Assessing the Strength of the U.S. Economic Recovery

James BullardPresident and CEOFederal Reserve Bank of St. Louis

Washington University in St. LouisOlin Business SchoolSt. Louis, MO6 May 2010

Any opinions expressed here are my own and do not necessarily reflect those of the Federal Open Market Committee participants.

This Talk

State of the U.S. economyThe rest of the worldMonetary policyRisks to the outlookFinancial regulatory reform

State of the U.S. Economy

Continued signs of recovery

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011

Real Gross Domestic ProductActual and forecasted, percent change from previous quarter at annual rate

Real GDP GrowthApr-2010 BC ForecastApr-2010 MA Forecast

Percent

Source: Bureau of Economic Analysis, Macroeconomic Advisers, Blue Chip Economic Indicators.

GDP expected to reach 2008:Q2 peak before year-end

98

99

100

101

102

103

104

2007 2008 2009 2010

2007:Q1 = 100

Real Gross Domestic Product and MA Forecast (As of May 5, 2010)

Source: Bureau of Economic Analysis, Macroeconomic Advisers.

Composition of real output

65

70

75

80

85

90

95

100

105

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

2007Q1 = 100

Components of Real Gross Domestic Product

Nondurables plus services

Durables

Investment

Source: Bureau of Economic Analysis.

Home prices are increasing but remain low

1

1.2

1.4

1.6

1.8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2001Q1=1

S&P Case Schiller House Prices and Nominal GDP

Nominal GDP

U.S. National S&P Case-Schiller Price Index

Source: Bureau of Economic Analysis, S&P, Fiserv, and MacroMarkets LLC.

Manufacturing has rebounded

25

30

35

40

45

50

55

60

-4

-3

-2

-1

0

1

2

2007 2008 2009 2010

Industrial Production and the ISM Manufacturing Index

Industrial Production (Left Axis)ISM Manufacturing (Right Axis)

Percent Change from Previous Index

Source: Federal Reserve Board/Institute of Supply Management.

Labor market conditions are slowly improving

-1000

-800

-600

-400

-200

0

200

400

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Nonfarm Payroll Employment GrowthChange from previous month.

Thousands

162 thousand jobs gained in March

Source: Bureau of Economic Analysis, S&P, Fiserv, and MacroMarkets LLC.

Unemployment remains high

4

5

6

7

8

9

10

11

12

200

250

300

350

400

450

500

550

600

650

700

2005 2006 2007 2008 2009 2010

Unemployment and Initial Claims

ThousandsPercent

Initial Claims for Unemployment Insurance, 4-wk moving average (Left Axis)

Unemployment Rate, SA (Right Axis)

Source: Bureau of Labor Statistics/Department of Labor.

Jan.-Mar. 9.7%

The Rest of the World

Japan3.8, 5.2, 2.9

Australia1.9, 4.7, 2.5

China9.6, 10.8, 8.4EU

0.2, 0.3, 1.9

South Africa3.2, 4.3, 4.4

Global growth

Latin America6.5, 4.8, 4.3

Canada5.0, 5.0, 4.0

U.S.5.6, 3.2, 4.0

India-2.2, 12.0, 9.0

Real GDP growth, SAAR, Percent, 2009:Q4, 2010:Q1, and 2010:Q2Source: Barclays Capital Global Economic Weekly.

Russia15.0, 9.4, 7.0

U.K.1.8, 1.3, 2.6

U.S. leads major partners in productivity

93

95

97

99

101

103

105

107

2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4

Index, 2007:Q1 = 100

Output per Employed Person

United States

Canada

JapanU.K.

Euro Area

Source: Board of Governors.

But the U.S. shed a larger percentage of the workforce

94

95

96

97

98

99

100

101

102

103

2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 2009:1 2009:2 2009:3 2009:4 2010:1

Index, 2007:Q1 = 100

Employment

United States

Canada

Japan

U.K.Euro Area

Source: Board of Governors.

Monetary Policy

Near-Zero Policy Rates in the G-7

0

1

2

3

4

5

6

2007 2008 2009 2010

Percent

U.S.

Euro Area

Canada

Japan

U.K

Federal Reserve balance sheet

0

500

1,000

1,500

2,000

2,500

3,000

Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010

Short-Term Lending to Financial Firms and Markets

Rescue Operations

Operations Focused on Longer-Term Credit Conditions

Traditional Portfolio

Traditional Portfolio and Long-Term Assets

Billions $

Source: Board of Governors.

-3

-2

-1

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010

Percent

Headline CPI Inflation

Core CPI Inflation

Inflation remains low

Source: Bureau of Labor Statistics.

Headline CPI Inflation and Core CPI Inflation(Year-over-year percent change. Monthly data. Last observation: March 2010.)

Risks to the Outlook

Sovereign Credit ProtectionFive-Year CDS ratesBasis Points

Source: Bloomberg.

U.S. State Debt Burdens

Source: The State of California Debt Affordability Report October 2009.

Debt Ratios of the 10 Most Populous States Ranked by Ratio of Debt to Personal IncomeState Moody’s / S&P/ Fitch Debt to Personal Income Debt per CapitaTexas Aa1/AA+/AA+ 1.4% $520Michigan Aa3/AA-/A+ 2.2% $766Pennsylvania Aa2/AA/AA 2.5% $950Ohio Aa2/AA+/AA 2.8% $962Florida Aa1/AAA/AA+ 2.9% $1,115Georgia Aaa/AAA/AAA 3.0% $984California Baa1/A/BBB 4.4% $1,805Illinois A1/AA-/A 4.6% $1,877New York Aa3/AA/AA- 6.3% $2,921New Jersey Aa3/AA/AA- 7.3% $3,621

Financial Regulatory Reform

Bank supervision

The Fed should continue to supervise state member banks and bank holding companies of all sizes. Understanding the entire financial landscape helps the Fed

make sound monetary policy decisions. It is important that the Fed remain connected with Main Street

America, and not become biased toward the very large, mostly New York-based institutions.

Fed structure

The Federal Reserve has three parts. Washington: Board of Governors. New York: One bank in the nation’s financial capital. Main Street: Eleven banks in the rest of the nation.

The regional structure was designed to keep some power out of New York and Washington.It allows for input on key policy questions from around the U.S.This system has been very successful.

Fed governanceThe Board of Governors members are appointed by the President and confirmed by the Senate.The Board of Governors has oversight authority for the Fed.This includes budget authority.It also includes authority over key appointments in the Fed. This means Presidents, First Vice-Presidents, as well as the Chair and

Vice-Chair of the Board of Directors at each Bank.

There is considerable accountability in the Roosevelt-era re-design of the Federal Reserve.

Auditing monetary policyMonetary policy is vigorously debated everyday, both inside and outside the Fed.The Fed is extensively audited—our rough estimate is about 425,000 hours annually: Internal audit function. Board of Governors oversight. External auditor (Deloitte).

Each hour of audit time requires staff time for compliance.In addition, the Fed is subject to auditing by the GAO, the investigative arm of Congress.Additional audits are welcome, so long as they do not constitute political meddling.

Federal Reserve independenceAllowing short-term politics to mix too closely with monetary policy leads to poor economic outcomes.This has occurred frequently in the developing world over the past 50 years.In the U.S., erosion of Fed independence could result in a 1970s-style period of volatility.The consequences for the U.S. and the global economy would be large.No one would be served well by this outcome.

Federal Reserve Bank of St. Louisstlouisfed.org

Federal Reserve Economic Data (FRED)research.stlouisfed.org/fred2/

James Bullardresearch.stlouisfed.org/econ/bullard/