Monetary Policy and What’s to Come

Ryan Herzog, Ph.D. Assistant Professor of Economics

Gonzaga University9/28/2011

Prepared for SMLA

The National Economy

National Output

Housing Starts

National Unemployment

Unemployment

Manufacturing and the Labor Force

Structural Concerns

Jobs• The recession has simply magnified and sped up

job losses in the manufacturing sectors.– The construction industry provided alternative

employment.• We need to focus on retraining 7-8 million

workers.• Extending unemployment compensation does

not address the structural problems in the manufacturing industry.– Workers are searching for jobs that do not exist or

will not exist in the near future.

Washington State

• Very similar problems to the rest of the nation– Unemployment rate 9.1%– Manufacturing and construction workers

State Unemployment

State Unemployment

Spokane Unemployment

Washington and Spokane Income

Foreclosure Rates

Washington State HousingForeclosure Rates (First Lien)

March 2011 December 2010 September 2010 June 2010 March 2010Spokane 3.2 3.2 3.1 2.9 2.4Seattle/Tacoma 4.1 4.0 3.7 3.1 2.8Portland/Vancouver 4.1 4.7 3.7 3.5 3.4Yakima 4.3 4.3 4.2 3.8 3.5Olympia 3.6 3.5 3.3 2.8 2.4Wenatchee 2.6 2.7 2.3 2.0 1.8Tri Cities 2.1 2.2 2.2 2.0 1.9Coeur d'Alene 3.8 4.0 3.8 3.8 3.5Lewiston, ID 2.6 2.9 2.5 2.1 2.2

90+ Days - Delinquency Rates (First Lien)March 2011 December 2010 September 2010 June 2010 March 2010

Spokane 3.2 3.1 3.2 3.5 3.7Seattle/Tacoma 4.3 4.3 4.3 4.8 5.0Portland/Vancouver 3.2 3.4 3.2 3.6 3.8Yakima 3.2 3.3 3.8 3.9 4.0Olympia 3.5 3.6 3.7 4.0 4.3Wenatchee 2.6 2.6 2.8 2.9 3.1Tri Cities 2.0 2.1 2.3 2.7 3.0Coeur d'Alene 2.7 2.5 2.6 3.0 3.6Lewiston, ID 2.1 2.0 2.5 2.6 3.1*Source www.foreclosure-response.org (Center for Housing Policy)

Washington Housing

Monetary Policy

• Dual Mandate: The Congress established two key objectives for monetary policy--maximum employment and stable prices

• Will continue expansionary policies until inflation shows signs of increasing.

• The hope is for increased home buying (and refinancing) and retail sales

Investment

Retail Sales

Inflation Rates

Long-Term Interest Rates

• Continue to surprise (under 2%)• Quantitative Easing I - March 2009– Buy $1.2 trillion in MBS and agency debt

• Quantitative Easing II – November 2010– Buy $600 billion

• Operation Twist – September 2011– Sell $400 billion of short term debt to buy long

term debt.

Short and Long-term Interest Rates

Federal Reserve Balance Sheet

• Fed holdings have increased• During the last FOMC meeting they

announced a shift from short-term to long-term securities

• Also agreed to reinvest principal received from its holdings of agency debt and agency MBS in agency MBS rather than continuing to reinvest in longer-term Treasury securities

Federal Reserve Balance Sheet

Interest Rate Targeting

Where do we go from here?

• The Fed is running out of tools• They left the door open for a QE3:

– Two members said that current conditions and the outlook could justify stronger policy action, but they supported undertaking the maturity extension program at this meeting as it did not rule out additional steps at future meetings.

• A gradual increase in inflationary expectations– Increase consumer spending– Comes at a large cost in higher nominal rates

(large interest rate risks)

Risks

• Holding long-term debt exposed the Federal Reserve to large amounts of interest rate risk

• Inflation?– Food and energy prices have stabilized following

the summer peaks.

Inflationary Concerns