Transcript San Francisco Federal Reserve Meeting

San Francisco Federal
Reserve Meeting
By: Anthony Flynn and
Gabriela Linder
Janet L. Yellen


President (since
June 14th, 2004) of
the San Francisco
Federal Reserve
Bank.
Professor of
Business &
Economics since
1980 at UC
Berkeley.
National Unemployment


Since May 2008, Unemployment has risen
from 5.0% to 5.5%.
Unemployment is expected to rise to 5.7%
by the end of the year.
Unemployment Cont’d

Rise in unemployment attributed to the
continuing fall in:
• Construction – less homes are being built as
the criteria for loan approval now demands
more. With a surplus of homes, construction
is at a halt. Overall house prices are dropping
as the supply exceeds the demand.
• Manufacturing – decrease due to less
investment (i.e. homes, business warehouses,
etc.)
• Retail – people have less disposable income, so
they are shopping less.
Overview of Output

GDP = C + I + G + NX
• Consumption is small
• Investment is also small
• Government spending is higher due to
the war in Iraq
• The trade balance is positive as more is
being exported due to the weak dollar
• Example: when output decreases by 1,
unemployment increases by 1
• High unemployment attributed to low
GDP
Inflation

CPI: is at an upward trend.

Growth is not keeping pace with CPI
Inflation Cont’d


Why not lower the Federal Funds Rate?
With the rate already low at 2.0%, the risk
of inflation is already very high. Lowering
the rate further will guarantee a higher
rate of inflation.
Strong Economy vs. Present
Economy
Inflationary Pressure
i MS P
Healthy Economy
•Effective Monetary
Policy
•Increased Money
Supply
•Positive Economic
Stimulus
•Increased Spending
VS
Present Economy
•Ineffective Monetary
Policy
•Increased Money
Supply
•Increased Prices
(Inflation)
•Decreased Spending
Liquidity Trap




With the T-Bill rate close to 0% (0.539 as
of May 19th), there are diminishing
marginal returns.
Investors are reluctant to get into long
term investments.
This problem weakens the Fed’s control of
the economy through monetary policy.
With interest rates close to zero, the
printing of money and buying of
government debt is ineffective, because
one zero-interest rate asset is being
exchanged for another.
Conclusion




The Federal Funds rate should remain
the same at 2.0%.
We have yet to see the effects from the
previous decrease, as it may take several
quarters to see the effect of monetary
policy changes.
Slow price recovery has enabled the
economy to recognize the last rate cut, so
keeping the rate the same will allow us to
see the effect on inflation.
Rushing to cut the rate further will create
higher inflation.
M. Friedman
“Too much, too late”
Sources



The Federal Reserve
<www.federalreserve.gov>
US Department of Labor
<www.bls.gov>
The New York Times
<www.nytimes.com>