San Francisco Federal Reserve Meeting

1
San Francisco Federal Reserve Meeting

• By Anthony Flynn and Gabriela Linder

2
Janet L. Yellen

• President (since June 14th, 2004) of the San
  Francisco Federal Reserve Bank.
• Professor of Business Economics since 1980 at
  UC Berkeley.

3
National Unemployment

• Since May 2008, Unemployment has risen from 5.0
  to 5.5.
• Unemployment is expected to rise to 5.7 by the
  end of the year.

4
Unemployment Contd

• Rise in unemployment attributed to the continuing
  fall in
• Construction less homes are being built as the
  criteria for loan approval now demands more.
  With a surplus of homes, construction is at a
  halt. Overall house prices are dropping as the
  supply exceeds the demand.
• Manufacturing decrease due to less investment
  (i.e. homes, business warehouses, etc.)
• Retail people have less disposable income, so
  they are shopping less.

5
Overview of Output

• GDP C I G NX
• Consumption is small
• Investment is also small
• Government spending is higher due to the war in
  Iraq
• The trade balance is positive as more is being
  exported due to the weak dollar
• Example when output decreases by 1, unemployment
  increases by 1
• High unemployment attributed to low GDP

6
Inflation

• CPI is at an upward trend.

• Growth is not keeping pace with CPI

7
Inflation Contd

• Why not lower the Federal Funds Rate?
• With the rate already low at 2.0, the risk of
  inflation is already very high. Lowering the
  rate further will guarantee a higher rate of
  inflation.

8
Strong Economy vs. Present Economy

• Inflationary Pressure
• i MS P

• Healthy Economy
• Effective Monetary Policy
• Increased Money Supply
• Positive Economic Stimulus
• Increased Spending

• Present Economy
• Ineffective Monetary Policy
• Increased Money Supply
• Increased Prices (Inflation)
• Decreased Spending

VS
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Liquidity Trap

• With the T-Bill rate close to 0 (0.539 as of May
  19th), there are diminishing marginal returns.
• Investors are reluctant to get into long term
  investments.
• This problem weakens the Feds control of the
  economy through monetary policy.
• With interest rates close to zero, the printing
  of money and buying of government debt is
  ineffective, because one zero-interest rate asset
  is being exchanged for another.

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Conclusion

• The Federal Funds rate should remain the same at
  2.0.
• We have yet to see the effects from the previous
  decrease, as it may take several quarters to see
  the effect of monetary policy changes.
• Slow price recovery has enabled the economy to
  recognize the last rate cut, so keeping the rate
  the same will allow us to see the effect on
  inflation.
• Rushing to cut the rate further will create
  higher inflation.

11
M. Friedman

• Too much, too late

12
Sources

• The Federal Reserve ltwww.federalreserve.govgt
• US Department of Labor ltwww.bls.govgt
• The New York Times ltwww.nytimes.comgt