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Central Bank Monitor

Bloomberg BRIEF: EconomicsJoseph Brusuelas, Robert Lawrie and

Michael McDonough

October 2012

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Bloomberg Economic Brief Central Bank Monitor

Image page • Fed will likely remain on hold at October 2012 meeting

• Forward guidance to remain unchanged.

• Discussion in committee will probably revolve around• Efficacy of open-ended MBS purchases. • Whether to continue Operation Twist II into 2013.• Restarting treasury purchase program at December 2012 meeting.

Executive Summary

2



• Fed will likely move toward explicit targeting of unemployment rate

over next six months.• Potential “Evans Rule” indicates central bank to remain

aggressive.

• Aggressive action to unclog monetary transmission mechanism to remain in place through 2013.

• Balance sheet likely to expand to $4 trillion by end of 2013.

Executive Summary

3



4

Evans Rule and Policy Guidance

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2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015-10

-8

-6

-4

-2

0

2

4

6

8

Taylor Rule & Evans Rule Estimates of the Fed Funds Rates

Perc

en

tage

Source: Bloomberg USFEDL01, PCE CYOY, USURTOT INDEX<GO>

Taylor Rule Es-timates

Evans RuleEstimates

Fed Funds Rate



5

Fed Policy Objective


Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12-20

0

20

40

60

80

100

120

140

160

180

Mortgage Backed Primary-Secondary Spread

Mortgage Backed Primary-Secondary Spread

Basi

s P

oin

ts

Starts of Fed MBS Purchase Programs

Source: Bloomberg ILM3NAVG, MTGEFNCL INDEX<GO>

QE1QE3



6

Balance Sheet Expanding


2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

2015

2015

2015

2015

4

5

6

7

8

9

10

11

0

500

1,000

1,500

2,000

2,500

The U.S. Unemployment Rate , Fed Holdings of Agency and Mortgage Backed Securities

Fed Holdings of Agency & MBS Debt Projected Purchases Unemployment Rate

Projections

Unem

plo

ym

ent

Rate

(%

)

MB

S H

old

ings

(US$ b

n)

Start of QE3

Start of QE1

Potential end of purchases when unemployment

hits 7%?

Source: Bloomberg



7

Balance Sheet Expanding


2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

500

1000

1500

2000

2500

3000

3500

Federal Reserve Balance Sheet

IUS$ b

n)

Source: Bloomberg FARWRBC INDEX<GO>

Start of QE3

Lehman Collapse

Start of QE3



8

Arterial Blockages




9

Negative Rate Environment to Persist


196219641967196919721974197719791982198419871989199219941997199920022004200720092012-6

-4

-2

0

2

4

6

8

10

12

U.S. Nominal and Real Long-Term Interest Rates

U.S. Real Fed Funds Rate U.S. Real 10-Year Interest Rate

Perc

enta

ge

Source: Bloomberg USFEDL01, USGG10YR less CPI YOY INDEX<GO>



10

Monetary Policy at the Zero Bound


2012 2013 2014 2015 Longer Run0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0.25% 0.25% 0.25%

1.00%

4.00%

FOMC Projections of Year-End Levels of the Fed Funds Rate(Median Projections as of January, June and September 2012)

January Median FOMC Projection

June Median FOMC Projection

Sept. Median FOMC Projection

Perc

ent

Source: Bloomberg



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Joseph Brusuelas,Senior EconomistBloomberg, [email protected]

Bloomberg

Joseph Brusuelas, Robert Lawrie and Michael McDonough are economists who write

for the Bloomberg Economic Brief. The observations they make are their own.

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