Transcript Speech by Chairman Ben S. Bernanke At the

The Impact of Macroeconomics
Conditions on the Strategic
Planning Process
Edmond Seifried Ph.D.
Seifried & Brew LLC
Fed FOMC News:
A Review
January 24-25, 2012 FOMC Meeting:
Announcement of Inflation and Employment Goals
•
The inflation rate over the longer run is primarily determined 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 personal consumption expenditures,
chain weighted price index...(This Chain Weighted index allows for substitution
to lower priced goods, unlike the CPI index where quantities remain fixed)
•
The maximum level of employment is largely determined by nonmonetary
factors that affect the structure and dynamics of the labor market. These
factors may change over time and may not be directly measurable.
•
FOMC participants' estimates of the longer-run normal rate of unemployment
had a central tendency of
5.2 percent to 6.0 percent,
PCE Core Chain Weighted Index
June 19-20, 2012 FOMC Meeting:
Operation Twist Extended through 2012
•
Information received since the Federal Open Market Committee met in April suggests that the
economy has been expanding moderately this year. However, growth in employment has
slowed in recent months, and the unemployment rate remains elevated.
•
To support a stronger economic recovery and to help ensure that inflation, the Committee
decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and -are
likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
•
The Committee intends to purchase Treasury securities with remaining maturities of 6 years to
30 years at the current pace and to sell or redeem an equal amount of Treasury securities with
remaining maturities of approximately 3 years or less. This continuation of the maturity
extension program should put downward pressure on longer-term interest rates. The
continuation of the maturity extension program will proceed at the current pace and result in
the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities
by the end of 2012.
•
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.
Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H.
Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L.
Yellen. Voting against the action was Jeffrey M. Lacker, who opposed continuation of the
maturity extension program.
•
Next meeting July 31- August 1, 2012
July 31-August 1, 2012
FOMC Meeting: No Changes
•
Information received since the Federal Open Market Committee met in June
suggests that economic activity decelerated somewhat over the first half of
this year. Growth in employment has been slow in recent months, and the
unemployment rate remains elevated.
•
The Committee decided today to keep the target range for the federal funds
rate at 0 to 1/4 percent and currently anticipates that economic conditions---are
likely to warrant exceptionally low levels for the federal funds rate at least
through late 2014.
•
The Committee also decided to continue through the end of the year its
program to extend the average maturity of its holdings of securities.
•
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William
C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto;
Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C.
Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who
preferred to omit the description of the time period over which economic conditions are
likely to warrant an exceptionally low level of the federal funds rate.
•
Next meeting Sept 12, 2012
Sept 12-13, 2012 FOMC Meeting: QE3!!!
•
The Committee is concerned that, without further policy accommodation, economic
growth might not be strong enough to generate sustained improvement in labor market
conditions.
•
To support a stronger economic recovery the committee agreed today to increase policy
accommodation by purchasing additional agency mortgage-backed securities at a pace
of $40 billion per month.
•
In particular, the Committee also decided today to keep the target range for the federal
funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for
the federal funds rate are likely to be warranted at least through mid-2015.
•
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William
C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto;
Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C.
Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who
opposed additional asset purchases and preferred to omit the description of the time
period over which exceptionally low levels for the federal funds rate are likely to be
warranted.
•
Next meeting Oct 23-24, 2012
Sept 12-13, 2012 FOMC Meeting: JOBS – JOBS - JOBS
“ 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.”
Recessions and Job Growth
Five Important FOMC Meeting Outcomes
(1 of 5)
Unemployment Control takes center Stage
FOMC fears Long-term Unemployment……
“The Committee is concerned that, without further
policy accommodation, economic growth might not
be
strong
enough
to
generate
sustained
improvement in labor market conditions.”
Five Important FOMC Meeting Outcomes
(2 of 5)
Extends time frame of Forward Guidance
FOMC acknowledges weakening
recovery…..
“In particular, the Committee also decided today to
keep the target range for the federal funds rate at 0
to 1/4 percent and currently anticipates that
exceptionally low levels for the federal funds rate
are likely to be warranted at least through mid2015.”
Five Important FOMC Meeting Outcomes
(3 of 5)
More help for housing sector QE3…QEⁿ
FOMC wants higher housing prices, more housing
starts, and more refinancing…..
“To support a stronger economic recovery the
committee agreed today to increase policy
accommodation by purchasing additional agency
mortgage-backed securities at a pace of $40 billion
per month.”
Bernanke denies the Fed is printing
money when it uses LSAP!
“It is not unreasonable to ask whether we are sowing the seeds of future
inflation. A related question I sometimes hear is this: By buying
securities, are you "monetizing the debt"--printing money for the
government to use--and will that inevitably lead to higher inflation? No,
that's not what is happening, and that will not happen. We are acquiring
Treasury securities on the open market and only on a temporary basis. At
the appropriate time, the Federal Reserve will gradually sell these
securities to return its balance sheet to a more normal size. “
“Moreover, the way the Fed finances its securities purchases is by
creating reserves in the banking system. Increased bank reserves held at
the Fed don't necessarily translate into more money or cash in
circulation.”
Speech by Chairman Ben S. Bernanke
At the Economic Club of Indiana, Indianapolis, Indiana
October 1, 2012
Five Important FOMC Meeting Outcomes
(4 of 5)
FOMC will not raise rates at first sight of
stronger recovery
FOMC will hold off on rate hikes until economy is
booming, not just improving….
“a higher accommodative stance on monetary policy
will remain appropriate for a considerable time
after the economic recovery strengthens.”
Five Important FOMC Meeting Outcomes
(5 of 5)
Dissent continues
Richmond Fed President Jeff Lacker votes no
again….
“Voting against the action was Jeffrey M. Lacker,
who opposed additional asset purchases and
preferred to omit the description of the time period
over which exceptionally low levels for the federal
funds rate are likely to be warranted. “
FOMC Members Rate Forecast Sept 13, 2012
FOMC Forecasts of Rates 2012-14 and Beyond:
Sept 13, 2012
Fed 2012 Remaining Policy Options
1. Remove interest on reserves (IOR) in an effort to
increase bank lending- today’s (IOR) rate = 0.25%
- higher than the 2-year treasury yield of 0.23%.
2. Extend Operation Twist through 2013.
3. Extend zero rate pledge through 2016-17
4. QE 4
LSAP: A New Monetary Policy at the
“Zero Bound”
•LSAP = Large-scale Asset Purchases
•LSAP = Quantitative Easing or QE
•QE 1 (2008(IV) thru 2010(I)) = Fed purchased $2.0
trillion of Mortgage Backed Securities, Agency debt
and long term Treasury securities.
•QE 2 (2010 (IV)- 2011(II)) = Fed purchased $600
billion of longer term Treasury securities.
Impact of LSAP on Interest Rates
Research studies indicate that QE1 lowered the 10
year US Treasury yield between 40 to 110 basis
points.
Research studies indicate that QE2 lowered the 10
year US Treasury yield between 15 to 45 basis
points.
Three studies found total effects of QE1 And QE2
and “Operation Twist” lowered the 10 year yield on
US Treasuries by 80 t0 120 basis points.
Effectiveness of LSAP according to
Bernanke
“When the Fed first announced purchases of
mortgage-backed securities in late 2008, 30-year
mortgage interest rates averaged a little above 6
percent; today they average about 3-1/2 percent.
Lower mortgage rates are one reason for the
improvement we have been seeing in the housing
market”
Speech by Chairman Ben S. Bernanke
At the Economic Club of Indiana, Indianapolis, Indiana
October 1, 2012
What’s the Economic Impact of
LSAP
Fed models estimate that the
combined impact of QE1 and
QE2 increased GDP by 3.0% and
created 2.0 million new jobs
How can community banks profit from
QE3 and operation twist?
If Bernanke is correct and mortgage
rates drop again in 2012-13, consider an
expansion of your refinance modelmore staff, heavy advertising to increase
fee income - especially if the 30 year
fixed rate drops below 3.0%!
Post QE 3: The “Great Exit” and your bank
•The larger the Fed’s balance sheet becomes, the
more difficult it becomes to execute an exit planThe “Great Exit” dilemma.
•Historically, it has been easier to lower rates than
raise them!
•This “Great Exit” might unlock a rare strategic
opportunity for the well-positioned community bank
to simultaneously increase earnings and reduce
duration risk in the investment portfolio.
Strategic positioning of your bank to
profit from the “Great Exit”
When the unemployment goal of the FOMC is
reached (Official Rate of U3 = 5.2% to 6.0%)…..
The Fed will have to reduce the size of its balance
sheet back to more normal levels…
This exit strategy could cause run-away inflation….
Certain FOMC members are concerned
the exit from LSAP could lead to inflation
“By greatly expanding the size of the Fed’s balance
sheet, the new asset-purchase program will exacerbate
the challenges …we will face when it comes time to
exit… risking higher inflation and harm the Fed’s
reputation …once the recovery takes off, long rates will
begin to rise and banks will begin lending excess
reserves sitting at the Fed. ..loan growth can be quite
rapid… the Fed will need to withdraw accommodation
very aggressively in order to contain inflation. Yet, if we
don’t tighten quickly enough, we could find ourselves far
behind the curve in restraining inflation.”
Speech by Charles I. Plosser, President, Federal Reserve Bank of Philadelphia
CFA Society of Philadelphia
September 25, 2012
Bernanke’s Response to Great Exit
Fears
“I'm confident that we have the necessary tools… to
shrink our balance sheet in a deliberate and orderly
way. For example, the Fed can tighten policy by
increasing the interest rate we pay banks on reserve
balances they deposit at the Fed. … banks will not
lend at rates lower than what they can earn at the
Fed… such an action should serve to raise rates and
tighten credit conditions preventing overheating in
the economy.”
Speech by Chairman Ben S. Bernanke
At the Economic Club of Indiana, Indianapolis, Indiana
October 1, 2012
Strange Recovery Burden for FOMC
Fiscal Cliff
•Fiscal Cliff – A Congressional Budget Office (CBO)
term used to describe the changes in taxes and
spending scheduled to occur on January 1, 2013.
•Current U.S. fiscal policy, if not changed before
December 31, 2012 will cause a $600 billion
economic headwind in 2013 (the equivalent of 4 %
of GDP) in 2013.
•However, CBO warns the combined effects of less
spending and higher taxes would push the economy
back into Recession
Fiscal Cliff by the Numbers
Source:
Glenmede Advisors
Can We Reverse This?
Reducing imports - our path to higher
GDP growth?
Consumers –Unlikely
Repairing Balance sheets after housing crash
Higher savings rate
Lite Economy
Government Spending?
Unlikely with record
deficits
GDP = C + I + G + (X-M)
Investment Spending –really?
Housing starts down
Business investment spending off – why?
Health care costs
Unknown regulations, taxes
Exports Maybe?
+ QE 3
- Euro Crisis
- Middle East Mess
An Update on the Energy
Independence Movement
Energy Independence will push US
income growth rates to new heights
The Rule of 70
The Rule of 70
Divide 70 by any constant growth rate to get years to
double:
If US GDP grows at 2%, we double the size of our
economy in 35 years
If US GDP grows at 7% we double the size of our
economy in
10 years
If Oil imports were zero in 2010…
We spend about $400 Billion/year on imported Oil
GDP = C + I + G + (E –M)
2.6% of GDP lost to imported energy
If Oil imports were zero in 2010…
Energy Independence 2010 GDP Growth Rate =
Actual 2010 GDP = +2.4%
+5.0%
If Oil imports were zero in 2010…
New Jobs from Energy Independence…..
If Every 1% increase in GDP = 1 million new jobs
2,600,000 new jobs!!!!!!
Marcellus and Utica Shale
• 500 trillion cubic feet of gas in Marcellus (Current
US Consumption= 23 trillion cubic feet per year)
• Utica estimates range from 1000- 2000 trillion
cubic feet
• Largest gas find of all time
• Gas prices decoupled from oil
• Marcellus on doorstep of largest consumer market
on the planet
Utica Shale Gas below Marcellus shale,
but contains much more gas.
Next Step….
Keystone Pipeline: One of Many
North Dakota Gas Flares from
Space (Red area)
Is This the Start of a New America?
2012 Forecast: 42%
Thank You!