This post is a guest  contribution by Asha G. Bangalore * of The Northern Trust  Company

The main theme of the opinion piece by Representatives Hensarling and Ryan from Texas and Wisconsin, respectively, in today’s Wall Street Journal (Jeb Hensarling and Paul Ryan: Why No One Expects a Strong Recovery - WSJ.com) is poor economic policy choices of the current administration. To make their case they focus on the Reagan administration’s successful economic policies. The success/failure of economic policy choices can be measured by various metrics. It is well known that the federal budget deficit as a percentage of GDP during the Reagan years has been the largest in the entire post-war period ending 2008 (see chart 1). Therefore, from a fiscal perspective, the perceived success of economic policies of the 1981-1988 period is not a resounding success.

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The main aspect that stands out in the October 2009 Senior Loan Officer Opinion Survey is that lending conditions were less tight than survey results of July 2009 indicated and there was a substantial improvement from the October 2008 survey when credit markets had frozen. The net fraction of banks that reported tightening standards on commercial and industrial (C&I) loans for large firms dropped to 14% during October from 31.5% in July and was noticeably below the peak of 83.6% reported in January 2009 (see chart 1). A similar reduction in the number of banks reporting tightening lending standards was reported for C&I loans to small firms (see chart 1).

However, demand for C&I loans continued

This post is a guest contribution by Asha Bangalore * of The Northern Trust Company.

The recession is behind us. Real gross domestic product of the U.S. economy grew at an annual rate of 3.5% in the third quarter after a 0.75 drop in the prior quarter. This is the first increase of real GDP after a string of four quarterly declines. Real GDP has declined in five out of the six quarters of the recession.

The Business Cycle Dating Committee of the National Bureau of Economic Research will make the official announcement after it confirms the turning point based on revisions of economic data. This recession is the longest on record in the post-war period and the deepest also. Real GDP has declined 3.8% from the peak in the second quarter

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

There is a growing concern about an inflationary threat in the U.S. economy given the enormous monetary accommodation the Fed has put in place. As expected, there are differing opinions about this issue. First, the unemployment rate in September was reported as 9.8%; the all inclusive unemployment rate is 17% (see chart 1).

Wages are unlikely to be the cause for a large increase in inflation in the near term because widely used measures of wages pressures are trending down (see chart 2), given the lack of demand in the labor market. By the way, the Federal Reserve tracks these variables to form its assessment of inflation.

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The tone of the policy statement and details are largely close to expectations. The federal funds rate was left unchanged at 0%-0.25%. The statement reiterates Chairman Bernanke’s opinion that an economic recovery is underway, representing a significant departure from the August policy statement which noted that “economic activity is leveling out.” The outlook for inflation remains favorable in the Fed’s opinion due to “substantial slack” in the economy. In addition, the stability of longer-term inflation expectations was cited to rule out the case of an inflationary threat.

The last paragraph of the Fed policy statement is devoted to the outlook of monetary policy. The Fed left the stance unchanged to read as follows: “The Committee will maintain the target range for

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The National Bureau of Economic Research (NBER), the arbiter of business cycles, officially announced the trough of March 1991 on December 22, 1992 and the trough of November 2001 on July 17, 2003. Based on this history, there is a lapse of roughly 20 months before the Business Cycle Dating Committee has announced the date of a business cycle trough. Real gross domestic product had risen in the second quarter of 1991 (see chart 1) and the fourth quarter of 2001 (see chart 2) and stayed positive until the next recession.

Real gross domestic product is projected to show an increase in the third quarter of 2009. Real gross domestic product is a quarterly estimate.

The Federal Reserve Board’s Senior Loan Officer Opinion Survey has just been published. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system. The analysis below is a guest contribution by Asha G Bangalore* of The Northern Trust Company.

The latest Senior Loan Officer Survey reports a small but notable easing of loan underwriting standards but demand for loans was weak with the exception of residential mortgages. The number of banks tightening underwriting standards for commercial and industrial (C&I) loans to large firms was smaller in July (30%) compared with the results of the April survey (40%); the peak was a little over 80% of bankers reporting strict terms for borrowing in the fourth quarter of 2008 (see chart 1).

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The employment report of July, published on August 7, included several signs suggesting that the labor market is stabilizing. The next question is what comes after stabilization. Historically, payroll employment has posted gains within 12 months into a recovery/expansion and gathers significant momentum by the end of 24 months in all post-war business cycles with the exception of the 1991 and 2001 recoveries (see table 1). The January - July 1980 recession was a short recession followed by another recession in July 1981. The 1991 and 2001 recoveries have been coined as ‘jobless recoveries’ based on the nature of the growth of payroll employment and the changes in the jobless rate.

Table 1 Change in Payroll Employment from Trough of Business Cycle

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The Fed announced the plan on March 18, 2009 to purchase $300 billion of long-dated Treasury securities over a six-month period. As of July 23, 2009, the Fed has bought $219.7 billion or roughly 73% of the plan. There are mixed opinions within the FOMC about raising the amount of purchases under this plan.

“Some participants thought that increases in purchases of Treasury securities might have little or no effect on long-term interest rates unless the increases were very sizable, given the large amount of current and projected supply of Treasury securities. Others were concerned that announcements of substantial additional purchases could add to perceptions that the federal debt was being monetized. While most members did not see large-scale purchases of Treasury securities as likely to be a source of inflation pressures

This post is a guest contribution by Asha G. Bangalore* of The Northern Trust Company.

Chairman Bernanke’s testimony and Wall Street Journal article outlined the Fed’s exit plan and addresses his critics with regard to a lack of transparency about the exit strategy. There is no doubt the Fed will be able and has the tools to unwind the massive monetary stimulus in place at the present time.

More importantly, the question is if the Fed can identify the appropriate “time” and “magnitude” of monetary policy tightening. There is no precise checklist to guide a central bank about when and by how much to tighten monetary policy. The Fed’s steps will entail judgments as the economy stabilizes and moves along a new growth path.

Going back in time, there are two cases that come