Professional Documents
Culture Documents
TheFedsEffortsto RestoreFinancialStability
Afinancialpanicinfall2008threatenedthe stabilityoftheglobalfinancialsystem. Initslenderoflastresortrole,theFederal Reserveprovidedliquidity(shortterm collateralizedloans)tohelpstabilizekeyfinancial institutionsandmarkets.
3
TheFedsEffortsto RestoreFinancialStability
TheFedworkedcloselywiththeTreasury,other regulatoryagencies(suchastheFDICandSEC). Coordinationwithforeigncentralbanksincluded thecreationofforeigncurrencyswaps.
TheFedprovideddollarstoothercentralbanksin exchangeforforeigncurrencies. Theswapsenabledforeigncentralbankstomeetthe dollarfundingneedsoftheirownfinancial institutions.
TheFedsContinuingEffortsto StrengthentheBankingSystem
TheFedledstresstestsofthe19largestU.S. banksinthespringof2009,whichhelpedrestore investorconfidenceandallowedbankstoraise about$140billioninprivatecapital. RecentstresstestsconductedbytheFedshowed substantialfurtherimprovementsinbankcapital andbanksresiliencetoshocks.
EvaluationoftheSpecial LenderofLastResortPrograms
Results:Theprograms
arrestedrunsonvarioustypesoffinancial institutions restoredfinancialmarketfunctioning,restarted flowofcredit,andsupportedresumptionof economicgrowth
ProgramswerelargelyphasedoutbyMarch 2010.
EvaluationoftheSpecial LenderofLastResortPrograms
FinancialriskstotheFederalReservewere minimal:
Lendingwasmostlyshorttermandbackedby collateral;thousandsofloansweremade,none defaulted. Althoughtheobjectiveoftheseprogramswas stabilization,notprofit,taxpayerscameout ahead.
MonetaryPolicyduringtheCrisis
TheFedusedlenderoflastresortpolicytohelp stabilizethefinancialsystem.Tostabilizethe economyandpromoteeconomicrecovery,the Fedturnedtomonetarypolicy.
MonetaryPolicyduringtheCrisis
Conventional monetarypolicyinvolves managementofatargetshortterminterestrate (thefederalfundsrate).Becauselongerterm ratestendtofallwhentheFedlowerstheshort termrate,andbecauselowerlongertermrates tendtoencouragepurchasesoflonglasting consumergoods,houses,andcapitalgoods, cuttingthefederalfundsratehelpsstimulatethe economy.
MonetaryPolicyduringtheCrisis
MonetarypolicyisconductedbytheFederalOpen MarketCommittee(FOMC). TheFOMCmeetsinWashington,D.C.eighttimesa year.Duringthecrisis,itsometimesalsoheld unscheduledvideoconferences.
10
MonetaryPolicyduringtheCrisis
TheFOMCconsistsof12members:
the7membersoftheBoardofGovernorsofthe FederalReserveSystem thepresidentoftheNewYorkFederalReserveBank 4oftheremaining11ReserveBankpresidents,who serveoneyeartermsonarotatingbasis
OtherReserveBankpresidentsparticipatein deliberationsbutdonotvote.
11
FederalFundsRate
Tosupportthe recovery,theFed reducedthefederal fundsratefrom 5 percentin September2007to nearly zeroin December2008, whereithas remainedsince.
12
LargeScaleAssetPurchases
Withthefederalfundsratenearzero,thescope forconventionalmonetarypolicywasexhausted. Buttheeconomyremainedweakandsome worriedabouttheriskofdeflation(fallingwages andprices).
13
LargeScaleAssetPurchases
Toinfluencelongertermratesdirectly,theFed undertooklargescalepurchasesofTreasuryand governmentsponsoredenterprise(GSE) mortgagerelatedsecurities. Largepurchaseprogramswereannouncedin March2009andNovember2010. TheseactionsboostedtheFedsbalancesheetby morethan$2trillion.
14
LargeScaleAssetPurchases
15
LargeScaleAssetPurchases
WiththeavailablesupplyofTreasuryandGSE securitiesreducedbyFedpurchases,investors werewillingtoacceptloweryields.Lower longertermrateshelpedstimulatetheeconomy, justastheydounderconventionalpolicies. ReducedavailabilityofTreasuryandGSE securitiesledinvestorstopurchaseotherassets, suchascorporatebonds,loweringtheyieldson thoseassetsaswell.
16
LargeScaleAssetPurchases
Thesesecuritiespurchaseswerefinancedby addingtothereservesheldbybanksattheFed; theydidnotsignificantlyaffecttheamountof moneyincirculation.TheFedhasmultipleways tounwindthelargescaleassetpurchases (LSAPs),includingsellingthesecuritiesbackinto themarket.
17
LargeScaleAssetPurchases
18
EffectsofLargeScaleAssetPurchases
LSAPs(alsoknownasquantitativeeasing) loweredlongerterminterestrates.
30yearmortgageratesfellbelow4percent. Corporatecreditbecamemoreavailable,andstock pricesrose.
EffectsofLargeScaleAssetPurchases
TheFedscredibilityandlongstanding commitmenttopricestabilityhashelpedanchor inflationandinflationexpectations,whichhave remainedlow. Atthesametime,LSAPsguardedagainsttherisk ofdeflation(fallingwagesandprices).
20
EffectsofLargeScaleAssetPurchases
TheFedsassetpurchasesarenotgovernment spending,becausetheassetstheFedacquired willultimatelybesoldbackintothemarket. Indeed,theFedhasmademoneyonits purchasessofar,transferringabout$200billion totheTreasuryfrom2009through2011,money thatbenefitedtaxpayersbyreducingthefederal deficit.
21
MonetaryPolicyCommunication
Clearcommunicationfromthecentralbankcan helpmakemonetarypolicymoreeffectiveby helpinginvestorsbetterunderstandpolicygoals andbetteranticipatefuturepolicyactions.
22
MonetaryPolicyCommunication
TheFedhas becomemore transparentabout monetarypolicy. Forexample,the Chairmanbegan holdingnews conferencesin 2011.
23
MonetaryPolicyCommunication
TheFedalsohasrecentlyprovidedmore informationaboutitsgoalsandpolicyapproach (forexample,bydefiningpricestabilityas inflationof2percentinthemediumterm).
24
MonetaryPolicyCommunication
TheFedhasalsobegunprovidingguidanceto investorsandthepublicabouthowitexpectsto adjustthefederalfundsrateinthefuture,given currentinformationabouttheeconomicoutlook. Thisguidancehelpsthepublicbetterunderstand theFOMCsviewsandpolicy.
25
EconomicRecovery
Aidedbytheeffectsofmonetaryandfiscalpolicy aswellastheeconomysnaturalrecuperative powers,economicactivitybegantorecoverin mid2009. Sincethen,realGDPhasincreasedatanaverage annualrateofabout2percent.
26
SluggishEconomicRecovery
27
SluggishEconomicRecovery
28
SlowingtheRecovery:Housing
29
SlowingtheRecovery:Housing
30
SlowingtheRecovery:Housing
31
SlowingtheRecovery:Housing
SlowingtheRecovery: FinancialandCreditMarkets
TheU.S.bankingsystemissignificantlystronger thanitwasthreeyearsago,andcreditismore availabletohouseholdsandbusinesses.
33
SlowingtheRecovery: FinancialandCreditMarkets
However,difficultiesremainforsomeborrowers:
Forhouseholds,mortgagesaredifficulttoobtain forborrowerswithlessthanpristinecreditscores. Forsmallbusinesses,creditmarketconditions remaintightbutappeartohavebegunto improve.
34
SlowingtheRecovery: FinancialandCreditMarkets
ConcernsaboutEuropeanfiscalandbanking conditionshavealsostressedfinancialmarkets andledtomoreconservativelendingand diminishedconfidence.
35
LongTermEconomicGrowth intheUnitedStates
Thefinancialcrisisandrecessionwereamajor trauma.Manypeoplewhohavebeen unemployedforalongtimehaveseentheirskills erode.Andlongertermproblems,likerising federaldeficits,havenotgoneaway.
36
LongTermEconomicGrowth intheUnitedStates
Ontheupside,however:
TheU.S.economyremainsthelargestinthe world,withahighlydiversemixofindustries. Oureconomyhasarobustentrepreneurial culture,withflexiblecapitalandlabormarkets.
37
LongTermEconomicGrowth intheUnitedStates
Ontheupside,however:
Weremainatechnologicalleader,withmanyof theworld'stopresearchuniversitiesandthe highestspendingonresearchanddevelopmentof anynation. And,intheaftermathofthecrisis,wehave strengthenedourfinancialregulatorysystem.
38
LongTermEconomicGrowth
39
PostcrisisRegulatoryChanges
Thecrisisrevealedmanyimportantregulatorygaps andweaknesses. LehmanBrothersandAIGendangeredthefinancial systemandhighlightedtheneedfornewtoolsto addressproblemsatsystemicallyimportant financialinstitutions. Moreoversightofthesystemasawholewas needed.
40
PostcrisisRegulatoryChanges
Rep.BarneyFrank
Sen.ChristopherDodd
41
KeyProvisionsoftheDoddFrankAct: SupervisionandRegulation
Theactexpandedthefinancialstabilitydutiesof financialregulators,includingtheFed:
ItcreatedtheFinancialStabilityOversightCouncil (FSOC)tohelpregulatorscoordinatetheirefforts. Itgaveallregulatorstheresponsibilitytotrackand respondtopossibleriskstothefinancialsystemas awhole.
42
KeyProvisionsoftheDoddFrankAct: SupervisionandRegulation
Itclosedgapsintheoversightofthefinancial system:
TheFSOCcandesignatesystemicallyimportant nonbankinstitutionstobesupervisedbytheFed. TheFSOCcanalsodesignatekeyfinancialmarket utilities(forexample,stockexchanges)for enhancedsupervision.
43
KeyProvisionsoftheDoddFrankAct: SystemicallyImportantInstitutions
Theactsubjectedsystemicallyimportantfinancial institutionstotoughersupervisionand regulation:
Highercapitalrequirementswereestablishedfor mostsystemicfirms. Bankaffiliatesareprohibitedfromtradingontheir ownaccount(Volckerrule).
44
KeyProvisionsoftheDoddFrankAct: SystemicallyImportantInstitutions
Theactmadesystemicallyimportantfinancial institutionssubjecttotoughersupervisionand regulation:
Regularstresstestsarebeingconductedto ensurethatfirmswillhaveadequatecapitaleven inbadeconomicscenarios.
45
KeyProvisionsoftheDoddFrankAct: SystemicallyImportantInstitutions
Italsotackledtheproblemoftoobigtofail financialfirms:
Neworderlyliquidationauthorityallowsthe FederalDepositInsuranceCorporation(FDIC)to closefailingsystemicfirmsinawaythatcauses lessdamagetothefinancialsystem.
46
KeyProvisionsoftheDoddFrankAct: OtherFeatures
Theacttookstepstomakethefinancialsystem moreresilient:
Itrequiredmoretransparencyandstandardization ofderivativetransactions.
47
KeyProvisionsoftheDoddFrankAct: OtherFeatures
Itcreatedanewagency(theConsumerFinancial ProtectionBureau)withbroadpowerstoprotect consumersintheirfinancialdealings. Financialregulatorsareimplementingtheseand otherprovisions,inconsultationwithforeign regulators.
48
TheEffectsoftheCrisison CentralBankPractice
Inthedecadesbeforethecrisis,centralbanks oftenviewedfinancialstabilitypolicyasthe juniorpartnertomonetarypolicy. Thecrisisunderscoredthatmaintainingfinancial stabilityisanequallycriticalresponsibility.
49
TheEffectsoftheCrisison CentralBankPractice
Financialcriseswillalwaysbewithus.Butas muchaspossible,centralbanksandother regulatorsshouldtrytoanticipateanddefuse threatstofinancialstabilityandmitigatethe effectswhenacrisisoccurs.
50
Conclusion
Webeganbynotingthetwoprincipaltoolsand responsibilitiesofcentralbanks
servingaslenderoflastresorttopreventor mitigatefinancialcrises usingmonetarypolicytoenhanceeconomic stability
51
Conclusion
TheFedandothercentralbanksusedbothtools extensivelyinthecrisisanditsaftermath.These toolshelpedpreventarepeatoftheGreat Depressionofthe1930sandsetthestagefora slowbutcontinuingeconomicrecovery.
52
Conclusion
Anewregulatoryframeworkwillreduce,butnot eliminate,theriskoffinancialcrisesinthefuture. Greatermonitoringofpotentialsystemicrisks shouldhelp. However,therecentfinancialcrisisshowsboth thatacrisiscanbehardtoanticipateandthatit cancausemajordamagetotheeconomy.
53