proposal to the fomc
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Proposal to the FOMC. Current Economic Situation & Dual Mandate Performance. Source: Bureau of Economic Analysis; Congressional Budget Office . Underemployment & Unemployment Elevated. Source: Bureau of Labor Statistics. Long-Term Unemployment Especially Problematic. - PowerPoint PPT PresentationTRANSCRIPT
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Proposal to the FOMC
Dual Mandate Performance
Economic Headwinds
Our Policy: Explicit Commitment to Contingent Quantitative Easing
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Current Economic Situation & Dual Mandate Performance
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20002001
20022003
20042005
20062007
20082009
20102011
201210,000
10,500
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
15,000
Sizable and Persistent GDP Gap
Potential Real GDPReal GDP
Billi
ons o
f US
Dolla
rs
-$867B, or -6.4%
Source: Bureau of Economic Analysis; Congressional Budget Office
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Underemployment & Unemployment Elevated
Source: Bureau of Labor Statistics
20002001
20022003
20042005
20062007
20082009
20102011
20120.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Under EmploymentUnemploymentPe
rcen
t
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Long-Term Unemployment Especially Problematic
19751977
19791981
19831985
19871989
19911993
19951997
19992001
20032005
20072009
20110.0
5.0
10.0
15.0
20.0
25.0
30.0Median Duration of Unemployment (in Weeks)
Source: Bureau of Economic Analysis; Congressional Budget Office
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Inflation Remains Stable
20032004
20052006
20072008
20092010
20112012
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Core PCEPCEMandate
Perc
ent
Source: Bureau of Economic Analysis; Federal Reserve
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20072008
20092010
20112012
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
5 Year TIPS Spread
5 Year Aver-age PCE, Survey of Professional Forecasters
Perc
ent
Inflation Expectations are Well Anchored
Lehman Brothers Bankruptcy
Source: Federal Reserve; Federal Reserve Bank of Philadelphia
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Dual Mandate Performance
Sizable GDP Gap
Unemployment Exceptionally High
Inflation Well Anchored Around 2% Target
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Economic Headwinds
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Source: Thomson Reuters/University of Michigan
19751977
19791981
19831985
19871989
19911993
19951997
19992001
20032005
20072009
201150.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
Low Consumer Confidence Inhibits Recovery
Inde
x
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Source: Board of Governors of the Federal Reserve
19861986
19871988
19891990
19911992
19931994
19951996
19971997
19981999
20002001
20022003
20042005
20062007
20082008
20092010
20112012
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00Spread of Baa Bonds over Treasuries
Perc
ent
Investors Lack Confidence in Corporate Debt
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Source: Bank of America Merrill Lynch, Board of Governors of the Federal Reserve
01-2000
01-2001
01-2002
01-2003
01-2004
01-2005
01-2006
01-2007
01-2008
01-2009
01-2010
01-2011
01-20120.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
BBB Bond Spread over US Treasuries
Perc
ent I
nter
est S
prea
d
20002001
20022003
20042005
20062007
20082009
20102011
201240,000
45,000
50,000
55,000
60,000
65,000
70,000
75,000
Mill
ions
of D
olla
rs
New Orders of Core Durable Goods (ex-Aircraft, ex-Defense)
Businesses Lack Confidence in Recovery Prospects
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“Fiscal Cliff” Poses Broad Macroeconomic Risks
Source: Congressional Budget Office
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European Debt Crisis Under Control, For Now
20022003
20042005
20062007
20082009
20102011
20120.0
1.0
2.0
3.0
4.0
5.0
6.0
10-year Spain Bond Spread
10-year Italy Bond Spread
Source: International Monetary Fund
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20002001
20022003
20042005
20062007
20082009
20102011
20122
2.5
3
3.5
4
4.5
5
5.5
6
6.5
Fall in PRFI is a Large Portion of GDP Gap
PRFI/Real GDP
Perc
ent
Source: Bureau of Economic Analysis
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20002001
20022003
20042005
20062007
20082009
20102011
2012300
500
700
900
1100
1300
1500
1700
1900
2100
2300
Housing Starts Far Below Pre-Recession Levels Th
ousa
nds o
f Hou
sing
Sta
rts
Source: Census Bureau
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Unconventional Monetary Policy
Asset Purchases Forward Guidance
Conventional Monetary PolicyInterest Rate Hit Lower Bound
Sluggish Economy
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Source: Board of Governors of the Federal Reserve
20052006
20072008
20092010
20112012
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Fed Actions Have Lowered Rates…
10-Year Treasury30-Year MortgagePe
rcen
t Int
eres
t
QE2
TwistQE1
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20052005
20052006
20062006
20072007
20072008
20082008
20092009
20092010
20102010
20112011
20112012
2012600
700
800
900
1000
1100
1200
1300
1400
1500
1600…And Boosted US Equities
S&P 500 Index
Inde
x
QE1 QE2
Twist
Source: Standard & Poor’s
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Conclusion
Weak Recovery Despite Accommodative Monetary Policy
Further Stimulus needed
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Current Fed Policy:
“If the outlook for the labor market does not improve substantially, the Committee will
continue its purchases of agency mortgage-backed securities, undertake additional asset
purchases, and employ its other policy tools as appropriate until such improvement is achieved
in a context of price stability.”
Source: FOMC Statement, October 24th 2012
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Our Policy:
“If the unemployment rate remains above 7% and core inflation remains below 3%, the
Committee will continue its purchases of agency mortgage-backed securities, undertake
additional asset purchases, and employ its other policy tools as it sees fit. ”
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Clarify and Commit Fed to Further Stimulus
Provide Stability to Offset Uncertainty Over Fiscal Policy and Other Macroeconomic Risks
Induce Confidence in the Recovery to Encourage Additional Investment and Consumption
Policy Goals:
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Further Guidance Occurs If:
Inflation Rises from a Supply Shock
Natural Rate of Unemployment is Higher than Currently Projected
Our Policy is Successful and Unemployment Falls Below 7%
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Inflation will remain controlled
Long Term Inflation Target of 2%
Temporary Nature of Policy
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Summary:
Economic Factors Warrant Further Monetary Stimulus
Increased Commitment and Clarity of Conditional QE Boosts Recovery Confidence
Inflation Remains Under Control