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The Outlook for the U.S. Economy. 2009 FRB St. Louis Professors Conference Zero Bound, Credit Easing and Quantitative Easing St. Louis, MO November 5, 2009 Kevin L. Kliesen Federal Reserve Bank of St. Louis Not an official document. Overview of Today’s Talk. The Big Picture

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the outlook for the u s economy

The Outlook for the U.S. Economy

2009 FRB St. Louis Professors Conference Zero Bound, Credit Easing and Quantitative Easing

St. Louis, MO

November 5, 2009

Kevin L. Kliesen

Federal Reserve Bank of St. Louis

Not an official document

overview of today s talk
Overview of Today’s Talk
  • The Big Picture
  • Current Developments
  • Risks to the Outlook (Things to Worry About)
  • A New Era in Financial Regulation?
the big picture
The Big Picture
  • The worldwide financial crisis and recession is unwinding.
  • Helped by a massive global policy response . . .
  • . . . And natural market forces.
  • It was an unusual recession . . . Unusual policy responses . . . Might be an unusual recovery.
  • Policy reactions will occur on several fronts.
  • Inflation appears contained . . . For now.
  • A looming problem: Big budget deficits.

Current Developments

  • The Recession is (“Technically”) Over
    • “From a technical perspective, the recession is very likely over at this point.” (Chairman Bernanke, Sept. 15, 2009)
    • This month’s FOMC statement . . .
    • The public may see things differently.

Current Developments

3.5% growth in 2009:Q3

current developments1
Current Developments
  • The U.S. and world economies are returning to normal (but is this normal the old normal?).
    • Consumers starting to spend again . . . tentatively
    • A manufacturing rebound!
    • Firms are not yet too eager to spend . . . uncertainty
    • Bulk of govt. stimulus in the pipeline
    • Housing usually leads the economy out of the recession.
current developments2
Current Developments
  • Good news in the housing sector—sort of

A hook!

current developments3
Current Developments
  • Efforts to Stem the Foreclosure Tide

Retention actions rose nearly 22 percent in 2009-Q2.

current developments4
Current Developments
  • Has the economy experienced a sugar high over the past few months?
    • A concern about temporary measures to boost growth.
      • Will the first-time homebuyer’s tax credit do to the housing market what Cash for Clunkers did to auto sales?
    • Production gains devoted to inventory re-stocking?
      • A sizable chunk of growth over the second half of 2009 is expected to come from inventory gains (e.g., automotive).
    • Where will the impetus to growth come from after these stimulants fade away?
      • Maintaining forward momentum will be crucial.
current developments5
Current Developments
  • Will the consumer come roaring back? Some considerations.
      • Labor market conditions remain weak, though improving from earlier this year.
        • Unemployment rate may surpass 10%.

9.8% in


current developments6
Current Developments
  • Will the consumer come roaring back? Some considerations.
      • Energy prices on the upswing.
        • One indication of stronger aggregate demand growth worldwide, but . . .
        • Higher energy prices are like a tax on consumers; need to see after-tax income growth rising to offset this tax.
        • The sharp increase in real energy prices in 2007-08 was one of the factors pushing the economy over the edge.
current developments7
Current Developments

Oil prices are already around $80 per barrel.


Actual was

About $68/bbl

current developments8
Current Developments
  • Will the consumer come roaring back? Some considerations.
      • Consumers continue to pay down debt (“deleveraging”).
current developments9
Current Developments

Living beyond our means!

current developments10
Current Developments
  • Will the consumer come roaring back? Some considerations.

An all-time high!

Rebalancing the economy away from consumption to business investment.

current developments11
Current Developments
  • Will the consumer come roaring back? Some considerations.
      • Are consumers saving in preparation for future tax increases or are they finally realizing that retirement is not that far off?
        • What is the optimal household saving rate?
current developments12
Current Developments

Some Good News For Households:

  • House prices in many areas have bottomed and are rising


  • Stock prices have rebounded sharply since March.
  • Interest rates remain low.
  • Credit conditions are improving (but the banking sector still remains under some duress).
current developments13
Current Developments

Financial conditions have improved modestly further . . in one dimension.

FSI is comprised of 18 weekly, interest rates, yield spreads, and other financial market indicators (e.g., equities).

current developments14
Current Developments

The outlook over the second half of 2009 continues to improve!

Growth in 2010 likely to be around 3%.

Forecast Date

current developments15
Current Developments
  • Is Inflation Dead and Buried?
current developments16
Current Developments

Pump priming by the Fed

  • Interest rates are low . . . A normal development during a low-inflation, low-growth environment
  • FOMC pledges to keep its interest rate target low for “an extended period”
  • Continue to “provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets.”
  • The Fed’s dilemma!

Current Developments

  • Question asked of Blue Chip Forecasters:

Current Developments

There is some risk of much higher inflation beginning in mid-2010 and continuing into early 2011.

things to think about
Things to Think About
  • The nation’s economic and financial sectors are evolving in the aftermath of the deep recession.
    • Implications for consumers
    • Implications for business
  • These factors suggests a weaker-than-normal recovery.
    • Deep recessions are typically followed by strong recoveries.
    • 3% growth vs. 5% growth
    • Slow improvement in labor markets
  • However, once a recovery starts, it lasts for a while.
    • Firms producing more with fewer workers.
things to think about1
Things to Think About
  • Another “Jobless Recovery?”

Positive job growth not likely until early 2010

Sept. 2009

things to think about2
Things to Think About
  • The View that Prevailed in August

About a 1-in-6 chance of a double-dip in 2010.

things to think about3
Things to Think About
  • Inflation (and thus interest rates) tend to rise during a recovery; non-food/non-energy price pressures are percolating at the producer level.
    • A Key: Keeping inflation expectations in check.
  • The Fed is walking a tightrope!
    • When to start putting policy on a sustainable basis?
  • As the economy strengthens, financial markets—both here and abroad—will begin to focus on the U.S. budget deficit.
    • Large deficits reduce the amount of saving available to the private sector, which is the raw material for investment and thus rising living standards over time.
yes please worry
Yes, Please Worry!

Something has got to change!

financial regulatory reform
Financial Regulatory Reform
  • Too Big to Fail (TBTF)—a key issue
    • Moral hazard and other issues
    • Break-up firms vs. More Regulation?
    • Should banks be required to adopt a “living will?”
    • Large banks also provide benefits
  • The Role of the Fed
    • Fed’s role as the nation’s central bank gives it considerable expertise in identifying key risks to the financial system
    • Expertise in supervision and regulation of banks
  • Don’t fix what’s not broken
    • Deposit insurance