The Mechanics of Finance: The Federal Reserve with Komal Sri- Kumar.
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Transcript of The Mechanics of Finance: The Federal Reserve with Komal Sri- Kumar.
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7/27/2019 The Mechanics of Finance: The Federal Reserve with Komal Sri- Kumar.
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M A N AG I N G T H E M O N E Y S U P P LY
M I L K E N I N S T I T U T E C E N T E R F O R F I N A N C I A L M A R K E T S
N AT I O N A L P R E S S F O U N D A T I O N
T U E S D A Y, J A N U A R Y 1 4 , 2 0 1 4
Mechanics of Finance: The Federal Reserve
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Overview2
Introduction 2
Crises and Fed Actions 5
Impact on markets 10
Global Action and Impacts 21 Tapering 30
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Monetary policy and the federal funds market
3
Normal Operations Quantitative Easing
Source: JPMorgan, Milken Institute
Interest
rates
Quantity of Bank Reserves
Tighten Ease
Fed
funds
rate
Bank Reserves Supply
Bank Reserves Demand
Interest
rates
Quantity of Bank Reserves QE zone
Bank Reserves Supply
Bank Reserves Demand
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Alternatives to QE
4
Floor System Corridor System
Excess money is soaked up at centralbanks borrowing facility
Borrowing and lending facility used toensure target rates stay in the corridor
Source: JPMorgan, Milken Institute
Interest
rates
Quantity of Bank Reserves
Deposit
rateBank Reserves Demand
Bank Reserves Supply
Quantity of Bank Reserves
Deposit
rate
Ff rate
Lending
rate
Quantity of money
Bank Reserves Supply
Bank Reserves Demand
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Overview5
Introduction 2
Crises and Fed Actions 5
Impact on markets 10
Global Action and Impacts 21 Tapering 30
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Fed Balance Sheet
6
Source: ISI Group
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Composition of Feds Balance Sheet
7
Sources: Federal Reserve, Milken Institute
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The Fed has engaged in Quantitative Easingrepeatedly
8
Sources: Federal Reserve, Milken Institute
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Federal Reserves earning remittances to U.S.Treasury
9
Source: Federal Reserve
0
20
40
60
80
100
1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012
US$ billions Federal reserve annual distributions to the U.S. Treasury
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Overview10
Introduction 2
Crises and Fed Actions 5
Impact on markets 10
Global Action and Impacts 21 Tapering 30
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Has the U.S. policy rate been kept too low for toolong?
11
Sources: Federal Reserve, Bloomberg, Milken Institute
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U.S. economy is still below its potential output trend
12
10,000
11,000
12,000
13,000
14,000
15,000
2000 2002 2004 2006 2008 2010 2012
Real GDP (US$ billions, 2005=100)
Potential real GDP
Real GDP
Sources: U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis
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Employment To Population Ratio
13
58%
59%
60%
61%
62%
63%
64%
EmploymenttoPopu
lationRate%
58.6%
Employment growth is flat
Source: Bureau of Labor Statistics
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Unemployment
14
Source: Bureau of Labor Statistics
0
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Unemployment rate
7.0%
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Housing Stats Have Improved
15
Source: US Department of Commerce
400
700
1,000
1,300
1,600
1,900
2,200
2,500
2,800
HousingStartsSAARThousan
ds
1,036,000
Average
1,472,000
But have a long way to go
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U.S. private capital formation has not been picked up
16
Sources: U.S. Bureau of Economic Analysis, Milken Institute
0
1
2
3
4
5
1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 2011
Net private fixed asset stock, four-year percent change at an annual rate (%), index, 2005=100
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Real treasury yield has turned negativein some recent periods
17
Sources: Federal Reserve, U.S. Bureau of Labor Statistics
-6
-4
-2
0
2
4
6
8
10
1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
U.S. real 10-year treasury yield, percent
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Relationship between Treasury yield and Fedsbuying Treasury securities
18
0
1
2
3
4
5
6
0.0
0.4
0.8
1.2
1.6
2.0
2005 2006 2007 2008 2009 2010 2011 2012 2013
US$ trillions Percent
QE1 QE2 QE310-year Treasury yield (%, RHS)
Fed holdings of Treasurysecurities (US$ trillions, LHS)
Sources: Federal Reserve, Milken Institute
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Yields on U.S. high-yield bond hit record low
19
Source: Datastream
Note: BOFA MLUS High Yield Master II Index
0
5
10
15
20
25
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Yield,%
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Total U.S. credit market debt
20
Sources: Federal Reserve, BEA
0
0.5
1
1.5
2
2.5
3
3.5
4
0
10
20
30
40
50
60
1949 1956 1963 1970 1977 1984 1991 1998 2005 2012
DebttoGDPR
atio
US$trillio
ns
Total credit market debt owed GDP Debt to GDP Ratio
Debt to GDP ratio
(1950-1980): 1.5
Debt to GDP ratio
(2012): 3.5+
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Overview21
Introduction 2
Crises and Fed Actions 5
Impact on markets 10
Global Action and Impacts 21 Tapering 30
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Central bank target interest rates remain low
22
Source: Bloomberg
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 2014
Policy interest rates, percent
Eurozone
United Kingdom
United States
Bank of Japan
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Emerging market central bank target rates
23
Source: Bloomberg
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012 2013
Russia
Brazil
India
Policy interest rates, percent
China
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Expansion of balance sheets of major central banks
24
Source: Bloomberg
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Central bank assets vs. GDPs of worlds largesteconomies
25
Sources: Federal Reserve, IMF, December 2013
0
2
4
6
8
10
12
14
16
18
United States China Japan US Federal
Reserve
Germany France United Kingdom European
Central Bank
US$trillion
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Output is still below the pre-crisis level in manymajor countries
26
Sources: Bloomberg, Milken Institute
80
85
90
95
100
105
110
Real GDP (Q1 2008=100)
U.S. Germany Japan U.K. Italy
U.S.
Germany
Japan.
U.K.
Italy
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Inflation may be worryingly low
27
Sources: Datastream, Milken Institute.
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Decline in government bond yields in major advancedcountries
28
Source: Bloomberg
0
1
2
3
4
5
6
1/9/2006 1/9/2007 1/9/2008 1/9/2009 1/9/2010 1/9/2011 1/9/2012 1/9/2013
US Germany UK Japan
10-year Government bond yield (%)
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Equities rally in 2013
29
Equity indices in major countries
Source: Bloomberg
Note: U.S. (S&P 500), Eurozone (German DAX), UK (FTSE 100), Japan (Topix)
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30
Introduction 2
Crises and Fed Actions 5
Impact on markets 10
Global Action and Impacts 21Tapering 30
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Bernankes taper talks scared the market
31
Source: Bloomberg
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Summer 201332
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Roadmap to tapering33
Projected monthly pace of Fed asset purchases Projected size of Fed balance sheet
Sources: Federal Reserve JPMorgan