San Francisco Federal Reserve Meeting San Francisco Federal Reserve Meeting By: Anthony Flynn and Gabriela Linder

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

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

Unemployment Cont’d Rise in unemployment attributed to the continuing fall in: 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.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.)Manufacturing – decrease due to less investment (i.e. homes, business warehouses, etc.) Retail – people have less disposable income, so they are shopping less.Retail – people have less disposable income, so they are shopping less.

Overview of Output GDP = C + I + G + NX GDP = C + I + G + NX Consumption is smallConsumption is small Investment is also smallInvestment is also small Government spending is higher due to the war in IraqGovernment spending is higher due to the war in Iraq The trade balance is positive as more is being exported due to the weak dollarThe trade balance is positive as more is being exported due to the weak dollar Example: when output decreases by 1, unemployment increases by 1Example: when output decreases by 1, unemployment increases by 1 High unemployment attributed to low GDPHigh unemployment attributed to low GDP

Inflation CPI: is at an upward trend. CPI: is at an upward trend. Growth is not keeping pace with CPI Growth is not keeping pace with CPI

Inflation Cont’d Why not lower the Federal Funds Rate? 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. 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.

Strong Economy vs. Present Economy Inflationary Pressure i MS P Healthy Economy Effective Monetary PolicyEffective Monetary Policy Increased Money SupplyIncreased Money Supply Positive Economic StimulusPositive Economic Stimulus Increased SpendingIncreased Spending VS Present Economy Ineffective Monetary PolicyIneffective Monetary Policy Increased Money SupplyIncreased Money Supply Increased Prices (Inflation)Increased Prices (Inflation) Decreased SpendingDecreased Spending

Liquidity Trap With the T-Bill rate close to 0% (0.539 as of May 19 th ), there are diminishing marginal returns. With the T-Bill rate close to 0% (0.539 as of May 19 th ), there are diminishing marginal returns. Investors are reluctant to get into long term investments. Investors are reluctant to get into long term investments. This problem weakens the Fed’s control of the economy through monetary policy. This problem weakens the Fed’s 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. 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.

Conclusion The Federal Funds rate should remain the same at 2.0%. 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. 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. 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. Rushing to cut the rate further will create higher inflation.

M. Friedman “Too much, too late”

Sources The Federal Reserve The Federal Reserve US Department of Labor US Department of Labor The New York Times The New York Times