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Acting to Avoid a Great Stagnation Eric S. Rosengren President & CEO Federal Reserve Bank of Boston South Shore Chamber of Commerce Quincy, Massachusetts September 20, 2012 EMBARGOED UNTIL THURSDAY, SEPTEMBER 20, 2012 AT 8:15 A.M. EASTERN TIME, OR UPON DELIVERY Avoiding a Great Stagnation Historians use “Great” to reflect success – e.g., Alexander the Great Economists use “Great” to reflect difficult episodes and policy that contributes or fails to alleviate – e.g., Great Depression, Great Recession Forceful action necessary – and being taken – to avoid a Great Stagnation 2 What Would Constitute A Great Stagnation? Policymakers accepting as inevitable a slow growth economy and underutilized economic resources Allowing high unemployment to become a more permanent feature of the economy Policy only reacting to large negative shocks; accepting slow growth that makes little progress in returning to full employment 3 Acting to Avoid It: Our Monetary Policy Response to Global Slowdown Seek faster growth than has occurred or is likely to occur without action Asset purchases (agency mortgage-backed and Treasury securities) More open-ended focus on economic outcomes rather than calendar dates or amounts purchased Communicating that we anticipate low short-term rates likely to be warranted at least through mid2015; accommodative until recovery is sustainable Context of price stability; assessment of costs, efficacy 4 Our Monetary Policy Response Continued… Unconventional policy has risks, but they are preferable to the risk of another year or more of economic stagnation My rationale for policy change… 5 Real-World Example of Stagnation Japan and Europe have both suffered long periods of slow growth Today I will focus on Japan – despite some key differences from the U.S. Demographics – Japanese population’s average age is rapidly rising Slow response to banking problems 6 Figure 1 Japan’s Real Gross Domestic Product 1980:Q1 - 2012:Q2 Trillions of Chained 2005 Yen, Seasonally Adjusted Annual Rate 800 Trend Line Estimated Over Period 1980 - 1990 600 Real GDP 400 200 0 1980:Q1 1984:Q1 1988:Q1 1992:Q1 Source: Cabinet Office of Japan / Haver Analytics 1996:Q1 2000:Q1 2004:Q1 2008:Q1 2012:Q1 7 Figure 2 U.S. Real Gross Domestic Product 1980:Q1 - 2012:Q2 Trillions of Chained 2005 Dollars, Seasonally Adjusted Annual Rate 16 Trend Line 1 1 12 Real GDP 1 8 0 4 0 1980:Q1 0 0 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 2012:Q1 Recession Source: BEA, NBER / Haver Analytics 8 Causes of Slow Growth Not unusual after a financial crisis Let’s look at a few factors (not enough time for a detailed discussion) 9 Figure 3 Growth in Real GDP and Real GDP Excluding Housing and Government Spending 2009:Q2 - 2012:Q2 Index, 2009:Q2=100 108 Real GDP Excluding Residential Investment and Government Spending (Average Annual Growth of 2.45%) 106 104 Real GDP (Average Annual Growth of 2.21%) 102 100 98 2009:Q2 2009:Q4 2010:Q2 Source: BEA, NBER / Haver Analytics 2010:Q4 2011:Q2 2011:Q4 2012:Q2 10 Figure 4 Housing Starts 2000:Q1 - 2012:Q2 Thousands of Units, Seasonally Adjusted Annual Rate 2,500 1 2,000 1 1,500 1 1,000 0 500 0 0 0 2000:Q1 2002:Q1 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1 Recession Source: Bureau of the Census, NBER / Haver Analytics 11 Figure 5 Growth in Real State and Local Government Spending 2000:Q1 - 2012:Q2 Percent Change from Year Earlier 6 1 4 1 2 1 0 0 -2 0 -4 -6 0 2000:Q1 2002:Q1 2004:Q1 2006:Q1 2008:Q1 2010:Q1 2012:Q1 Recession Source: BEA, NBER / Haver Analytics 12 Figure 6 Change in Real GDP from U.S. Business Cycle Peak by Country 2007:Q4 - 2012:Q2 Index, 2007:Q4=100 110 105 Canada Germany United States France Japan United Kingdom 100 95 90 2007:Q4 2008:Q2 2008:Q4 2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4 2012:Q2 Source: BEA, CAO, Eurostat, ONS, INSEE, StatCan / Haver Analytics 13 The Significant Costs of a Slow Recovery Impact on those unemployed or underemployed Temporary labor market problems can eventually become more permanent because of a slow recovery 14 Figure 7 Employment-to-Population* Ratio January 2000 - August 2012 Percent 66 1 64 1 62 1 60 0 58 0 56 0 Jan-2000 Jan-2002 Jan-2004 *Includes population 16 years and older Source: BLS, NBER / Haver Analytics Jan-2006 Jan-2008 Jan-2010 Jan-2012 Recession 15 Figure 8 Long-Term Unemployment January 1980 - August 2012 Percent 50 1 40 1 Percent of unemployed out of work for 27 weeks or more 30 1 20 0 10 0 0 0 Jan-1980 Jan-1984 Jan-1988 Jan-1992 Jan-1996 Jan-2000 Jan-2004 Jan-2008 Jan-2012 Recession Source: BLS, NBER / Haver Analytics 16 What Should Monetary Policymakers Do? Conventional response – lower short-term rates… not possible at the zero lower bound Unconventional responses More costs Impact less certain Still, not a reason to avoid necessary actions 17 Figure 9 Japan’s Central Bank Assets and Inflation Rate 1990:Q1 - 2012:Q2 Trillions of Yen 160 Total Assets of Bank of Japan 120 80 40 0 1990:Q1 1993:Q1 1996:Q1 1999:Q1 2002:Q1 2005:Q1 2008:Q1 2011:Q1 1999:Q1 2002:Q1 2005:Q1 2008:Q1 2011:Q1 Percent Change from Year Earlier 6.0 Consumer Price Index for Japan 3.0 0.0 -3.0 1990:Q1 1993:Q1 1996:Q1 Source: Japanese Ministry of Internal Affairs and Communications, Bank of Japan / Haver Analytics 18 Figure 10 Federal Reserve System Assets and U.S. Inflation Rate January 1990 - July 2012 Trillions of Dollars 4.0 1 1 3.0 Federal Reserve System Assets 2.0 1 0 1.0 0.0 Jan-1990 0 Jan-1993 Percent Change from Year Earlier 6.0 4.0 Jan-1996 Jan-1999 Jan-2002 Recession Jan-2005 Jan-2008 Jan-2011 0 1 Personal Consumption Expenditure Price Index 1 1 2.0 0 0.0 -2.0 Jan-1990 0 Jan-1993 Jan-1996 Jan-1999 Source: Federal Reserve Board / Haver Analytics Jan-2002 Jan-2005 Jan-2008 Jan-2011 0 19 FOMC Announcement Asset purchases $40 billion per month of agency MortgageBacked Securities (MBS) Continued exchange of short-term Treasury securities for an equal amount of long-term securities through the end of the year – $45 billion per month – via the maturity extension program begun in June 20 Announcement Continued… Plan is more open-ended – continue purchases until there has been sustained improvement in labor markets – end based on economic outcomes, not a set purchase amount or a date Committee expects the highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens – currently anticipate low rates are likely to be warranted at least through mid-2015 21 Figure 11 Financial Market Response to FOMC Announcement August 1, 2012 - September 14, 2012 September FOMC Statement Day After FOMC Statement Chairman Bernanke’s Jackson Hole Speech 9/12 - 9/13 9/12 - 9/14 8/30 - 9/14 7/31 - 9/14 S&P 500 (Percent Change) +1.6% +2.0% +4.7% +6.3% Exchange Rate: Euros Per Dollar (Percent Change) -0.1% -1.9% -4.9% -6.3% 5-7-Year Investment-Grade Corporate Bond Yield (Change in Basis Points) -4.4 bp -3.8 bp -5.4 bp -12.9 bp Yield on 30-Year FNMA Current Coupon MBS (Change in Basis Points) -24.4 bp -12.5 bp -12.1 bp -1.7 bp Previous FOMC Statement Source: Federal Reserve Board, Bank of America Merrill Lynch, WSJ, Bloomberg / Haver Analytics 22 Conclusion Action intended to promote faster growth and return to full employment more quickly But monetary policy is not a panacea – large shocks can be mitigated, but likely not offset While policy will quicken recovery – it still will take time This underlines the importance of forceful and timely action necessary to avoid the dubious title of “Great” 23
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