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
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