Central Bank Monitor

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Central Bank Monitor
Bloomberg BRIEF: Economics
Joseph Brusuelas, Robert Lawrie and
Michael McDonough
October 2012

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Bloomberg Economic Brief Central Bank Monitor

Image page Summary
Executive
• 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.

2



Executive Summary
• 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.

3



Evans Rule and Policy Guidance
Taylor Rule & Evans Rule Estimates of the Fed Funds Rates
8

6
Taylor Rule
4 Fed Funds Rate Estimates

2
Percentage

0
Evans Rule
-2
Estimates
-4

-6

-8

-10
2007 2008 2009 2010 2011 2012 2013 2014 2015

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

Email jbrusuelas3@bloomberg.net or call 212-617-7664
4



Fed Policy Objective
Mortgage Backed Primary-Secondary Spread
180
Starts of Fed QE3
160 QE1 MBS Purchase Programs

140

120

100
Basis Points

80

60

40

20

0
Mortgage Backed Primary-Secondary Spread
-20
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Source: Bloomberg ILM3NAVG, MTGEFNCL INDEX<GO>

5



Balance Sheet Expanding
The U.S. Unemployment Rate , Fed Holdings of Agency and Mortgage
Backed Securities
11 2,500
Potential end of
10 purchases when
unemployment hits 2,000
7%?
Unemployment Rate (%)

MBS Holdings (US$ bn)
9

1,500
8
Start of
QE3
7
1,000

6

Start of 500
5 QE1

4 0
2008 2009 2010 2011 2012 2013 2014 2015

Fed Holdings of Agency & MBS Debt Projected Purchases Unemployment Rate Projections

Source: Bloomberg

6



Balance Sheet Expanding
Federal Reserve Balance Sheet
3500
Start of
QE3
3000

2500
IUS$ bn)

2000
Start of
QE3
1500 Lehman
Collapse

1000

500
2007 2008 2009 2010 2011 2012

Source: Bloomberg FARWRBC INDEX<GO>

7



Arterial Blockages

8



Negative Rate Environment to Persist
U.S. Nominal and Real Long-Term Interest Rates
12

10

8

6
Percentage

4

2

0

-2

-4

U.S. Real Fed Funds Rate U.S. Real 10-Year Interest Rate
-6
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

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

9



Monetary Policy at the Zero Bound

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

4.5%
January Median FOMC Projection 4.00%
4.0% June Median FOMC Projection
Sept. Median FOMC Projection
3.5%

3.0%
Percent

2.5%

2.0%

1.5%
1.00%
1.0%

0.5% 0.25% 0.25% 0.25%

0.0%
2012 2013 2014 2015 Longer Run
Source: Bloomberg

10



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11

Bloomberg
Joseph Brusuelas,
Senior Economist
Bloomberg, LP
jbrusuelas3@bloomberg.net
Joseph Brusuelas, Robert Lawrie and Michael McDonough are economists who write for the Bloomberg
Economic Brief. The observations they make are their own. Bloomberg is a leading source of
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