RMR Wealth Management Blog

Chairman Bernanke Speech at the Economic Club of Indiana text Posted by Ryan C. Rogers, RMR Wealth Managment, LLC

RMR Wealth Management - Thursday, October 04, 2012

Chairman Ben S. Bernanke

At the Economic Club of Indiana, Indianapolis, Indiana

October 1, 2012

Five Questions about the Federal Reserve and Monetary Policy

Good afternoon. I am pleased to be able to join the Economic Club of Indiana for lunch today. I note that the mission of the club is "to promote an interest in, and enlighten its membership on, important governmental, economic and social issues." I hope my remarks today will meet that standard. Before diving in, I'd like to thank my former colleague at the White House, Al Hubbard, for helping to make this event possible. As the head of the National Economic Council under President Bush, Al had the difficult task of making sure that diverse perspectives on economic policy issues were given a fair hearing before recommendations went to the President. Al had to be a combination of economist, political guru, diplomat, and traffic cop, and he handled it with great skill.

My topic today is "Five Questions about the Federal Reserve and Monetary Policy." I have used a question-and-answer format in talks before, and I know from much experience that people are eager to know more about the Federal Reserve, what we do, and why we do it. And that interest is even broader than one might think. I'm a baseball fan, and I was excited to be invited to a recent batting practice of the playoff-bound Washington Nationals. I was introduced to one of the team's star players, but before I could press my questions on some fine points of baseball strategy, he asked, "So, what's the scoop on quantitative easing?" So, for that player, for club members and guests here today, and for anyone else curious about the Federal Reserve and monetary policy, I will ask and answer these five questions:

  1. What are the Fed's objectives, and how is it trying to meet them?
  2. What's the relationship between the Fed's monetary policy and the fiscal decisions of the Administration and the Congress?
  3. What is the risk that the Fed's accommodative monetary policy will lead to inflation?
  4. How does the Fed's monetary policy affect savers and investors?
  5. How is the Federal Reserve held accountable in our democratic society?

What Are the Fed's Objectives, and How Is It Trying to Meet Them?
The first question on my list concerns the Federal Reserve's objectives and the tools it has to try to meet them.

As the nation's central bank, the Federal Reserve is charged with promoting a healthy economy--broadly speaking, an economy with low unemployment, low and stable inflation, and a financial system that meets the economy's needs for credit and other services and that is not itself a source of instability. We pursue these goals through a variety of means. Together with other federal supervisory agencies, we oversee banks and other financial institutions. We monitor the financial system as a whole for possible risks to its stability. We encourage financial and economic literacy, promote equal access to credit, and advance local economic development by working with communities, nonprofit organizations, and others around the country. We also provide some basic services to the financial sector--for example, by processing payments and distributing currency and coin to banks.

But today I want to focus on a role that is particularly identified with the Federal Reserve--the making of monetary policy. The goals of monetary policy--maximum employment and price stability--are given to us by the Congress. These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.

In normal circumstances, the Federal Reserve implements monetary policy through its influence on short-term interest rates, which in turn affect other interest rates and asset prices.1 Generally, if economic weakness is the primary concern, the Fed acts to reduce interest rates, which supports the economy by inducing businesses to invest more in new capital goods and by leading households to spend more on houses, autos, and other goods and services. Likewise, if the economy is overheating, the Fed can raise interest rates to help cool total demand and constrain inflationary pressures.

Following this standard approach, the Fed cut short-term interest rates rapidly during the financial crisis, reducing them to nearly zero by the end of 2008--a time when the economy was contracting sharply. At that point, however, we faced a real challenge: Once at zero, the short-term interest rate could not be cut further, so our traditional policy tool for dealing with economic weakness was no longer available. Yet, with unemployment soaring, the economy and job market clearly needed more support. Central banks around the world found themselves in a similar predicament. We asked ourselves, "What do we do now?"

To answer this question, we could draw on the experience of Japan, where short-term interest rates have been near zero for many years, as well as a good deal of academic work. Unable to reduce short-term interest rates further, we looked instead for ways to influence longer-term interest rates, which remained well above zero. We reasoned that, as with traditional monetary policy, bringing down longer-term rates should support economic growth and employment by lowering the cost of borrowing to buy homes and cars or to finance capital investments. Since 2008, we've used two types of less-traditional monetary policy tools to bring down longer-term rates.

The first of these less-traditional tools involves the Fed purchasing longer-term securities on the open market--principally Treasury securities and mortgage-backed securities guaranteed by government-sponsored enterprises such as Fannie Mae and Freddie Mac. The Fed's purchases reduce the amount of longer-term securities held by investors and put downward pressure on the interest rates on those securities. That downward pressure transmits to a wide range of interest rates that individuals and businesses pay. For example, when the Fed first announced purchases of mortgage-backed securities in late 2008, 30-year mortgage interest rates averaged a little above 6percent; 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, which in turn is benefiting the economy more broadly. Other important interest rates, such as corporate bond rates and rates on auto loans, have also come down. Lower interest rates also put upward pressure on the prices of assets, such as stocks and homes, providing further impetus to household and business spending.

The second monetary policy tool we have been using involves communicating our expectations for how long the short-term interest rate will remain exceptionally low. Because the yield on, say, a five-year security embeds market expectations for the course of short-term rates over the next five years, convincing investors that we will keep the short-term rate low for a longer time can help to pull down market-determined longer-term rates. In sum, the Fed's basic strategy for strengthening the economy--reducing interest rates and easing financial conditions more generally--is the same as it has always been. The difference is that, with the short-term interest rate nearly at zero, we have shifted to tools aimed at reducing longer-term interest rates more directly.

Last month, my colleagues and I used both tools--securities purchases and communications about our future actions--in a coordinated way to further support the recovery and the job market. Why did we act? Though the economy has been growing since mid-2009 and we expect it to continue to expand, it simply has not been growing fast enough recently to make significant progress in bringing down unemployment. At 8.1 percent, the unemployment rate is nearly unchanged since the beginning of the year and is well above normal levels. While unemployment has been stubbornly high, our economy has enjoyed broad price stability for some time, and we expect inflation to remain low for the foreseeable future. So the case seemed clear to most of my colleagues that we could do more to assist economic growth and the job market without compromising our goal of price stability.

Specifically, what did we do? On securities purchases, we announced that we would buy mortgage-backed securities guaranteed by the government-sponsored enterprises at a rate of $40 billion per month. Those purchases, along with the continuation of a previous program involving Treasury securities, mean we are buying $85 billion of longer-term securities per month through the end of the year. We expect these purchases to put further downward pressure on longer-term interest rates, including mortgage rates. To underline the Federal Reserve's commitment to fostering a sustainable economic recovery, we said that we would continue securities purchases and employ other policy tools until the outlook for the job market improves substantially in a context of price stability.

In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn't mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve's commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.

Now, as I have said many times, monetary policy is no panacea. It can be used to support stronger economic growth in situations in which, as today, the economy is not making full use of its resources, and it can foster a healthier economy in the longer term by maintaining low and stable inflation. However, many other steps could be taken to strengthen our economy over time, such as putting the federal budget on a sustainable path, reforming the tax code, improving our educational system, supporting technological innovation, and expanding international trade. Although monetary policy cannot cure the economy's ills, particularly in today's challenging circumstances, we do think it can provide meaningful help. So we at the Federal Reserve are going to do what we can do and trust that others, in both the public and private sectors, will do what they can as well.

What's the Relationship between Monetary Policy and Fiscal Policy?
That brings me to the second question: What's the relationship between monetary policy and fiscal policy? To answer this question, it may help to begin with the more basic question of how monetary and fiscal policy differ.

In short, monetary policy and fiscal policy involve quite different sets of actors, decisions, and tools. Fiscal policy involves decisions about how much the government should spend, how much it should tax, and how much it should borrow. At the federal level, those decisions are made by the Administration and the Congress. Fiscal policy determines the size of the federal budget deficit, which is the difference between federal spending and revenues in a year. Borrowing to finance budget deficits increases the government's total outstanding debt.

As I have discussed, monetary policy is the responsibility of the Federal Reserve--or, more specifically, the Federal Open Market Committee, which includes members of the Federal Reserve's Board of Governors and presidents of Federal Reserve Banks. Unlike fiscal policy, monetary policy does not involve any taxation, transfer payments, or purchases of goods and services. Instead, as I mentioned, monetary policy mainly involves the purchase and sale of securities. The securities that the Fed purchases in the conduct of monetary policy are held in our portfolio and earn interest. The great bulk of these interest earnings is sent to the Treasury, thereby helping reduce the government deficit. In the past three years, the Fed remitted $200 billion to the federal government. Ultimately, the securities held by the Fed will mature or will be sold back into the market. So the odds are high that the purchase programs that the Fed has undertaken in support of the recovery will end up reducing, not increasing, the federal debt, both through the interest earnings we send the Treasury and because a stronger economy tends to lead to higher tax revenues and reduced government spending (on unemployment benefits, for example).

Even though our activities are likely to result in a lower national debt over the long term, I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it's worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues. Would such a step lead to better fiscal outcomes? It seems likely that a significant widening of the deficit--which would make the needed fiscal actions even more difficult and painful--would worsen rather than improve the prospects for a comprehensive fiscal solution.

I certainly don't underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the Administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year. According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the Administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations, an outcome that would have extremely negative consequences for the country for years to come. Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery.

What Is the Risk that the Federal Reserve's Monetary Policy Will Lead to Inflation?
A third question, and an important one, is whether the Federal Reserve's monetary policy will lead to higher inflation down the road. In response, I will start by pointing out that the Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it. Inflation has averaged close to 2 percent per year for several decades, and that's about where it is today. In particular, the low interest rate policies the Fed has been following for about five years now have not led to increased inflation. Moreover, according to a variety of measures, the public's expectations of inflation over the long run remain quite stable within the range that they have been for many years.

With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear--which bears also on the relationship between monetary and fiscal policy, 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. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, 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, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.

For controlling inflation, the key question is whether the Federal Reserve has the policy tools to tighten monetary conditions at the appropriate time so as to prevent the emergence of inflationary pressures down the road. I'm confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. For example, the Fed can tighten policy, even if our balance sheet remains large, by increasing the interest rate we pay banks on reserve balances they deposit at the Fed. Because 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 more generally, preventing any tendency toward overheating in the economy.

Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to "take away the punch bowl" is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.

How Does the Fed's Monetary Policy Affect Savers and Investors?
The concern about possible inflation is a concern about the future. One concern in the here and now is about the effect of low interest rates on savers and investors. My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some.

However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve's monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation's financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and--through pension funds and 401(k) accounts--they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

How Is the Federal Reserve Held Accountable in a Democratic Society?
I will turn, finally, to the question of how the Federal Reserve is held accountable in a democratic society.

The Federal Reserve was created by the Congress, now almost a century ago. In the Federal Reserve Act and subsequent legislation, the Congress laid out the central bank's goals and powers, and the Fed is responsible to the Congress for meeting its mandated objectives, including fostering maximum employment and price stability. At the same time, the Congress wisely designed the Federal Reserve to be insulated from short-term political pressures. For example, members of the Federal Reserve Board are appointed to staggered, 14-year terms, with the result that some members may serve through several Administrations. Research and practical experience have established that freeing the central bank from short-term political pressures leads to better monetary policy because it allows policymakers to focus on what is best for the economy in the longer run, independently of near-term electoral or partisan concerns. All of the members of the Federal Open Market Committee take this principle very seriously and strive always to make monetary policy decisions based solely on factual evidence and careful analysis.

It is important to keep politics out of monetary policy decisions, but it is equally important, in a democracy, for those decisions--and, indeed, all of the Federal Reserve's decisions and actions--to be undertaken in a strong framework of accountability and transparency. The American people have a right to know how the Federal Reserve is carrying out its responsibilities and how we are using taxpayer resources.

One of my principal objectives as Chairman has been to make monetary policy at the Federal Reserve as transparent as possible. We promote policy transparency in many ways. For example, the Federal Open Market Committee explains the reasons for its policy decisions in a statement released after each regularly scheduled meeting, and three weeks later we publish minutes with a detailed summary of the meeting discussion. The Committee also publishes quarterly economic projections with information about where we anticipate both policy and the economy will be headed over the next several years. I hold news conferences four times a year and testify often before congressional committees, including twice-yearly appearances that are specifically designated for the purpose of my presenting a comprehensive monetary policy report to the Congress. My colleagues and I frequently deliver speeches, such as this one, in towns and cities across the country.

The Federal Reserve is also very open about its finances and operations. The Federal Reserve Act requires the Federal Reserve to report annually on its operations and to publish its balance sheet weekly. Similarly, under the financial reform law enacted after the financial crisis, we publicly report in detail on our lending programs and securities purchases, including the identities of borrowers and counterparties, amounts lent or purchased, and other information, such as collateral accepted. In late 2010, we posted detailed information on our public website about more than 21,000 individual credit and other transactions conducted to stabilize markets during the financial crisis. And, just last Friday, we posted the first in an ongoing series of quarterly reports providing a great deal of information on individual discount window loans and securities transactions. The Federal Reserve's financial statement is audited by an independent, outside accounting firm, and an independent Inspector General has wide powers to review actions taken by the Board. Importantly, the Government Accountability Office (GAO) has the ability to--and does--oversee the efficiency and integrity of all of our operations, including our financial controls and governance.

While the GAO has access to all aspects of the Fed's operations and is free to criticize or make recommendations, there is one important exception: monetary policymaking. In the 1970s, the Congress deliberately excluded monetary policy deliberations, decisions, and actions from the scope of GAO reviews. In doing so, the Congress carefully balanced the need for democratic accountability with the benefits that flow from keeping monetary policy free from short-term political pressures.

However, there have been recent proposals to expand the authority of the GAO over the Federal Reserve to include reviews of monetary policy decisions. Because the GAO is the investigative arm of the Congress and GAO reviews may be initiated at the request of members of the Congress, these reviews (or the prospect of reviews) of individual policy decisions could be seen, with good reason, as efforts to bring political pressure to bear on monetary policymakers. A perceived politicization of monetary policy would reduce public confidence in the ability of the Federal Reserve to make its policy decisions based strictly on what is good for the economy in the longer term. Balancing the need for accountability against the goal of insulating monetary policy from short-term political pressure is very important, and I believe that the Congress had it right in the 1970s when it explicitly chose to protect monetary policy decisionmaking from the possibility of politically motivated reviews.

In conclusion, I will simply note that these past few years have been a difficult time for the nation and the economy. For its part, the Federal Reserve has also been tested by unprecedented challenges. As we approach next year's 100th anniversary of the signing of the Federal Reserve Act, however, I have great confidence in the institution. In particular, I would like to recognize the skill, professionalism, and dedication of the employees of the Federal Reserve System. They work tirelessly to serve the public interest and to promote prosperity for people and businesses across America. The Fed's policy choices can always be debated, but the quality and commitment of the Federal Reserve as a public institution is second to none, and I am proud to lead it.

Now that I've answered questions that I've posed to myself, I'd be happy to respond to yours.


1. The Fed has a number of ways to influence short-term rates; basically, they involve steps to affect the supply, and thus the cost, of short-term funding. Return to text


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Spain Bank Stress Test Results Posted by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Friday, September 28, 2012

Spanish Bank Stress Test:

Shortfall roughly 60 Billion Euros.  53.7 Billion with tax credits.

7 Banks in need of capital. 7 do not.

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Chicago Fed Charles Evans Speech Full Text posted by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, September 26, 2012

A speech delivered on September 26, 2012, at the Lakeshore Chamber of Commerce Business Expo in Hammond, IN


Perspectives on Current Economic Issues


Thank you for that kind introduction. I’m delighted to be here today at the Lakeshore Chamber of Commerce to offer my perspective on the state of the U.S. economy. Before I begin I must state that the views I express are my own and do not necessarily reflect the views of my colleagues on the Federal Open Market Committee (FOMC) or within the Federal Reserve System.


Earlier this month, in response to accumulating evidence that we were not achieving a significant and substantial improvement in U.S. labor markets, the Federal Open Market Committee (FOMC) took some important policy actions. First, it initiated a new program to buy mortgage backed securities that will continue—and, if necessary, be augmented by other policy actions—until the outlook for the labor market improves substantially. Second, the Committee stated that it expects to maintain a highly accommodative stance for policy for a considerable time after the recovery strengthens. In particular, it expects that near zero short-term interest rates will be appropriate at least through mid-2015.[1]


For more than two years, I have vigorously supported strongly accommodative monetary policy measures as the appropriate response to the unacceptable state of the U.S. labor market and benign outlook for inflation. I believe the combination of new asset purchases and enhanced forward guidance about future policy should provide an important added stimulus to economic activity and hiring. However, as I’ll explain later, I think there are additional steps the Fed can take to further strengthen its positive effects on the economy.


The context for our recent actions is an economy that has been growing, but not at a pace fast enough to restore it to its productive potential in anything close to a reasonable amount of time. And today, even the growth we do see faces some big risks — risks that further bolster the argument for strong accommodation.


I regularly talk to a large number of chief executive officers (CEOs) about business conditions. Many of these executives run big firms with an international presence. Throughout the summer, they increasingly pointed to the U.S. as the bright spot in the global economy. Their comments, however, were not a testament to the U.S. recovery, but an indication that global economic activity was weakening — first in Europe and later elsewhere around the world. In addition, at home, we could face substantially more restrictive fiscal conditions if federal budget negotiations fail to resolve the issues surrounding the so-called fiscal cliff. And for both the global situation and the U.S. fiscal cliff, there is a lot of uncertainty over what the eventual outcomes will be.


More monetary accommodation and greater confidence in the future mean a stronger U.S. economy. A stronger economy would be more resilient to a large-scale decline in global growth or a sharp fiscal retrenchment. In contrast, piling these risk-events on a weak economy could throw us back into recession.


Our economy today is simply not resilient enough. The damage from the Great Recession was substantial; and to date, the recovery has been disappointing. The real value of goods and services produced in the U.S. today is probably more than 5 percent below what economists call potential — that is, the economy’s ability to produce goods and services without generating inflationary pressures. The unemployment rate has been stuck at around 8 percent for nearly a year — well above the 5 percent to 6 percent level we would see if all of our resources were fully engaged. In the absence of further monetary stimulus or fiscal repair, the outlook would be for more of the same: moderate growth that is not strong enough to generate substantial improvement in the labor market; an unemployment rate that is likely to remain above its long-run level for a long time to come; and an economy that would be vulnerable to shocks at home and abroad.


Now, I am an optimist. I think we can do better than this gloomy outlook. That is why action is important. A great deal of state-of-the-art analysis — done both inside and outside of the Fed — indicates that the severe downturn in 2008–09 was mainly the result of a large drop in aggregate demand which left the economy operating below its potential. Research also shows that better and more accommodative policies have the power to reverse these setbacks and raise employment, output and incomes.[2] In other words, more accommodative policy can deliver a stronger economy and the resiliency we are seeking. Furthermore, appropriate policy can deliver these better outcomes without generating inflation that is significantly higher than the Fed’s long-run goal of 2 percent.


There are many who believe otherwise. In their view, our current low output and high unemployment are the hallmarks of an economy that has lost its competitiveness — an economy that experienced permanent disruptions in its infrastructure, the skills base of its work force and its technological capability. In such a dismal view of the economy, monetary policy is powerless and cannot generate a stronger, more robust expansion. Any attempt to increase aggregate demand through more accommodative monetary policy would simply lead to higher inflation rather than better resource allocation.


I see little evidence to support such a pessimistic view of the world. And I refuse to be so nihilistic in the absence of strong evidence of permanent disruptions. It is very hard to believe that millions of people who were working productively just a few years ago have suddenly become unemployable. And while many of the pessimists have been predicting higher inflation for several years, it hasn’t materialized. Indeed, core inflation has been under 2 percent since the end of 2008; and except for some near-term transitory movements in food and energy prices, most forecasters do not see any major change in inflation over the next few years.


Forces Restraining Growth

Before I discuss the risks to the economy, let me explain forces that have been restraining growth for some time.


Reviewing the historical record from around the world, Carmen Reinhart and Kenneth Rogoff and others find that, given the monetary and fiscal policies that are typically pursued, a prolonged period of slow growth following a financial crisis is the unfortunate norm.[3] And, despite the fact that the Federal Reserve has turned to many atypical monetary policy responses, the current U.S. experience is following the typical pattern. The recent financial crisis set in motion powerful forces that generated huge losses in wealth, greatly restrained aggregate demand and created difficult credit conditions. The effects have lingered, notably through a long period of deleveraging as many households and businesses seek to repair their damaged balance sheets.


There are a number of facets to this process. The financial sector is still recovering from its losses during the crisis and realizes the need — partly because of new regulatory standards — to hold larger liquidity and capital cushions against potential shocks. Many nonfinancial firms see weak or erratic demand for their products and few profitable investment opportunities. Moreover, these businesses are well-attuned to the downside risks to the economy. These factors lead them to reduce debt burdens and save cash. In addition, households still face high unemployment risk and slow wage growth, while holding a stock of wealth that has yet to return to its pre-crisis level. Furthermore, for many families, credit conditions are still tight. As a result, growth in consumer spending has been sluggish.


This is important because the ultimate end-user for all production is the consumer. For example, intermediate goods ultimately go toward the production of consumer goods. Likewise, investment expands businesses’ productive capacity to make even more consumer goods. And U.S. exports to other countries provide goods and services to consumers abroad. Therefore, deleveraging by domestic households and less robust consumption by our trading partners both eventually translate into weaker overall aggregate demand in the U.S.


Whenever the economy operates below its potential, the key mechanism that returns the economy back to potential is a fall in real interest rates. This decline reduces the supply of saving and boosts the demand for investment, resulting in increased spending. This equilibrating process has been made more difficult because our traditional interest rate policy tool, the federal funds rate, has already been lowered to essentially zero.[4] We can’t lower it any further. Instead, we have turned to nontraditional policies, such as providing forward guidance about future policy rates and making large-scale purchases of longer-dated Treasury bonds and mortgage-backed securities. These policies have helped support growth — the economy would be in much worse shape if we had not made these moves. That said, they were not enough to generate robust growth in the face of unexpectedly strong and persistent headwinds throughout this recovery period. In part, the FOMC’s additional monetary policy actions were a response to the disappointing pace of the recovery. However, they were also intended to increase the resiliency of the economy in the face of the increasing headwinds and greater downside risks posed by the slowdown in global economic growth, the economic turmoil in Europe and the fast-approaching U.S. fiscal cliff.


Let me now go into some more detail on each of these risks.


A Slowing Global Economy

In the first couple years following the 2008–09 recession, we saw a two-speed global recovery: moderate growth in the U.S. and other advanced economies and strong growth in emerging economies, such as China, Brazil and India. But today, Europe is in recession, and other advanced economies are growing only modestly. Growth in the emerging economies has slowed; notably, gross domestic production (GDP) in China appears to be rising at about an 8 percent pace this year. This sounds like a big number, but it is well below the more than 11-1/2 percent rate it averaged in the five years prior to the global recession. According to the latest projections by the International Monetary Fund, growth in overall world output is expected to be about 3-1/2 percent in 2012; this compares with gains that averaged roughly 5 percent prior to the recession.[5]


As I noted earlier, my conversations with CEOs, as well as the recent earnings reports of international firms more generally, indicate that the impact of slower growth abroad is already evident in sales of U.S. firms that operate in global markets. This means that we can’t count on a boost to U.S. output from robust exports. And this dynamic is true for the world as a whole. Demand has to come from somewhere. No country can count on export growth if their trading partners aren’t economically healthy. Since the global balance of trade must by definition balance, the math is straightforward: It is impossible for every country to run a trade surplus and export their way to better economic health.


Over the past couple of decades, world economic growth has depended heavily on U.S. consumers. Our consumer spending was a critical driver of growth in auto sales, electronics, housing and technology — all of which not only benefited the U.S. economy, but also supported growth beyond our borders. Given the forces holding back U.S. consumers, the world economy can no longer count on U.S. households to drive growth. Other countries need to take steps to stimulate their own domestic demand.


Hopefully, the recession in Europe will be confined to Europe. And hopefully, other advanced and emerging market economies will spur vibrant recoveries that allow them to achieve their full potential. But for the moment, there’s a significant risk that the global recovery might weaken further. One only has to think about the statement that the U.S. is the bright spot for growth to infer the sense of pessimism many business leaders have about prospects around the rest of the world.


European Crisis

The second risk we face is the potential for serious fallout on the U.S. economy from the ongoing crisis in Europe.


Europe is in an extremely difficult situation: Not only is the euro area in recession, but there are existential questions about the viability of the currency union itself. Clearly, the eurozone’s periphery countries, such as Greece, Ireland, Portugal, Spain and Italy, face great economic difficulties. The problems for these periphery countries are many and vary from the excessive government spending and the inability to collect taxes in Greece to the hangover of insolvent banks resulting from past exuberance in Spain and Ireland.


Most of the focus has been on the immediate ability of the periphery countries to finance their debt. Of course, the fundamental problem in these countries is the lack of growth and competitiveness. These problems are manifest in their large trade deficits, which are mostly with other countries in the eurozone. For such countries this requires an increase in competitiveness. For a country with its own currency, a quick channel for achieving improved competitiveness is currency depreciation. As Milton Friedman said “It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.".[6] This automatically increases the country’s international competitiveness, provides immediate support to growth and gives the country more time to institute the structural and regulatory reforms needed to permanently increase its productive capacity and competitiveness.


The experiences of the United Kingdom (UK) and Italy in 1992 are classic examples of such an adjustment process. At the time, a number of European countries were part of the European Exchange Rate Mechanism (ERM), in which members agreed to maintain their exchange rates within a narrow band around the anchor set by the strong deutsche mark. To do so, members’ monetary policy rates could not stray too far from each other. At the time, German policy rates were kept high to address domestic inflationary pressures arising from the reunification of East and West Germany. In contrast, other ERM members, such as the UK and Italy were dealing with high unemployment and trade imbalances. Germany’s high interest rates were too restrictive for them. Eventually, the UK and Italy abandoned the ERM, lowered policy rates, and let the pound and lira depreciate significantly. With a lower exchange rate, their products became more competitive and growth rebounded relatively quickly.


Today, however, within the eurozone, a currency realignment is impossible because every country uses the same currency. Periphery countries must find other means to increase productivity and regain competitiveness. These could include large nominal wage cuts and substantial product price reductions, as well as structural labor and regulatory reforms. At the moment, the expectation is that a combination of liquidity support for banks and sovereigns will reduce financial restraint, allowing sovereigns the time to address individual imbalances and deficits. But regardless of how the adjustment occurs, the periphery countries will almost certainly experience a great deal of pain.


The U.S. is largely a bystander to European policies. But we are not immune to the developments in Europe. In the past two years, our trade with Europe has grown at a significantly slower pace than our trade with the rest of the world. Some of this reflects weaker demand for U.S. goods due to lower income growth in Europe, and some of this reflects the appreciation of the dollar against the euro. Should economic and financial conditions in Europe deteriorate further, they could have significant adverse effects on our growth and in our financial markets. And just the uncertainty over the downside scenarios is likely already putting a damper on investment and spending decisions in the U.S.


Fiscal Cliff

This brings me to the third risk on my list: the U.S. fiscal cliff.


Under current law, tax and spending provisions enacted in various stimulus packages dating as far back as 2001 are scheduled to expire on January 1, 2013. These include the expiration of the so-called Bush tax cuts, the expiration of the payroll tax holiday and the conclusions of numerous other provisions. In addition, under current law, in the absence of a budget deal, there will be automatic sequestration of spending amounting to $1 trillion over a 10-year period.


The impact of permitting these programs to all expire at once would be huge. The Congressional Budget Office recently compared the full force of the current law with a scenario in which only the payroll tax cut and extended unemployment insurance benefits were allowed to expire. Their central estimate was that the full suite of scheduled budget actions could shrink real GDP in 2013 by 2-1/4 percent and increase the unemployment rate by about a percentage point relative to the less draconian scenario.[7] 


Such fiscal contraction would be a serious threat to our fragile recovery. And it would be an unusual response to economic weakness. Normally, fiscal policy acts as an economic stabilizer as it did in the 1970s, 1980s and 2000s, when robust government spending boosted real GDP growth as we recovered from recession. However, as in other aspects, the current recovery does not fit the usual mold. Although policy was stimulative in 2008 and 2009, over the course of the expansion the government’s purchases of goods and services as a share of GDP has fallen by more than 2 percentage points, with state and local government spending having a large negative effect on growth.


There is a great deal of uncertainty as to how these fiscal issues will be resolved. With the presidential campaign in full swing, a solution is unlikely until after the outcome of the election. And unfortunately, a political stalemate that triggers slated spending cuts — an extreme outcome — cannot be ruled out. So it comes as no surprise that business people who must plan for 2013 and beyond are nervous and unsure how to proceed.


The Case for More Accommodation

All of this was the setting for our September FOMC meeting. Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy that can withstand the headwinds that might come its way. Earlier this month, the FOMC provided a more accommodative monetary policy that can help us achieve such resilience. I strongly supported the Committee’s policy actions. These actions, along with Chairman Bernanke’s powerful commentary that the employment situation remained a “grave concern,” moved quite a ways toward my preference for providing more explicit forward guidance with respect to monetary policy reactions to changes in labor market conditions.


In many venues over the past couple years I have laid out my preferred way to provide additional accommodation.[8] Specifically, I believe we should adopt an explicit state-contingent policy rule that commits the Fed to providing accommodation at least as long as the unemployment rate remains above 7 percent and the outlook for inflation over the medium term is under 3 percent. If our progress toward this unemployment marker falters, then we should expand our balance sheet to increase the degree of monetary support. Indeed, we took such an action. Note the importance of the inflation trigger — it is a safeguard against unacceptable outcomes with regard to price stability. I also believe we should be more explicit about what it means for the inflation target to be symmetric, as Chairman Bernanke has stated. Namely, symmetry means that the costs of an inflation rate above our 2 percent goal are the same as the costs of equal-sized miss in inflation below 2 percent. Its implication is that we should not be resistant to policies that could move the unemployment rate closer its longer-run level, but run the risk of inflation running only a few tenths above our 2 percent goal. Such accommodative polices could further improve the employment picture, even beyond our recent highly beneficial actions.


While our policy actions earlier this month don’t exactly match my preferred policy structure, I support them wholeheartedly. Tying the period of time over which we will purchase assets to the achievement of significant improvement in the labor market is a strong step towards economic conditionality — that is, it conditions our actions to the economy’s performance instead of a calendar date. And stating that we expect to keep a highly accommodative stance for policy for a considerable time after the recovery strengthens is an important reassurance to households and businesses that Fed policy will not tighten prematurely. A large body of economic research says that committing to such a delay is a key feature of optimal policies during periods when policy rates are constrained to be zero, such as we have experienced in the U.S. since late 2008.



Let me be clear. This was the time to act. With the problems we face and the potential dangers lying ahead, it is essential to do as much as we can now to bolster the resiliency and vibrancy of the economy. We cannot be complacent and assume that the economy is not being damaged if no action is taken. I am optimistic that we can achieve better outcomes through more monetary policy accommodation.


Some have argued that the circumstances we find ourselves in today are so different from the way in which monetary policy normally operates that we must tread cautiously. They argue that more monetary policy accommodation may lead to unintended consequences. Yet, being timid and unduly passive can also lead to unintended consequences. If we continue to take only modest, cautious, safe policy actions, we risk suffering a lost decade similar to that which Japan experienced in the 1990s. Underestimating the enormity of our problems and the negative forces holding back growth itself exposes the economy to other potentially more serious unintended consequences. That type of passivity is a gamble that is not worth taking. Thank you.



[1] Federal Open Market Committee (2012).

[2] A number of articles and working papers estimate that the role of structural factors in explaining recent high unemployment rates is relatively modest. These include Barlevy (2011), Şahin et al. (2012), Valletta and Kuang (2012) and Lazear and Spletzer (2012). Supporting these assessments, the Congressional Budget Office (2012b) estimated that in late 2011 the natural rate of unemployment was about 6 percent, up from about 5 percent before the recession, although far below the 8.5 percent unemployment rate reported in December of that year.

[3] See Reinhart and Rogoff (2009) and Jordà, Schularick and Taylor (2011).

[4] My thinking on liquidity traps can be found in many of my speeches, such as Evans (2012b, c).

[5] See International Monetary Fund, Research Department (2012).

[6] Friedman (1953).

[7] Congressional Budget Office (2012a).

[8] See, for example, Evans (2012a, b and 2011).


Barlevy, Gadi, 2011, “Evaluating the role of labor market mismatch in rising unemployment(pdf),” Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 35, Third Quarter, pp. 82–96.


Congressional Budget Office, 2012a, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, report(external-pdf), Washington, DC, August.


__________, 2012b, The Budget and Economic Outlook: Fiscal Years 2012 to 2022, report(external-pdf), Washington, DC, January.


Evans, Charles, 2012a, “Some thoughts on global risks and monetary policy,” speech, Market News International seminar, Hong Kong, China, August 27.


__________, 2012b, “A perspective on the future of monetary policy and the implications for Asia,” speech, Sasin Bangkok Forum, Bangkok, Thailand, July 9.


__________, 2012c, “Monetary policy communications and forward guidance,” speech, International Research Forum on Monetary Policy — Seventh Conference, Frankfurt, Germany, March 16.


__________, 2011, “The Fed's dual mandate responsibilities and challenges facing U.S. monetary policy,” speech, European Economics and Financial Centre, London, UK, September 7.


Federal Open Market Committee, 2012, Statement, press release(external), Board of Governors of the Federal Reserve System, September 13.


Friedman, Milton, 1953, "The case for flexible exchange rates," in Essays in Positive Economics, Chicago: University of Chicago Press.


International Monetary Fund, Research Department, 2012, World Economic Outlook, April 2012: Growth Resuming, Dangers Remain, report(external-pdf), Washington DC, April 17.


Jordà, Òscar, Moritz Schularick, and Alan M. Taylor, 2011, “Financial crises, credit booms, and external imbalances: 140 years of lessons,” IMF Economic Review, Vol. 59, No. 2, pp. 340–378.


Lazear, Edward P., and James R. Spletzer, 2012, “The United States labor market: Status quo or a new normal?,” Stanford University Graduate School of Business and Hoover Institution and U.S. Census Bureau, working paper(external-pdf), July 22.


Reinhart, Carmen M., and Kenneth S. Rogoff, 2009, This Time Is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton University Press.


Şahin, Ayşegül, Joseph Song, Giorgio Topa, and Giovanni L. Violante, 2012, “Mismatch unemployment,” Federal Reserve Bank of New York, staff report(external-pdf), No. 566, August.


Valletta, Rob, and Katherine Kuang, 2010, “Is structural unemployment on the rise?(external),” Economic Letter, Federal Reserve Bank of San Francisco, No. 2010-34, November 8.


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Federal Reserve Bank of New York Statement posted by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, September 13, 2012

Statement Regarding Transactions in Agency Mortgage-Backed Securities and Treasury Securities

September 13, 2012



On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month. The FOMC also directed the Desk to continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June and to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS.

The FOMC noted that these actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Purchases of Agency MBS
The purchases of additional agency MBS will begin tomorrow, and are expected to total approximately $23 billion over the remainder of September. Going forward, details associated with the additional amount of MBS to be purchased each month will be announced on or around the last business day of the prior month.

Consistent with current practice, the planned amount of purchases associated with reinvestments of principal payments on holdings of agency securities that are anticipated to take place over each monthly period will be announced on or around the eighth business day of the prior month. The next monthly reinvestment purchase amount was also published today, and can be found here: http://www.newyorkfed.org/markets/ambs/ambs_schedule.html.

The Desk anticipates that the agency MBS purchases associated with both the additional asset purchases and the principal reinvestments will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, although the Desk may purchase other agency MBS if market conditions warrant.

Consistent with current practices, all purchases of agency MBS will be conducted with the Federal Reserve’s primary dealers through a competitive bidding process and results will be published on the Federal Reserve Bank of New York’s website. The Desk will also continue to publish transaction prices for individual operations on a monthly basis.

Frequently Asked Questions associated with these purchases will be released later today.

FOMC statement post by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, September 13, 2012



Release Date: September 13, 2012

For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. 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. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. 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.

Fed Chairman Bernanke - Jackson Hole Speech - Full Text Posted by Ryan C. Rogers RMR Wealth Management, LLC

RMR Wealth Management - Friday, August 31, 2012
Chairman Ben S. Bernanke

At the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming

August 31, 2012

Monetary Policy since the Onset of the Crisis

When we convened in Jackson Hole in August 2007, the Federal Open Market Committee's (FOMC) target for the federal funds rate was 5-1/4 percent. Sixteen months later, with the financial crisis in full swing, the FOMC had lowered the target for the federal funds rate to nearly zero, thereby entering the unfamiliar territory of having to conduct monetary policy with the policy interest rate at its effective lower bound. The unusual severity of the recession and ongoing strains in financial markets made the challenges facing monetary policymakers all the greater.

Today I will review the evolution of U.S. monetary policy since late 2007. My focus will be the Federal Reserve's experience with nontraditional policy tools, notably those based on the management of the Federal Reserve's balance sheet and on its public communications. I'll discuss what we have learned about the efficacy and drawbacks of these less familiar forms of monetary policy, and I'll talk about the implications for the Federal Reserve's ongoing efforts to promote a return to maximum employment in a context of price stability.

Monetary Policy in 2007 and 2008
When significant financial stresses first emerged, in August 2007, the FOMC responded quickly, first through liquidity actions--cutting the discount rate and extending term loans to banks--and then, in September, by lowering the target for the federal funds rate by 50 basis points. 1 As further indications of economic weakness appeared over subsequent months, the Committee reduced its target for the federal funds rate by a cumulative 325 basis points, leaving the target at 2 percent by the spring of 2008.

The Committee held rates constant over the summer as it monitored economic and financial conditions. When the crisis intensified markedly in the fall, the Committee responded by cutting the target for the federal funds rate by 100 basis points in October, with half of this easing coming as part of an unprecedented coordinated interest rate cut by six major central banks. Then, in December 2008, as evidence of a dramatic slowdown mounted, the Committee reduced its target to a range of 0 to 25 basis points, effectively its lower bound. That target range remains in place today.

Despite the easing of monetary policy, dysfunction in credit markets continued to worsen. As you know, in the latter part of 2008 and early 2009, the Federal Reserve took extraordinary steps to provide liquidity and support credit market functioning, including the establishment of a number of emergency lending facilities and the creation or extension of currency swap agreements with 14 central banks around the world.2 In its role as banking regulator, the Federal Reserve also led stress tests of the largest U.S. bank holding companies, setting the stage for the companies to raise capital. These actions--along with a host of interventions by other policymakers in the United States and throughout the world--helped stabilize global financial markets, which in turn served to check the deterioration in the real economy and the emergence of deflationary pressures.

Unfortunately, although it is likely that even worse outcomes had been averted, the damage to the economy was severe. The unemployment rate in the United States rose from about 6 percent in September 2008 to nearly 9 percent by April 2009--it would peak at 10 percent in October--while inflation declined sharply. As the crisis crested, and with the federal funds rate at its effective lower bound, the FOMC turned to nontraditional policy approaches to support the recovery.

As the Committee embarked on this path, we were guided by some general principles and some insightful academic work but--with the important exception of the Japanese case--limited historical experience. As a result, central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing. I will discuss some of what we have learned, beginning with our experience conducting policy using the Federal Reserve's balance sheet, then turn to our use of communications tools.

Balance Sheet Tools
In using the Federal Reserve's balance sheet as a tool for achieving its mandated objectives of maximum employment and price stability, the FOMC has focused on the acquisition of longer-term securities--specifically, Treasury and agency securities, which are the principal types of securities that the Federal Reserve is permitted to buy under the Federal Reserve Act.3 One mechanism through which such purchases are believed to affect the economy is the so-called portfolio balance channel, which is based on the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer. The key premise underlying this channel is that, for a variety of reasons, different classes of financial assets are not perfect substitutes in investors' portfolios.4 For example, some institutional investors face regulatory restrictions on the types of securities they can hold, retail investors may be reluctant to hold certain types of assets because of high transactions or information costs, and some assets have risk characteristics that are difficult or costly to hedge.

Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets. Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan's deflationary trap.5

Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about "tail" risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.

With the space for further cuts in the target for the federal funds rate increasingly limited, in late 2008 the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). In November, the FOMC announced a program to purchase a total of $600 billion in agency MBS and agency debt.6 In March 2009, the FOMC expanded this purchase program substantially, announcing that it would purchase up to $1.25 trillion of agency MBS, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury debt.7 These purchases were completed, with minor adjustments, in early 2010.8 In November 2010, the FOMC announced that it would further expand the Federal Reserve's security holdings by purchasing an additional $600 billion of longer-term Treasury securities over a period ending in mid-2011.9

About a year ago, the FOMC introduced a variation on its earlier purchase programs, known as the maturity extension program (MEP), under which the Federal Reserve would purchase $400 billion of long-term Treasury securities and sell an equivalent amount of shorter-term Treasury securities over the period ending in June 2012.10 The FOMC subsequently extended the MEP through the end of this year.11 By reducing the average maturity of the securities held by the public, the MEP puts additional downward pressure on longer-term interest rates and further eases overall financial conditions.

How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve's large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve's asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.

Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

While there is substantial evidence that the Federal Reserve's asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual--how the economy would have performed in the absence of the Federal Reserve's actions--cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15 The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.16

To be sure, these estimates of the macroeconomic effects of LSAPs should be treated with caution. It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models; for example, restrictive mortgage underwriting standards have reduced the effects of lower mortgage rates. Further, the estimated macroeconomic effects depend on uncertain estimates of the persistence of the effects of LSAPs on financial conditions.17 Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.

Now I will turn to our use of communications tools.

Communication Tools
Clear communication is always important in central banking, but it can be especially important when economic conditions call for further policy stimulus but the policy rate is already at its effective lower bound. In particular, forward guidance that lowers private-sector expectations regarding future short-term rates should cause longer-term interest rates to decline, leading to more accommodative financial conditions.18

The Federal Reserve has made considerable use of forward guidance as a policy tool.19 From March 2009 through June 2011, the FOMC's postmeeting statement noted that economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period."20 At the August 2011 meeting, the Committee made its guidance more precise by stating that economic conditions would likely warrant that the federal funds rate remain exceptionally low "at least through mid-2013."21 At the beginning of this year, the FOMC extended the anticipated period of exceptionally low rates further, to "at least through late 2014," guidance that has been reaffirmed at subsequent meetings.22 As the language indicates, this guidance is not an unconditional promise; rather, it is a statement about the FOMC's collective judgment regarding the path of policy that is likely to prove appropriate, given the Committee's objectives and its outlook for the economy.

The views of Committee members regarding the likely timing of policy firming represent a balance of many factors, but the current forward guidance is broadly consistent with prescriptions coming from a range of standard benchmarks, including simple policy rules and optimal control methods.23 Some of the policy rules informing the forward guidance relate policy interest rates to familiar determinants, such as inflation and the output gap. But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods. These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates.24

Has the forward guidance been effective? It is certainly true that, over time, both investors and private forecasters have pushed out considerably the date at which they expect the federal funds rate to begin to rise; moreover, current policy expectations appear to align well with the FOMC's forward guidance. To be sure, the changes over time in when the private sector expects the federal funds rate to begin firming resulted in part from the same deterioration of the economic outlook that led the FOMC to introduce and then extend its forward guidance. But the private sector's revised outlook for the policy rate also appears to reflect a growing appreciation of how forceful the FOMC intends to be in supporting a sustainable recovery. For example, since 2009, forecasters participating in the Blue Chip survey have repeatedly marked down their projections of the unemployment rate they expect to prevail at the time that the FOMC begins to lift the target for the federal funds rate away from zero. Thus, the Committee's forward guidance may have conveyed a greater willingness to maintain accommodation than private forecasters had previously believed.25 The behavior of financial market prices in periods around changes in the forward guidance is also consistent with the view that the guidance has affected policy expectations.26

Making Policy with Nontraditional Tools: A Cost-Benefit Framework
Making monetary policy with nontraditional tools is challenging. In particular, our experience with these tools remains limited. In this context, the FOMC carefully compares the expected benefits and costs of proposed policy actions.

The potential benefit of policy action, of course, is the possibility of better economic outcomes--outcomes more consistent with the FOMC's dual mandate. In light of the evidence I discussed, it appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation, though we are less certain about the magnitude and persistence of these effects than we are about those of more-traditional policies.

The possible benefits of an action, however, must be considered alongside its potential costs. I will focus now on the potential costs of LSAPs.

One possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets. As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities; the supply of those securities is large but finite, and not all of the supply is actively traded. Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery. As the global financial system depends on deep and liquid markets for U.S. Treasury securities, significant impairment of those markets would be costly, and, in particular, could impede the transmission of monetary policy. For example, market disruptions could lead to higher liquidity premiums on Treasury securities, which would run counter to the policy goal of reducing Treasury yields. However, although market capacity could ultimately become an issue, to this point we have seen few if any problems in the markets for Treasury or agency securities, private-sector holdings of securities remain large, and trading among private market participants remains robust.

A second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability. It is noteworthy, however, that the expansion of the balance sheet to date has not materially affected inflation expectations, likely in part because of the great emphasis the Federal Reserve has placed on developing tools to ensure that we can normalize monetary policy when appropriate, even if our securities holdings remain large. In particular, the FOMC will be able to put upward pressure on short-term interest rates by raising the interest rate it pays banks for reserves they hold at the Fed. Upward pressure on rates can also be achieved by using reserve-draining tools or by selling securities from the Federal Reserve's portfolio, thus reversing the effects achieved by LSAPs. The FOMC has spent considerable effort planning and testing our exit strategy and will act decisively to execute it at the appropriate time.

A third cost to be weighed is that of risks to financial stability. For example, some observers have raised concerns that, by driving longer-term yields lower, nontraditional policies could induce an imprudent reach for yield by some investors and thereby threaten financial stability. Of course, one objective of both traditional and nontraditional policy during recoveries is to promote a return to productive risk-taking; as always, the goal is to strike the appropriate balance. Moreover, a stronger recovery is itself clearly helpful for financial stability. In assessing this risk, it is important to note that the Federal Reserve, both on its own and in collaboration with other members of the Financial Stability Oversight Council, has substantially expanded its monitoring of the financial system and modified its supervisory approach to take a more systemic perspective. We have seen little evidence thus far of unsafe buildups of risk or leverage, but we will continue both our careful oversight and the implementation of financial regulatory reforms aimed at reducing systemic risk.

A fourth potential cost of balance sheet policies is the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent. Extensive analyses suggest that, from a purely fiscal perspective, the odds are strong that the Fed's asset purchases will make money for the taxpayers, reducing the federal deficit and debt.27 And, of course, to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve's balance sheet.

In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.

Economic Prospects
The accommodative monetary policies I have reviewed today, both traditional and nontraditional, have provided important support to the economic recovery while helping to maintain price stability. As of July, the unemployment rate had fallen to 8.3 percent from its cyclical peak of 10 percent and payrolls had risen by 4 million jobs from their low point. And despite periodic concerns about deflation risks, on the one hand, and repeated warnings that excessive policy accommodation would ignite inflation, on the other hand, inflation (except for temporary deviations caused primarily by swings in commodity prices) has remained near the Committee's 2 percent objective and inflation expectations have remained stable. Key sectors such as manufacturing, housing, and international trade have strengthened, firms' investment in equipment and software has rebounded, and conditions in financial and credit markets have improved.

Notwithstanding these positive signs, the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value, and other indicators--such as the labor force participation rate and the number of people working part time for economic reasons--confirm that labor force utilization remains at very low levels. Further, the rate of improvement in the labor market has been painfully slow. I have noted on other occasions that the declines in unemployment we have seen would likely continue only if economic growth picked up to a rate above its longer-term trend.28 In fact, growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January. Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.

In light of the policy actions the FOMC has taken to date, as well as the economy's natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment. Some have taken the lack of progress as evidence that the financial crisis caused structural damage to the economy, rendering the current levels of unemployment impervious to additional monetary accommodation. The literature on this issue is extensive, and I cannot fully review it today.29 However, following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level, and, although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years.

Rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds. First, although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.

Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge.30 It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.

Third, stresses in credit and financial markets continue to restrain the economy. Earlier in the recovery, limited credit availability was an important factor holding back growth, and tight borrowing conditions for some potential homebuyers and small businesses remain a problem today. More recently, however, a major source of financial strains has been uncertainty about developments in Europe. These strains are most problematic for the Europeans, of course, but through global trade and financial linkages, the effects of the European situation on the U.S. economy are significant as well. Some recent policy proposals in Europe have been quite constructive, in my view, and I urge our European colleagues to press ahead with policy initiatives to resolve the crisis.

Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound.31 I was reacting to common assertions at the time that monetary policymakers would be "out of ammunition" as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.

As I have discussed today, it is also true that nontraditional policies are relatively more difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Summary of Commentary on Current Economic Conditions by Federal Reserve District posted by Ryan C. Rorgers, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, August 30, 2012


Summary of Commentary on Current Economic Conditions by Federal Reserve District


Prepared at the Federal Reserve Bank of Boston and based on information collected on or before August 20, 2012. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts suggest economic activity continued to expand gradually in July and early August across most regions and sectors. Six Districts indicated the local economy continued to expand at a modest pace and another three cited moderate growth; among the latter, Chicago noted that the pace of growth had slowed from the prior period. The Philadelphia and Richmond Districts reported slow growth in most sectors and declines in manufacturing, while Boston cited mixed reports from business contacts and some slowdown since the previous report.

Most Districts indicated that retail activity, including auto sales, had increased since the last Beige Book report, although Cleveland, Chicago, St. Louis, Dallas, and San Francisco noted the retail improvements were small. Atlanta said that retail growth had slowed, while Philadelphia indicated growth in retail sales was somewhat faster than in the previous report. Boston, New York, Richmond, Atlanta, Minneapolis, and San Francisco recorded strong performance in tourism. Many Districts reported some softening in manufacturing, either a slowdown in the rate of growth or a decline in the level of sales, output, or orders; among those with declining shipments and orders, Philadelphia noted that the rate of decline was tempering.

Districts mentioning nonfinancial services noted increased activity, although at a slowing pace in Boston, softening in New York, and "flattening" in Philadelphia; Kansas City reported that sales of high-tech services declined slightly. Several Districts cited declining demand for staffing services. According to District reports, bankers in New York, Philadelphia, Cleveland, Atlanta, Chicago, and Kansas City saw increases in demand for most loan types in recent months; by contrast, St. Louis, Dallas, and San Francisco indicated that loan demand was mixed, softening, or slightly weaker.

Real estate markets were generally said to be improving. On the residential side, all 12 Districts cited increases in home sales, home prices, or housing construction. Reports on commercial real estate markets were also generally positive, although San Francisco noted stable demand, Boston indicated conditions were not much changed since the last report, and Richmond, Chicago, and St. Louis said commercial real estate conditions were mixed.

District reports indicated that energy and mining activity was generally high and increasing. However, Cleveland noted softening demand for coal, while Minneapolis and Kansas City had some energy sectors up and some down. The Midwest drought has reduced actual and expected farm output, especially cotton, soybean, and/or corn crops in the Chicago, Kansas City, and St. Louis Districts.

Most Districts reported that the selling prices of manufacturing and retail products were largely stable. By exception, several Districts noted concerns about rising agricultural commodity prices, and Richmond mentioned a small uptick in retail prices. Hiring was said to be modest across the Districts, and wage pressures were characterized as contained.

Consumer Spending and Tourism
Most Districts reported that retail spending in July and early August was up compared with the previous Beige Book. New York and San Francisco noted strengthening sales compared with a softer May and June, although in San Francisco's case, the rise was only "a bit further." Philadelphia, Richmond, Minneapolis, and Kansas City reported stronger retail sales, while Cleveland, Chicago, St. Louis, and Dallas all said that sales were up "slightly." In the Atlanta District, most retail contacts reported slower sales, while Boston's retail contacts provided a mixed assessment. The Atlanta and San Francisco reports noted that discount retailers performed better than traditional department stores, while the Chicago report attributed the pace of growth in consumer spending to heavy discounting by retailers clearing space for back-to-school items. Boston and Chicago reported continuing weakness in furniture sales; Boston also reported weak sales of electronics, but Chicago noted some improvement in this category. Adult clothing sold well in Boston, Chicago, and Dallas. The Atlanta District said that luxury goods merchants, while still largely positive, provided more mixed reports compared with earlier this year; Kansas City cited weaker sales for high-end jewelry. For the remainder of 2012, Boston retailers have mixed sales expectations, Philadelphia retailers are cautiously optimistic, and those in Atlanta are conservative; retail contacts in Minneapolis, Kansas City, and Dallas expect sales to rise through the end of the year.

Automobile sales are up in the New York, Philadelphia, Atlanta, St. Louis, Minneapolis, and Kansas City Districts, flat in Cleveland, Chicago, and Dallas, and a bit slower paced in Richmond and San Francisco; nonetheless, vehicle demand in the latter two Districts is still strong, especially for used cars. The New York District reported that new car sales are "particularly robust" and Kansas City cited a sharp increase in new vehicle sales. Atlanta, St. Louis, and Kansas City indicated that car dealers in their Districts expected these strong automobile sales to continue, while the Philadelphia and Dallas Districts reported concerns that consumer uncertainty might depress vehicle sales in coming months.

Respondents in the Boston, New York, Richmond, Atlanta, Minneapolis, and San Francisco Districts reported that tourist industry performance remains strong. The Atlanta District mentioned that Florida contacts reported a drop in European travelers, but said this decline was offset by an increase in business from Central and South America. Contacts in Boston noted some concern that weakness in Europe could soften tourist activity and that rising gas prices could affect leisure travel. The San Francisco District reported that the pace of growth had slowed in Las Vegas and other areas.

Manufacturing and Related Services
The picture in manufacturing was mixed. The Boston, Chicago, Kansas City and San Francisco Districts reported increasing demand and sales since the previous Beige Book, although the improvement was generally small and uneven, with two of these four Districts reporting that demand growth, while positive, was slowing. Six Districts reported that demand for manufactured goods was actually falling, although none reported a dramatic fall. The outlook was somewhat more positive, with six Districts reporting that manufacturers expected increasing demand and only two reporting the opposite.

Areas of strength were varied. The Cleveland and Philadelphia Districts both pointed to the revolution in natural gas production in the United States as a driver of demand, but the Chicago District said that a contact blamed cheap natural gas for weakness in demand for coal. Several Districts noted that improvements in residential construction boosted demand for products such as lumber, PVC, cement, and home goods. The Chicago and Philadelphia Districts said that auto production was positive, but Richmond said the opposite.

Weakness overseas remains a problem for U.S. manufacturing. Reports from the Boston, Atlanta, and Chicago Districts explicitly mentioned it. Although Europe represented one notable problem, several Districts also mentioned weakness in demand in Asia as an issue. In general, District reports indicate that the cost and availability of raw materials has not been an issue for manufacturers recently, especially as compared with the situation in previous years. Four Districts reported lower input costs, but contacts in New York reported a slight increase.

On the employment front, there was little movement. Across all Districts, few manufacturing firms reported any major hiring or layoffs, and the ones that did usually attributed it to idiosyncratic factors like new products or restructuring related to a merger. The Cleveland District reported that firms continued to have trouble finding skilled workers. Capital spending also showed little change; in addition, several Districts reported that contacted manufacturers had not revised their investment plans.

Nonfinancial Services
Activity in nonfinancial services generally picked up since the previous report, although results were mixed across Districts and service industries. New York and Philadelphia reported that overall service-sector activity was flat to down slightly, whereas Minneapolis and San Francisco noted expanding activity. Several Districts, including Boston, Richmond, and San Francisco, reported steady to increasing demand for information technology services; Kansas City, by contrast, cited decreased sales at high-tech services firms. Reports from the healthcare sector were also somewhat mixed, with Philadelphia and St. Louis reporting positive results and San Francisco noting a drop in the frequency of elective procedures. Advertisers in the Philadelphia and San Francisco Districts continued to report strong revenues. In the Dallas District, legal firms reported continued increases in demand for services, while accounting firms cited seasonal slowness. Demand for staffing services was generally lower than expected, with decreases reported by Boston, New York, Richmond, and Dallas. Even so, demand remained strong for highly skilled IT personnel in the Boston and Richmond Districts.

Reports on transportation services were generally positive. Rail contacts reported continued increases in intermodal shipments in the Atlanta District and increased cargo volumes in the Dallas District, with both Districts recognizing gains in lumber shipments. Atlanta and Dallas also reported steady to increasing demand for trucking services, whereas logistics firms and carriers in the Philadelphia District reported a relatively sluggish start to the traditional "freight season."

Banking and Financial Services
Credit conditions have improved over the reporting period according to District reports. Credit spreads were lower and competition for high-quality borrowers among lending institutions has increased. The New York District noted that shrinking spreads were observed particularly in commercial and industrial loans as well as in commercial mortgages. Some bankers in the Cleveland District mentioned a moderate loosening of lending guidelines. The New York, St. Louis, and Kansas City Districts reported unchanged credit standards; New York and Cleveland cited declining delinquency rates.

The direction and magnitude of changes in loan demand varied among the Districts and also with respect to type of loan. The Richmond and Atlanta Districts reported generally low demand for loans, but some pockets of growth. The Chicago District noted that growth in business loan demand was generated mostly from small and mid-size firms and for the purpose of refinancing rather than financing capital expenditures. Cleveland, St. Louis, and San Francisco mentioned small positive or negative changes in business credit demand, and relatively strong demand for consumer credit. The Kansas City District reported stable demand for commercial and industrial loans and commercial real estate loans, while Dallas noted softer demand for loans overall; however, both Districts cited increases in demand for residential real estate loans. The New York and Philadelphia Districts observed growth in most lending categories.

Real Estate and Construction
Housing markets across most Districts exhibited signs of improvement, with sales and construction continuing to increase. Dallas reported significant levels of buyer traffic, Richmond noted strong pending sales, and Minneapolis and St. Louis mentioned increases in building permits. New York, Philadelphia, and Chicago indicated improvements as well, but characterized the progress as slow and modest. Declines in inventory levels were reported in Boston, New York, Philadelphia, Atlanta, Dallas, and San Francisco; these declining inventories put some upward pressure on prices according to Boston, Atlanta, and Dallas. A reduction in the stock of distressed properties was mentioned in New York, Richmond, and San Francisco. In Philadelphia and Kansas City, the possibility of shadow inventory entering the market remains a concern. In general, outlooks were positive, with continued increases in activity expected, although the projected gains were more modest in Boston, Cleveland, and Kansas City.

Commercial real estate market conditions held steady or improved in nearly all Districts in recent weeks. New York, Philadelphia, Minneapolis, and Kansas City all reported that commercial leasing increased and vacancy rates fell. New York and Kansas City reported increases in office rents as well; Kansas City also cited a rise in commercial construction. Commercial building permits were up significantly from one year ago in portions of the Minneapolis District. Chicago's report was mixed: office vacancy rates remained high, restraining demand for new office construction, but office leasing demand improved modestly and industrial construction picked up. Atlanta reported rising apartment rents and small gains in office leasing, with weakness in the retail and industrial sectors. Boston reported that office fundamentals were flat on average, with rising rents in portions of Boston proper and muted but steady activity elsewhere in the District. Nonresidential construction picked up in the Boston and Cleveland Districts. Office and industrial real estate markets remained healthy in Dallas. The St. Louis report noted an increase in commercial construction across much of the District and varied reports on leasing across areas within the District. In San Francisco, demand for commercial property was stable while commercial construction was limited. Richmond reported a decline in office leasing volume in Washington, D.C., but some portions of the District recorded increasing sales and construction. Multifamily real estate remained a strong submarket and a key driver of construction in many Districts, including Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco.

Agriculture and Natural Resources
According to District reports, agricultural conditions were mixed largely because of severe drought conditions that affected the Midwest more than the rest of the country. Producers in the Chicago, St. Louis, and Kansas City Districts were all severely affected by the drought, with cotton, soybean, and corn crops particularly damaged. Cotton production in the Dallas District was also badly damaged, while the northern part of the Minneapolis District reported good corn, soybean, and wheat crops, and the San Francisco and Richmond Districts reported strong demand for their healthy cotton crops. Although nearly all agricultural commodity prices rose, higher feed costs led to reduced herd sizes and lower livestock prices in nearly all Districts reporting on livestock. Reports from the Richmond and Kansas City Districts indicated that farmland values have continued to rise, although contacts in the Kansas City District expected them to hold steady for the rest of the year. Farm incomes generally rose or stayed the same in the Minneapolis District.

Oil and gas activity continued to be robust across most Districts. Extraction of natural gas and petroleum remained at high levels in the Dallas and Minneapolis Districts and expanded in the Cleveland and Richmond Districts, partly because of increased demand from electrical utilities. Production increased in Gulf Coast oil refineries in the Atlanta District as a result of closures along the East Coast, while higher demand for crude oil, diesel, and other distillates supported prices. However, natural gas producers in the Cleveland, Richmond, Minneapolis, and Dallas Districts reported a decline in exploration and drilling of new wells on account of high inventories and low prices. Coal demand was unchanged from 2011 in the St. Louis District but was expected to fall below 2011 levels in the Cleveland District due to reduced demand for thermal coal from domestic utilities and metallurgical coal from Europe and Asia. Iron ore, taconite, and sand mines in the Minneapolis District continued to operate at high capacity.

Employment, Wages, and Prices
Most Districts reported that employment was holding steady or growing only slightly. Several Districts including Boston, New York, Philadelphia, and Richmond noted a softening in employment relative to expectations; upcoming layoffs were reported by a defense contractor in the Boston District and by firms in sectors such as air transportation, appliances, and business support services in the St Louis District. Almost all Districts indicated that manufacturers were continuing to hire, albeit modestly. Demand has been strongest for skilled manufacturing and engineering positions, as well as for IT services. Contacts in the Cleveland, Richmond, Atlanta, Kansas City, and Dallas Districts all reported some difficulty meeting demand for truck drivers.

Overall, upward wage pressure was reported to be very contained across Districts. The Philadelphia and Chicago Districts both noted that despite little wage pressure, some contacts reported upward pressures for medical benefits. Sources from Boston and Atlanta mentioned that continuing demand was putting some upward pressure on wages for highly-skilled positions in software, engineering, and information technology. The San Francisco District also noted specialized IT positions as an exception to generally limited wage growth. The Dallas District reported upward wage pressure for truck drivers and construction workers, and the Minneapolis District noted wage increases in areas with increased oil drilling.

Most Districts reported that overall prices for finished goods were relatively stable despite somewhat increased input prices. Higher prices for grain and other food commodities were cited by many Districts, primarily due to the drought. The Cleveland District noted increased upward pressure on lumber prices, while contacts in Boston, Philadelphia, and Minneapolis reported higher gasoline prices as a potential concern. Chicago mentioned some pass-through of higher crop prices to wholesale prices, while contacts in the Kansas City and Richmond Districts expected to raise future prices in response to more expensive raw materials.

European Central Bank President Mario Draghi Opening Statement Text posted by Ryan C. Rogers

RMR Wealth Management - Thursday, August 02, 2012

ECB President Mario Draghi Opening Statement - 08/02/12

“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged, following the decrease of 25 basis points in July. As we said a month ago, inflation should decline further in the course of 2012 and be below 2% again in 2013. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area remains weak, with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment. A further intensification of financial market tensions has the potential to affect the balance of risks for both growth and inflation on the downside.

The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

The adherence of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

Let me now explain our assessment in greater detail, starting with the economic analysis. On a quarterly basis, euro area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3% in the previous quarter. Economic indicators point to weak economic activity in the second quarter of 2012 and at the beginning of the third quarter, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually, with growth momentum being further dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum, which is also affected by the ongoing global slowdown.

The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Downside risks also relate to possible renewed increases in energy prices over the medium term.

Euro area annual HICP inflation was 2.4% in July 2012, according to Eurostat’s flash estimate, unchanged from the previous month. On the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be below 2% again in 2013. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.

Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term. The main downside risks relate to the impact of weaker than expected growth in the euro area, in particular resulting from a further intensification of financial market tensions. Such intensification has the potential to affect the balance of risks on the downside.

Turning to the monetary analysis, the underlying pace of monetary expansion remained subdued. The annual growth rate of M3 stood at 3.2% in June 2012, slightly higher than the 3.1% observed in the previous month and close to the rate observed at the end of the first quarter. Overall, inflows into broad money in the second quarter were weak. Annual growth in M1 increased further to 3.5% in June, in line with the increased preference of investors for liquid instruments in an environment of low interest rates and high uncertainty.

The annual growth rate of loans to the private sector (adjusted for loan sales and securitization) declined to 0.3% in June (from 0.5% in May). As net redemptions of loans to non-financial corporations and households (both adjusted for loan sales and securitization) were observed in June, the annual growth rates for loans to both non-financial corporations and households (adjusted for loan sales and securitization) decreased further in June, to -0.3% and 1.1% respectively. To a large extent, subdued loan growth reflects the current cyclical situation, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. A considerable contribution of demand factors to weak MFI loan growth is confirmed by the euro area bank lending survey for the second quarter of 2012. This survey also shows that the net tightening of banks’ credit standards at the euro area level was broadly stable in the second quarter of 2012, as compared with the previous quarter, for loans to both enterprises and households.

Looking ahead, it is essential for banks to continue to strengthen their resilience where this is needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalization of all funding channels.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

While significant progress has been achieved with fiscal consolidation over recent years, further decisive and urgent steps need to be taken to improve competitiveness. From 2009 to 2011, euro area countries, on average, reduced the deficit-to-GDP ratio by 2.3 percentage points, and the primary deficit improved by about 2½ percentage points. Fiscal adjustment in the euro area is continuing in 2012, and it is indeed crucial that efforts are maintained to restore sound fiscal positions. At the same time, structural reforms are as essential as fiscal consolidation efforts and the measures to repair the financial sector. Some progress has also been made in this area. For example, unit labor costs and current account developments have started to undergo a correction process in most of the countries strongly affected by the crisis. However, further reform measures need to be implemented swiftly and decisively. Product market reforms to foster competitiveness and the creation of efficient and flexible labor markets are preconditions for the unwinding of existing imbalances and the achievement of robust, sustainable growth. It is now crucial that Member States implement their country-specific recommendations with determination.”

Fed Chief Bernanke Q&A bullets by Ryan C. Rogers, RMR Wealth Management

RMR Wealth Management - Tuesday, July 17, 2012



:NY FED was aware of banks under reporting to improve strength of bank.Not aware traders collaborating for profit until reported

: Will not endorse a specific spending program. But is recommending a plan that does reduce spending over time.

: Fiscal shock analysis of all 2001/2003 tax cuts. Not just tax increase on 250k+ earners.

: The world is in an easing period. FED not only central bank using these methods.

:Global slowdown emanating from Europe. Slowing in Asia as well. Global economy slowing. Not nearly as bad as the crisis period.

: Try to create favorable tax, credit and regulatory environment to help start ups. Does not have a program to suggest how.

: Start Ups are a generator of new jobs/employment. Lack of credit availability may be having negative impact.

: EU trying to establish angle bank regulator. Could take well into next year to accomplish.

: his major economic concern for US. 2 issues: 1.EU debt issue (hopes EU solves it) and 2.Fiscal cliff. (Hopes congress solves it)

: could change LIBOR from reported rate to openly traded...would be very difficult to transition

: Less conventional tools available for FED to meet dual mandate, but has other tools.

: tells to take whatever actions warranted to encourage employment and economic growth while keeping inflation low.

: putting off fiscal cliff would be very bad. (Don't kick can down the road)

: seriously concerned fiscal cliff spending reductions and tax code will be negative

: Household spending growth continues, may be slowing. (yesterdays retail sales numbers might be a hint of SLOWING)

Fed Chief Bernanke Q&A bullets by Ryan C. Rogers, RMR Wealth Management

RMR Wealth Management - Monday, June 25, 2012




Bernanke: Fed will not buy European sovereign debt.......Other than the European sovereign debt they already own.

Bernakne: additional steps available for central banks, BUT they are not understood and they have costs and risks!!!!!!!

Bernanke: doing more means........he's not really sure.

Bernanke: prepared to protect US financial markets and economy if HOPE doesn't work out.

Bernanke: VERY HOPEFULL Europe policy makers get it right

Bernanke: HOPES europe doesn't get worse.......

Bernanke: Volker rule positive....could have prevented JP Morgan $2 bil loss

Bernanke: won't comment on Volker rule release

Bernanke: plenty of securities available for fed to buy

Bernanke: Blames rest of world(EU,Japan,etc) for slow growth in US. Plus housing market. And finally state and local fiscal governments.

Bernanke: Fiscal Cliff is the problem of congress. Hopes they don't kick can down the road...........

Bernanke: World central banks consulting with each other....not coordinating........

Bernanke: all steps taken by FED and EU have risks associated with them.

Bernanke: federal reserve non-partisan............

Fed Chairman: incoming data since last meeting largely disappointing

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