14:21 Aug 30, 2013
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22613044.eps
Note: Definitions of variables are in the gellt'ral note to table L The data forthe actual values of the ,miabies are annual
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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MONETARY POLICY REPORT: fEBRUARY 1013
As shown in figure 2, most panicipants judged
that highly accommodative monetary policy
was likely to be warranted over the next few
years. In particular, 14 participants thought
that it would be appropriate for the first
increase in the target federal funds rate to
occur during 2015 or later. Most panicipants
judged that appropriate monetary ]Xllicy
would include purchasing agency mortgagebacked securities (MBS) and longer-term
Treasury securities after the completion of the
maturity extension program at the end of 2012.
As in September, participants judged the
uncenainty associated with the outlook
for real activity and the unemployment
rate to be unusually high compared with
historical norms, with the risks weighted
mainly toward slower economic growth
and a higher unemployment rate. While a
number of participants viewed the uncertainty
surrounding their projections for inflation
to be unusually high, more saw the level of
uncenainty to be broadly similar to historical
norms; most considered the risks to inBation
to be roughly balanced .
The Outlook for Economic Activity
Participants judged that the economy grew
at a moderate pace over the second half of
2012 and projected that, conditional on their
individual assumptions about appropriate
monetary ]Xllicy, the economy would grow
at a somewhat faster pace in 2013 before
expanding in 20\4 and 20 \5 at a rate above
what pan icipantssaw as the longer-run rate
of output growth. The central tendency of
their projections for the change in real GDP
in 2012 v.'3S 1.7 to 1.8 percent, slightly lower
than in September. A number of participants
mentioned that last summer's drought and
the efiects of Hurricane Sandy likely had held
down economic activity in the second half of
this year. Many panicipants also noted that,
VerDate Nov 24 2008
14:21 Aug 30, 2013
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Fmt 6621
while conditions in the housing and labor
markets appeared to have improved recently,
uncenainty about fiscal policy appeared to
be holding back business and household
spending. Participants' projections for 2013
through 2015 were generally linie changed
relative to their September projections. The
central tendency of part icipants' projections
for real GDP growth in 2013 was 2.3 to
3.0 percent, followed by a central tendency of
3.0 to 3.5 percent for 2014 and one of 3.0 to
3.7 percent for 2015. The central tendency
for the longer-run rate of increase of real
GDP remained 2.3 to 2.5 percent, unchanged
from September. Most participants noted
that the high degree of monetary policy
accommodat ion a§umed in their projections
would help promote the economic recovery
over the forecast period; however, they also
judged that several factors would likely
hold back the pace of economic expansion,
including slower growth abroad, a stillweak housing market, the difficult fiscal
and financial situation in Europe, and fiscal
restraint in the United States.
Participants projected the unemployment
rate for the final quaner of 2012 to be close
to its average level in October and November,
implying a rate some\l.'hat below that projected
in September. Participants anticipated a
gradual decline in the unemployment rate over
the forecast period; even so, they generally
thought that the unemployment rate at the
end of 2015 would still be well above their
individual estimates of its longer-run normal
level. The central tendencies of participants'
forecasts for the unemployment rate were
7.4 to 7.7 percent at the end of 2013, 6.8 to
7.3 percent at the end of 2014, and 6.0 to
6.6 percent at the end of 2015. The central
tendency of participants' estimates of the
longer-run normal rate of unemployment that
would prevail under appropriate monetary
policy and in the absence of further shocks to
the economy was 5.2 to 6.0 percent, unchanged
from September. Most participants projected
that the unemployment rate would converge
Sfmt 6621
22613045.eps
close to or below the FOMes longer-run
inflation objective of 2 percent.
45
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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46
PART 3: SUMM.I,RY OF ECONOMIC I'ROJEalONS
figure 2. Onl""iew of roMe participants' assessments of appropriate monetary policy, December 2012
Nod>erolpuhcip... to
Awopriale liming of policy fuming
20[4
2013
~16
2015
Awopriale pace of policy fuming
,
Target federal funds rate aI year.e)d
......... ~ 6
••••• "1".
· •
...................................................... ··············································· · ···1······ · · _
•
········ ~
4
•
•
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••
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-
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............ ~ 1
,
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•
................................................................................................. ·· 1 ······· ................. ~ 0
~12
~lJ
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~15
1
Longer run
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Nott: Iu the U[lpfr panel, tbe height of each bar dfDO~S the number of FOMC participants who judge that, under
appropriale monetary policy, tbe filit increase in the target federal funds rate from its CllJTfDt mge of 0 to Y. perctot
\\ill oocuriu tbespecifJed caleodar lear [u September 2012, tbe numbersof FOMC palticipants who judged thal the
first increase in thelilrget federal funds rate would oocurin 2012, 2013, 2014, 20[5, and 2016 \\ere,re;~ti\"e1y, 1,3,
2, 12, and I. In the I~r panel, each shaded circle indicales the ,alue (rounded to the nearest Y. perctlliage point) of
an inw,idual participant's judgment of the appropriate lew[ of the target federal funds rate aI the end of the specified
.:aIendar )\'"3J or over the 1000ger J"\IIl
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
93
MONITARY POLICY RtPORT: fEBRUARY 2013
Figures 3.A and 3.B provide details on the
diversity of panicipants' views regarding the
likely outcomes for real GOP growth and
the unemployment rate over the next three
years and o\'er the longer run. The dispersion
in these projections reflects differences in
participants' assessmentS of many factors,
including appropriate monetary policy
and its etfects on tbe economy, the rate
of improvement in the housing sector, the
spillo"er effects of the fiscal atxl financial
situation in Europe, the prospective path for
U.S. fiscal policy, the extent of structural
dislocations in the labor market, the likely
evolution of credit and financial market
conditions, and longer-term trends in
productivity and the labor force. With the data
for much of 20 12 now in hand, the dispersion
of participants' projections of real GOP
growth and the unemployment rate this year
narro",:ed compared with their September
submissions. Meanwhile, the distribution
of participants' forecasts for tile change in
real GOP in 2013 shifted down a bit, and
that for 2014 narrowed slightly. Hov.'e\"er, the
range of projections for real GOP growth
in 2015 was little changed from September.
The distributions of the unemployment rate
projections at the end of 2012, 2013, and 2014
all shifted lower, wllile the range of projections
for the unemplo:yment rate for 2015, at 5.1 to
6.8 percent, remained close to its September
level. The dispersion of estimates for the
longer-run rate of output growth sla}'ed fairly
narrow, with all but one between 2.2 and
2.5 percent. The range of participants'
estimates of the longer-run rate of
unemployment, at 5.0 to 6.0 percent, narrowed
relatht: 10 September. This range reflected
different judgments among participants about
several factors, including the outlook for labor
force participation and the structure of tbe
labor market.
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The Outlook for Inflation
Participants' views on the broad out look for
inflation under appropriate monetary policy
were little changed from September. Most
anticipated that inflation for 2012 as a whole
would be close to 1.6 percent, somewhat lov.t:r
than projected in September. A number of
participants remarked that recent inflation
readings had come in below their expectations.
Almost all of the participants judged that
bolh headline and core inAation would remain
sulxlued over the 2013- 15 period, running al
rates equal to or below the FOMe's longerrun objective of 2 percent. Specifically, the
central tendency of participants' projections
for inflation, as measured by the PeE price
index, mo\'ed down to 1.3102.0 percent for
2013 and v.~ little changed for 2014 and 2015
at 1.5 to 2.0 percent and 1.7 10 2.0 percent,
respecti\'ely. The central tendencies of the
forecasts for core inflation wl;!re broadly similar
to those for the headline measure for 2013
through 2015. In discussing factors likely to
sustain low inAation, several participants cited
stable inBation expectations and expectations
for continued sizable resource slack.
Figures lC and 3. 0 provide information
aboul the diversity of participants' views
about the outlook for inflation. The range of
participants' projections for headline inAation
for 2012 narro\'.'ed from 1.5 to 1.9 percent
in September to 1.6 to L8 percent in
December; nearly all participants' projections
in December were at 1.6 percent or 1.7 percent,
broadly in line with recent infiation readings.
The distributions of participants' projections
for headline inflation in 2013 and 2014 shifted
lower compared with the corresponding
distributions for September, while Ihe range of
projections for core inAation narrowed slightly
for both years. The distributions for core and
on:rall infiation in 2015 were concentrated
near the Committee's longer-run inflation
objective of 2 percent, although somewhat less
so than in September,
Sfmt 6621
22613047.eps
to their estimates of its longer-run normal rate
in five or six rears, while a few judged that less
time would be needed.
47
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
94
48
PART 3: SUMM.I,RY OF ECONOMIC I'ROJEalONS
Flgul'l! 3A . Dis(ribu(ioo of partici pants' projwtions for (he change in l'I!aJ GDp, 2012-15 and over (he longer run
2012
C
~
Deoo""",
projection'
_. Sepltmbor project",'"
-"
-"
-"
->2
--w,
-- ,6
~~~~~~,~,•. "-,c,c.--~"c.--~,.~-c,~,.--c,oo.---,c,c.--~"c-~,.c.--c,7,--c,o,---,c,c.--' 2
11
U
U
U
U
11
U
~
U
U
1.6-
"
'1
U
Pen:ult range
Wll
_..... - ,..
- - :1
c
""
t lII
H11
12U
u-
U
,.-,
16U
11U
J.O11
J.l-
U
-1. -.
11
1.7
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H
-
~
IS
--- "">2
c
""
t l-
H·
"
"
2.'U
.. - ".~-• •''''':'''' '-=--'';'';I
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11
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H-
U
II
1)
II
lb1.1
H-
I~-
J~
'1
-- w,
- 6
--,2
,
12'.1
Percent range
WI>
c
""
Nod>"orp"'dp....
_ Longer run
c
I';'
II
J.O-
IIII
"
Perceot ratlge
,.,
n
1. -
H·
"
"
u·
H·
" "
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Note: DclmitioDI of variabks areiD tile geDerai note to table I
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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MONETARY POLICY REPORT: fEBRUARY 2013 49
Figure lB. Distribution of participants' projectioos for the unempbymen t rate, 2012- 15 and oYer the longer rw]
=
2012
D n..:am.r projections
_
-- SoplO mborprojectiOll'
_
c
In·
Sol
~~
~
~t·
~~
~
I.!
15
l.J
H
6.1
u·
6.)
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~
6.1
6,1
u·
63
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J.
1-1
IA'
IS
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I
I'"
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=::
-"
-' = jij
-I _I 1
=:
1_
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J!}
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,_
, --,2
u·
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l.\
IJ
Percent rn.nge
.. ,
_
In·
),]
1.1·
Sol
H·
1,1
H·
).J
_
~
~
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6,1
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u·
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.
••
~
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3
1~
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6.1
63
7.1
),J
u·
IJ
U
JJ
Percen'rn.nge
2015
_ , _ [3B_;;':':
".
"
~
H·
~
~
u·
~
u·
~
a
lJl.JH6,1636.16.1631-l
Percent =ge
),)-
"
.." ,
a·
.•
w
~ _iDD: -.~.,
I~
),]
SolH
1.'1,1
H
\.1-
6.(1-
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n
Percent rn.nge
,.
.
,.• •.,
" "" " "
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-"
-"
-"
-n
- '"
-,
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1.)-
--, '
n
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Sfmt 6621
22613049.eps
Note: DefilliuOlIs of l"ariabieS are in the ge!leral note to lable 1
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
96
50
PART 3: SUMM.I,RY OF ECONOMIC I'ROJEalONS
Figure lC. Distribution of participants' projections for PCE inflation, 2012- 15 and om the longer run
=[]
2012
_
••
n.o._ projocliollS
-- """
-"
- 18
r----'
s.pltmbtrprojec~OII'
-.
-,
- 10
L____
-
4
~~~~__~______" ,__~ l
" Percent range
"
WIJ
"---- ______ I_
----~
== -
cJIIIII
,
U
IA
\.1-
\1
\,
I'
tl
2]
-----~
~\
U
Percent range
W14
Pero'nt range
2015
.. ----,
I
Percent range
-- """
-- ",
loDger rllD
-
10
-,
-,
,l
""
"" Percent range
""
",.
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Note: Definitions of Iwiableureio lhegeneral DOte \0 table I
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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MONETARY POLICY REPORT: fEBRUARY 2013
51
Figure 1D. Distribution of participants' projections for core PCE inflation, 2012- 15
~"Qf p>rti:ipu"
- 21HZ
_
0 0.0._ p<oj<cti"'"
•• S<pt<mb<Tproj<clioo,
r-----'
I
L _____ _
Per«ntrange
- 2013
_____ J - - - - - -,
I
- 20[4
Per«ntrange
N,.erofpll10p0. I,
- 20[5
-"
-"
-I<
r-----'
-
I<
- 12
-,
-
,
"
IQ
-,
--':.IIII,I~~- ;
"
"
Per«ntrn.ge
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Note, DdinitiOllSof\'anablesare in the general note to table [
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
98
PART 3: SUMM,>,RY OF ECONOMIC PROJECTIONS
Appropriate Monetary Policy
As indicated in figure 2, most participants
judged that e.xceptionally [ow levels of the
federal funds rate would remain appropriate
for several more years. In particular,
13 participants thought that the first increase
in the target federal funds rate v.'Ou[d nOI be
warranted until 2015, and 1judged that policy
firming would likely not be appropriate until
2016 (upper panel), The 13 participants who
expected that the target federal funds rate
would not move above ils effective lower
bound until 2015 1houghllhe federal funds
rate would be 1Y. percent or lower at the
end of that year, while the I participant who
expected that policy firming would commence
in 2016 sav.' the federal funds rate target at
50 basis points at the end of that year. Five
participants judged that an earlier increase in
the federal funds rate, in 2013 or 2014, would
be most consistent with the Committee's
statutory mandate. Those participants judged
that the appropriate value for the federal funds
rate would range from ~ to 20/. percent at the
end of 2014 and from 2to 4Y2 percent at the
end of 2015.
Among the participants who saw a later
tightening of policy, a majority indicated that
they believed it was appropriate to maintain
the current [evel of the federal funds rate
until the unemployment rate is less than or
equal to 6~ percent. In contrast, a majority
of those who favored an earlier tightening of
policy pointed to concerns about inflation as
a primary reason for expecting that it would
be appropriate to tighten policy sooner.
Participants were about evenly split between
those who judged the appropriate path for the
federal funds rate to be unchanged relative to
September and those who saw the appropriate
path as [ov.-er.
VerDate Nov 24 2008
14:21 Aug 30, 2013
federal funds rate ranged fro m 3 to 4~ percent,
reflecting the Committee's inflation objective
of 2 percent and participants' judgments about
the longer-run equilibrium le'·el of the real
federal funds rate.
Participants also provided information on
their views regarding the appropriate path
of the Federal Reserve's balance sheet. Most
participants thought it was appropriate for
the Committee to continue purchasing MBS
and longer-term Treasury securities after
completing the maturity extension program
at the end of this year. In their projections,
taking imo account the likely benefits and
costs of purchases as v.-ell as the expected
evolution of the outlook, these participants
v.-ere approximately evenly divided between
those who judged that it would likely be
appropriate for the Committee to complete its
asset purchases sometime around the middle
of 2013 and those who judged that it would
likely be appropriate for the asset purchases
to continue beyond that date. In contrast,
several participants believed the Committee
would beSt foster its dual objectives by ending
its purcbases of Treasury securities or all of
its asset purchases at the end of this year
when tbe maturity extension program was
completed.
Nearly all participants saw the appropriate
target for the federal funds rate at the end of
2015 as still well below its expected [ongerrun value. Estimates of the longer-run target
Key factors informing participants'
views of tbe economic outlook and the
appropriate setting for monetary policy
include their judgments regarding labor
market conditions that would be consistent
with maximum employment, the extenl to
which employment currently deviated from
maximum employmem, the extent to which
projected inflation om the medium term
deviated from tbe Committee's longer-term
objective of 2 percent, and participants'
projections of the likely time horizon necessary
to return employment and inflation to
mandate-consistentleve\s. Many participants
mentioned economic thresholds based on the
unemployment rate and the inflation outlook
that were consistent with their judgments
Jkt 048080
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52
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
99
MONETARY POLICY REPORT: fEBRUARY 1013 53
Figure 3.E details the distribution of
participants' judgments regarding the
appropriate level of the target federal funds
rate at the end of each calendar year from
201210 2015 and over the longer run. As
previously noted, most participants judged
that economic conditions would warrant
maintaining the current low level of the
federa l funds rate until 2015. Views on the
appropriate level of the federal funds rate by
the end of 2015 varied, with 12 participants
seeing the appropriate level of the federal
funds rate as 1 percent or lower and 4 of them
seeing the appropriate level as 21f:. percent or
higher. Generally, the participants who judged
that a longer period of \·ery accommodative
monetary PJlicy would be appropriate were
those who projected that a sizable gap between
the unemployment rate and the longer-run
normal level of the unemployment rate would
persist until 2015 or later. in contrast, the
majority of the 5 panicipants who judged that
policy firming should begin in 2013 or 2014
indicated that the Committee would need to
act relatively soon in order to keep inflation
near the FOMCs longer-run objective of
2 percent and to prevent a rise in inflation
expectations.
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Table 2. AWJ1Ige historical projection enor I1IIlges
""",,nto!')OpoIn"
Ch'ny i. ,"IODI"
"" ." "" ""
±0.6
±1.4
±1.7
fl.?
U......pkl)lIlOmru..
±0.2
10.9
±1.5
!l.9
±05
J:O.9
J: I.I
no
Variable
Tau.lc""'Ill"'''prioer' ..
""",..-..:I
min.,
Nt.m: Error "'II#' ,.""'" ...
os pl., "r
rlit roo!
"",an oq.aro<! .""r"r projoc!io., for 1992 1brougb :!(Ill rhal ......
..It""'" in tho raU ~. "orio... privlr. . 0<1 t",.....,.,.1 r.....,.".". A.
dacribod ill tho I><I< "For«aR U"",rWDly.-.odtr",rW. iJO.mJl!io.~
tho .. i. about a 70 po""'"t probabilirylhlU octuol """"'""" ilr ,..1 GDP,
u..",p~monl, a,.j ""."",." pr>:.. will bo in n OV' implied by tho
""'"'"Y ,i,. " r projection .""" made ill tho post, fuothor ior"rmati""
maybo il.o<I in [)a..'id R.il1d...i<l,raod P<l<fTulip (:l(JQ7j, ··aauy.t
tho U..-:mai.ory "r tho Eco.<lII1ic Ou~ook from Hiororical ror«aRint;
Erro",* FiII~1U ao<l Ecooomb Di.co";"n S<rirs ))(I?-60 (\\'""hi.gtoo
!loanl "r Go-.mI .... "r rho Fo.kral R....... S)~ltm, N"",mbtr).
1,o.fiDitio.. "r,...riorblo.a.. i.th.r:<D<r1l1ooto-totorblt 1
2, Mt3<ure i,lb. "",,,,Ueoo,umo, pn.:., iodt .. tho pnc. """" .. that
... boo. most "ideIy .oed in t"", ...,..11IIId pri":... ""'."..,, r"r«aR~
P'ojoctio. is I""".r cha"", rounh qua,lt, of tho pmi"",)'eor to tho
r""'tbqlllrttrortho)~or~
Uncertainty and Risks
Nearly all of the participants judged their
current levels of uncertainty about real GDP
grov.1h and unemployment to be higher than
was the norm during the previous 20 years
(figure 4).1Se\'en participants judged that the
levels of uncertainty associated with their
forecasts of total PCE inflation were higher
as well, while another 10 participants viewed
uncertainty about inflation as broadly similar
to historical norms. The main factors cited
as contributing to the elevated uncertainty
aboul economic outcomes were the difficulties
invoh'ed in predicting fiscal policy in the
United States, the continuing potential for
European developments to threaten financial
stability, and the possibility of a general
slol,l,TIown in global economic growth. As in
September, participants noted the challenges
associated with forecasting the path of the
I. Table 2 plUlides estimates of the forecast
uncertainty for the change in real GDp, the
unemplO}ment rate, and total conswner price inflation
om the pericd frem 1992 through 2011. At the end
of this swnmary, the box "Fomast Uncertainty"
discusses the sources and interpretation of IUlcertainty
in the economic forecasts and explains the approach
used 10 assess the Wlcertaintyand risks attending the
participants' projections.
Sfmt 6621
22613053.eps
of when it would be appropriate to consider
beginning to raise the federal funds rate.
A couple of participants noted that their
assessments of the appropriate path for the
federal funds rate took into account the
likelihood that the neutral level of the federal
funds rate was somewhat below its historical
norm. There was some concern expressed that
a protracted period of very accommodative
monetary PJlicy could lead to imbalances in
the financial system. It v.'aS also noted that
because the appropriate stance of monetary
policy is conditional on the evolution of real
activity and inflation over time, a&')essments
of the appropriate future path of the federal
funds rate and the balance sheet could change
if economic conditions were to evolve in an
unexpected manner.
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
100
54
PART 3: SUMM.I,RY OF ECONOMIC I'ROJEalONS
Figure 3.E. Distribution of participants' projections for the target federal fund. rate, 2012-15 and over the longer run
Wil
o
=
=U
.I
Deuoi>erp.-oject.,,.
. , StplOruberproj«otion.
:: 1
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= 1!
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2.61
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),62
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311
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),13 1.D
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14:21 Aug 30, 2013
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NOle: The target federal fWlds rare is measured as lIie Ie>'eJ of tile target Tate at the rod of the caleudar year or
io the 1000ger nm
L:\HEARINGS 2013\02-26 THE SEMIANNUAL MONETARY POLICY REPORT TO THE CON
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MONETARY POLICY REPORT: fEBRUARY 2013
55
figure 4. Uncerlainty and risks in economic projections
- Uncertaintyaoout GDP growth
- Risks toG DP gr0\\1h
_ 1:1 ~p<o.ie<ti"",
_ •• StplOmberproj«otioA'
_ 1:1 D=ri>orproj."6,,o.
_ •• StplOmbeT projection,
-"
-"
-"
-"
-12
.,,
->0
-
Bmadly
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d(lYonslde
"""
-
U~rtaiuty
rr--.. . ·=:!
aboUllhe uneruplO)"rotll t rate
-
2t)
. ,.... -,-:::---,-,----' '
Ihoadly
Weighted to
upside
_ Risks tOlhe unemplo)ment rate
1-14
1- 12
l~
,-,
,-,
1=
;1'
r
Ihoadly
stllIIlar
\\'e!ghted to
d(M"DSlde
- Uoctrtaiuty all-out PCE in8atioD
,....-..""
r
Broadly
oola1lCed
WeIghted to
upside
-"
-"
-"
-"
-12
-Risks to PCE inIIatioD
-----
Bmadly
snullar
Higher
1. _ _ _ _ - 4
to
d(M"Ds!de
W~i gltltd
. ,""'"
Broadly
~1ILJ 2
Weigltledto
UpsIde
-"
-"
-"
-"
- 12
- Risks tocore peE inllatiOll
- Uncertainty about core PCEinilatiOll
.,
- >0
-
.,
- >0
-
I.----, -~
Ihoadly
SUlIIlar
Higher
Weiglttedto
d(M"DSlde
. ,""'"
Ihoadly
Weighted to
Upllde
VerDate Nov 24 2008
14:21 Aug 30, 2013
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Note: For deliDitiOlls oflWCtrtaiuty 3lld risks in OCOItoruic p-ojeoiOllS, set the box ·forecasl U~rtaiD\(·Deliui
tiOilS of variables are in the getICr&1 note to I3bIe 1
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PART 3: SUMM,>,RY OF ECONOMIC PROJEalONS
u.s. economic recovery following a financial
crisis and recession that difi'ered markedly
from recent historical experience. A number
of participants also commented that in the
aftermath of the financial crisis, they were
more uncertain about the level of potential
output and its rate of growth. It was noted
that some of the uncertainty about potential
output arose from the risk that a continuation
of elevated levels of long-term unemployment
might impair the skills of the affected
individuals or cause some of them to drop out
of the labor force, thereby reducing potential
output in the medium term.
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14:21 Aug 30, 2013
of risk were U.S. fiscal policy, which many
participants thought had the potential to slow
economic activity significantly over the near
term, and the situation in Europe.
A majority of participants reported that they
saw the risks to their forecasts of real GDP
growth as weighted tov.'<lrd the downside and,
accordingly, the risks to their projections
of the unemployment rate as tilted to the
upside. The most frequently identified sources
Most participants cominued to judge the risks
to their projections for inflation as broadly
balanced, with several highlighting the recent
stability of longer-term inl1ation expectations.
Howewr, three participants saw the risks to
inflation as tilted to the dov.llside, reflecting,
for example, risks of disinl1atiollthat could
arise from ad\'erse shocks to the economy that
policy would have limited scope 10 offset. A
couple of participants saw the risks to inflation
as weighted to the upside in light of concerns
about U.S. fiscal imbalances, the current highly
accommodative stance of monetary policy,
and uncertainty about the Committee's ability
to shift to a less accommodative policy stance
when it becomes appropriate to do so,
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MONETARY POLICY REPORT: fEBRUARY 1013 57
Forecast Uncertainty
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and fourth years. The corresponding 70 percent
confidence intervals for overall inflation would
be 1.5 to 2.S percent in the current year, 1.1 to
2.9 percent in the second year, 0.9 to 3.1 percent in
the third year, and 1.0 to 3,0 percent in the fourth
year.
Because current conditions may differ from
those that prevailed, on average, over history,
participants provide judgments as to whether the
uncertainty attached to their projections of each
variable is greater than, smaller than, or broadly
similar to typical levels of forecast uncertainty
in the past, as shewn in table 2. Participants also
provide judgments as to whether the risks to their
projections are weighted to the upside, are weightoo
to the da.vnside, or are broadly balanced. That is,
participants judge whether each variable is more
likely to be above or belew their projections of the
most likely outcome. These judgments about the
uncertainty and the risks attending each participant's
projections are distiflCt from the diversity of
participants' \'iews about the most likely outcomes.
Forecast uncertainty is concerned with the risks
associatoo with a particular projection rather than
10th divergences across a number of different
projections.
As with real activity and inflation, the outlook
for the future path of the federal funds rate is subject
to considerable uncertainty. This uncertainty arises
primarily because each participant's assessment of
the awropriate stance of rmnetary policy depends
importantly on the evolution of real activity and
inflation over time. tf economic conditions evolve
in an unexpectoo manner, then assessments of the
appropriate setting of the fooera l funds rate would
change from that point forward.
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The economc projections provided by the
members of the Board of Governors and the
presidents of the Federal Reserve Banks inform
discussions of moneliry policy among policymakers
and can aid public understanding of the basis for
policy actions. Considerable uncertainty attends
these projections, howel'€r. The economic and
statistical models and relationships used to help
produce economic forecasts are necessarily
imperfect descriptions of the rea l world, and the
future path of the economy can be affected by
myriad unforeseen del'€lopments and events, Thus,
in setting the stance of monetary policy, participants
consider not only what appears to be the most likely
economic outcome as erIDodied in their projections,
but also the range of alternative possibilities, the
likelihood of their occurring, and the potential costs
to the economy should they occur.
Table 2 summarizes the average historical
accuracy of a range of forecasts, including those
reported in past Monel.ary Policy Reports and those
preraroo by the Fooeral Reser\'€ Boord's staff in
advance of meetings of the Fooeral Open Marlce!
Committee. The projection error ranges shewn in
the table illustrate the considerable uncertainty
associated with economc forecasts. For example,
suppose a participant projects that real gross
domestic product (GOP) and total consumer prices
will rise steadily at annual rates of, respectively,
3 percent and 2 percent. If the uncerta inty attending
those projections is similar to that experienced in
the past and the risks around the projections are
broadly balanced, the numbers reported in table 2
would imply a probability of about 70 percent that
actual GOP would eKpaod within a range of 2.4 to
3.6 percent in the current year, 1.6 to 4.4 percent in
the second year, and 1J to 4.7 percent in the third
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59
ABBREVIATIONS
14:21 Aug 30, 2013
asset·backed commercial paper
advanced foreign economy
BHC
bank holding company
CDS
credit default
C&I
commercial and industrial
~v:aps
CMBS
commercial mortgage-backed securities
CP
C{)mmercial paper
CRE
commercial real estate
DPI
disposable personal income
ECB
European Central Bank
EME
emerging market economy
E&S
equipment and software
FOMe
Federal Open Market Committee; also, the Committee
GDP
gross domestic product
MBS
mortgage-backed securities
MEP
matunty exlenslOO program
MMF
money market fund
NI PA
nalional income and product accounts
OMT
Outright Monetary Transactions
PCE
personal consumption e.xpenditures
REIT
real estate investment trust
repo
repurchase agreement
SEP
Summary of Economic Projections
SLOOS
Seoior Loan Officer Opinion Survey on Bank Lending Practices
S&P
Standard and Poor's
TALF
Term Asset-Backed Securities Loan Facility
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ABCP
AFE
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