Embed Size (px)
DESCRIPTION
This is the presentation that was given at the Federal Reserve Bank of Chicago for the 2010 Federal Reserve Challenge.
Citation preview
Conducting Monetary Policy at
Low Short Term Interest Rates
Eric Cramer
November 1, 2010Federal Reserve Challenge: Bank of Chicago1
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago2
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago3
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Gross Domestic Product (Billions)
November 1, 2010Federal Reserve Challenge: Bank of Chicago4
Source: Congressional Budget Office and the Bureau of Economic Analysis
$8,000.00
$9,000.00
$10,000.00
$11,000.00
$12,000.00
$13,000.00
$14,000.00
$15,000.00
$16,000.00
Potential GDPReal GDPForecasted GDP
Unemployment Index
November 1, 2010Federal Reserve Challenge: Bank of Chicago5
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Unemployment Rate
Median Duration of Unemployment
Source: the Bureau of Labor Statistics
Inflation
November 1, 2010Federal Reserve Challenge: Bank of Chicago6
Source: the Bureau of Labor Statistics and the University of Michigan
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
CPI Inflation
Core CPI Inflation
Expected Inflation
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago7
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Federal Funds Rate
November 1, 2010Federal Reserve Challenge: Bank of Chicago8
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Federal Funds Rate
Source: Board of Governors Federal Reserve
Monetary Policy at Low Interest Rates
November 1, 2010Federal Reserve Challenge: Bank of Chicago9
Provide assurance to investors that short term rates will
remain low in the future
Change the relative supplies of securities in the market by
altering the composition of the Federal Reserve’s balance
sheet
Increase the size of the Federal Reserve balance sheet
Monetary Policy at Low Interest Rates
November 1, 2010Federal Reserve Challenge: Bank of Chicago10
Provide assurance to investors that short term rates will
remain low in the future
Change the relative supply of securities in the market by
altering the composition of the Federal Reserve’s balance
sheet
Increase the size of the Federal Reserve balance sheet
Spread Between BAA and 10yr T-Bond
November 1, 2010Federal Reserve Challenge: Bank of Chicago11
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Spread Between 10 Yr Treas and BAA
Source: Board of Governors Federal Reserve
Treasury Security Yield Curve
November 1, 2010Federal Reserve Challenge: Bank of Chicago12
Source: Board of Governors Federal Reserve
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 20 Year 30 Year
December 1, 2007
October 22, 2010
Federal Reserve Balance Sheet
November 1, 2010Federal Reserve Challenge: Bank of Chicago13
As of October 21, 2010
Millions of Dollars
Assets Liabilities
Securities Deposits with Federal Reserve Banks $ 264,052
Held Outright $ 2,044,742 Reserve Balances $ 264,052
Treas. Sec and Fed Agency Debt $ 824,964 Other Liability and Capital $ 72,508
Mortgage Backed Securities $ 1,067,874
Other Loans $ 48,582 Monetary Base
Primary Credit $ 32 Reserve Balances $ 983,202
Term Asset-Back Security $ 28,899 Currency $ 961,745
Maiden Lane LLC I, II, and III $ 66,465
Net Holdings of Commercial Paper --
Central Bank Liquidity Swaps $ 560
Other $ 98,475
Total Assets $ 2,343,438 Total Liabilities $ 2,251,827
Source: Board of Governors Federal Reserve
Balance Sheet Assets
November 1, 2010Federal Reserve Challenge: Bank of Chicago14
Source: Board of Governors Federal Reserve
36%
7%
46%
12%
US Treasury Securities
Federal Agency Debt Securities
Mortgage Backed Securities
Other Assets
Monetary Policy at Low Interest Rates
November 1, 2010Federal Reserve Challenge: Bank of Chicago15
Provide assurance to investors that short term rates will
remain low in the future
Change the relative supply of securities in the market by
altering the composition of the Federal Reserve’s balance
sheet
Increase the size of the Federal Reserve balance sheet
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago16
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Support for Quantitative Easing
November 1, 2010Federal Reserve Challenge: Bank of Chicago17
Fed’s promise of Lower Interest Rates sounds more
credible
Rebalancing of investment portfolios
Possible inflationary effects
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago18
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Inefficiencies of Quantitative Easing
November 1, 2010Federal Reserve Challenge: Bank of Chicago19
Limited flexibility on monetary policy when the
economy recovers
Increased rates of inflation caused by excess reserves
in the market
Increased inflation caused by an implementation lag from
the previous use of quantitative easing
Obstacles of quantitative easing
Liquidity Trap
November 1, 2010Federal Reserve Challenge: Bank of Chicago20
Further increases in
the money supply
will have little effect
on interest rates.
There will be a
limited increase in
investment or GDP.In
tere
st R
ate
Quantity of Money
Demand
Supply2Supply1
Treasury Inflation Protected Securities
November 1, 2010Federal Reserve Challenge: Bank of Chicago21
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
April-06 October-06 April-07 October-07 April-08 October-08 April-09 October-09 April-10
5-Year TIPS
10-Year TIPS
Source: Haver Analytics
TED Spread
November 1, 2010Federal Reserve Challenge: Bank of Chicago22
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
TED Spread
Source: Board of Governors Federal Reserve and LIBORATED
Current Credit Market Conditions
November 1, 2010Federal Reserve Challenge: Bank of Chicago23
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Credit Cards
Commercial Real Estate
Small Firms
Large and Medium Firms
Source: Board of Governors Federal Reserve
Capacity Utilization
November 1, 2010Federal Reserve Challenge: Bank of Chicago24
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
80.00%
85.00%
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Manufacturing Utilization
Total Utilization
Source: Board of Governors Federal Reserve
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago25
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Advantages of Quantitative Easing
November 1, 2010Federal Reserve Challenge: Bank of Chicago26
Stabilize Output
Catalyst for future economic growth
Maximize Employment
Begin to place downward pressure on the unemployment rate
Price Stability
Currently below the non-accelerating inflationary rate
Housing Market
Housing Market Index
November 1, 2010Federal Reserve Challenge: Bank of Chicago27
Source: Board of Governors Federal Reserve and the Department of Commerce
0.00
25.00
50.00
75.00
100.00
125.00
150.00
175.00
200.00
225.00
250.00
275.00
300.00
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Housing Starts
Real Estate Loans
30 Year Conventional Mortgage
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago28
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Excess Reserves
November 1, 2010Federal Reserve Challenge: Bank of Chicago29
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Log of Excess Reserves
Interest on Excess Reserves
Source: Board of Governors Federal Reserve
Money Multiplier
November 1, 2010Federal Reserve Challenge: Bank of Chicago30
0.50
0.70
0.90
1.10
1.30
1.50
1.70
1.90
2.10
January-00 January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08 January-09 January-10
Money Multiplier
Source: Board of Governors Federal Reserve
Overview
November 1, 2010Federal Reserve Challenge: Bank of Chicago31
Current State of the Economy
Monetary Policy at Low Interest Rates
Options Available
Federal Open Market Committee Recommendation
Quantitative Easing
Support
Inefficiencies
Advantages
Interest on Excess Reserves
Conclusion
Conclusion
November 1, 2010Federal Reserve Challenge: Bank of Chicago32
Implement the second round of quantitative easing
Purchase long term Treasury Securities
Continue to hold mortgage backed securities to maturity
Continue to target the Federal Funds Rate at between 0
and 25 basis points
Lower the interest on excess reserves back to 0%
