By Mary Alice Murphy
Roberto Coronado, assistant vice president in charge at the El Paso Branch of the Federal Reserve Bank of Dallas, addressed students and community members at Western New Mexico University's Global Resource Center on Thursday morning.
Francesca Reyes, WNMU assistant professor of economics, introduced Coronado as part of the business department's lecture series.
She said Coronado is a senior economist with oversight at the El Paso Branch. He addresses border issues, including maquiladoras in Mexico, and is also a professor at the University of Texas, El Paso.
"I am giving three presentations in one," Coronado said. "I will give an overview of the Federal Reserve, monetary policy and an economic update."
He explained that the Federal Reserve is the central bank of the U.S. "It is a bank for all banks." Congress, which in the U.S. Constitution has the right to "coin money and regulate the value thereof," after two failed attempts in the past to create a central bank, delegated the constitutional rights to the Federal Reserve in 1913."
The four main responsibilities of the Federal Reserve are to conduct monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system, and provide financial services to the U.S. government, U.S. financial institutions, and foreign official financial institutions.
The structure of the Federal Reserve, Coronado said, is unusual. "Congress set up the system out of fear of centralized power, with three parts, the board of governors, the Federal Reserve Bank and the Federal Open Market Committee."
The board of governors has seven members, appointed by the president and confirmed by the Senate to 14-year staggered terms. The chairman and vice-chairman of the board serve four-year terms, over the last two years of a presidential term and the first two years of the next presidential term. The current chairwoman is Janet Yellen.
The Federal Reserve is made up of 12 Reserve banks and 24 branches, with varying numbers of branches per Reserve bank. The Federal Reserve Bank of Dallas has four branches, including the headquarters in Dallas, and branches in Houston, San Antonio and El Paso, Texas.
The Federal Open Market Committee has 19 individual members in charge of implementing monetary policy. Seven are housed in Washington, D.C. and 12 are from the Reserve Banks. "Most Federal Reserve Banks are in the East, because the population was greater in the East in 1913. The 11th District is the Federal Reserve Bank of Dallas, which covers all of Texas, the northern part of Louisiana and the southern part of New Mexico. The El Paso Branch has four offices, in Las Cruces, NM, and in Midland, Odessa and El Paso, Texas."
Resources for the committee members include the Beige Book, with anecdotal observations of business and industry leaders as to the health and direction of the economy. "Last night we met with business leaders in the Silver City area," Coronado said. "Mike Martin of Western Bank in Lordsburg is on the Community Depository Institutions Advisory Council."
The El Paso Branch was the first branch out of Dallas, and was set up June 17, 1918. Coronado said the reasoning was that it was more than one day's train ride from Dallas to get there, at more than 650 miles. "We provide resources to financial institutions in west Texas, El Paso, all of New Mexico and southern Colorado. We offer regional economic analyses on Mexico and the border economy, and our outreach programs are offered to constituents in English and Spanish. We also spend a lot of time in the San Francisco Federal Reserve areas of southern Arizona and southern California, offering Spanish services."
The El Paso Branch has a board of seven directors, including two from New Mexico, Teresa Molina of 1st New Mexico Bank in Deming and Jerry Pacheco of Santa Teresa, NM. "We have industry and geographic diversity. Every eight weeks, we go to Dallas and brief the president."
The second section of his presentation covered monetary policy, for which he showed several graphs and charts.
"The actions of a central bank influence the availability and cost of money and credit to achieve national economic goals," Coronado said. "Basically, it means how much money is in circulation.
"In 1977, Congress mandated two goals—maximum employment and stable prices," Coronado continued. "They include moderate long-term interest rates. We are one of the few central banks in the world with dual mandates. Most strive for stable prices."
Monetary policy tools include reserve management, with a minimum balance in banking institutions. "They have to keep a certain percentage with the central bank. We can push liquidity by lowering the percentage or can drain the banks by a greater percentage to keep money stable."
"The Federal Reserve Bank also offers discount lending to institutions, as the lender of last resort," Coronado said. "All loans must be AAA-rated and collateralized. We make overnight loans that must be paid back the next morning. We also lend at a percentage rate above market rates. We want to remain the lender of last resort."
Open market operations are run at the New York Federal Reserve Bank, for the purchase and sale of securities in the open market, which are mostly Treasury bills, to influence the amount of money in circulation.
"How do these policies affect you and me?" Coronado asked. "They come into play in household spending decisions. Lower consumer rates elicit greater demand for consumer goods. For businesses it is the same, the lower rates stimulate investment."
The Federal Open Market Committee, which buys government bonds from or sells government bonds to the public, buys to increase the money supply and sells to decrease the money supply. He showed a graph of the liquidity effect of demand and supply in the system.
Coronado explained that the dual mandate has two forces moving in opposite directions, "so it's a balancing act."
He said in 2008, at the beginning of the recession, the central bank increased its balance sheet. "It started at $1trillion and now is at $4.5 trillion. We have pumped a lot of liquidity into the system." Three portions of the graph showed that Treasury bonds form the largest part of the assets, with a smaller percentage being mortgage-backed securities and a smaller still portion of other assets.
"Any central bank is risk adverse," Coronado said. "Many people are concerned because we've never been here before, and that this much liquidity has a risk of inflation.
"The money supply is actually stable," he said. "The monetary base is huge, and people are sitting on a lot of money."
Three new tools have been implemented, including interest on required reserve balances that are in excess of the required balance; overnight reverse repurchase agreements, "where we'll buy from you"; and a term deposit facility to manage the aggregate quantity of reserve balances held by depository institutions. "We will, for instance, sell a certificate of deposit to a financial institution, but there can be no early withdrawal and we keep the money until its term is up."
The last part of his presentation was the U.S. Economic Update.
"2014 was solid," Coronado said. "We have had moderate growth in 2015. Consumer spending picked up in 2014. Declining energy prices have proved to be a boost to consumer spending. And strong consumption and strength in service-providing are offsetting weakness in manufacturing."
He said the headline is that the unemployment rate is 5.1 percent, but "with the underemployed and those who have dropped out of the workforce, it goes to 10 percent. Manufacturing is struggling and service is doing well. Global demand is weaker and the strength of the dollar creates problems for manufacturing."
In the New Mexico economic update, he said that New Mexico has struggled through the recession. "The state depends a lot on government, and the federal government has been weak since 2011, and housing has been slow to recover. In 2015, the lower energy prices and the strong dollar negatively impact commodity production. New Mexico exports copper, pecans, potash and pistachios, for instance. While New Mexico stayed stronger during the recession, with the U.S. now recovering, New Mexico is trending downward. In 2014, New Mexico was 27th in the country; in 2015, with 0.1 in growth, it is now 44th. It is still in positive territory, but barely. Southern New Mexico has held up well since 2008, much better than northern New Mexico, but now southern New Mexico is contracting because of energy and commodities. New Mexico has 5 ½ times more jobs in energy than nationally and the state is also heavily concentrated in federal and state government. New Mexico hurts with the oil price decline, although consumers benefit. The 50 percent decrease in the oil price has led to a loss of at least 6,000 jobs, and the state severance tax receipts will decline. We anticipate a -0.7 impact in New Mexico."
"In good news, the rising star in New Mexico is Santa Teresa," Coronado said. "About 5 to 6 percent of the trading with Mexico goes through there and brings in $25 billion a year. Mexico is the No. 1 trading partner with New Mexico. It is a two-speed recovery, with southern New Mexico moving more slowly, but still outperforming northern New Mexico."
He asked those present to think of the Dallas Federal Reserve as a resource at dallasfed.org.
To an audience question, which Coronado rephrased to how much money is in circulation, he said: "Even though we push liquidity, we don't see lending activity, because loan demand is not there. Plus more regulations made it more burdensome."
An audience member asked if all the mortgage-backed securities, which he presumed were AAA-rated when purchased, still were at AAA status.
"They were AAA when we bought them, and we monitor them actively," Coronado replied. "A significant portion have been captured. While housing struggled, we were trying to lower the medium- to long-term rates, and so have generated a lot of revenue."
The same audience member asked if the Reserve was refinancing at lower rates.
"We have a reinvestment policy, so the size of the balance sheet stays the same," Coronado said. "As they mature, we reinvest."
Another audience member asked about the two central banks that failed. Coronado said the second one failed in the late 1870s and the current central bank was not founded until 1913. He noted that federalreserve.gov has historical documents.
A student from Germany asked how the European Central Bank and the U.S. Federal Reserve Bank differ.
"They are similar in governance, but the European Central Bank has only one mandate to stabilize prices, while the U.S. Federal Reserve Bank has two mandates. The U.S. central bank is across all 50 states, with one central bank and one fiscal policy entity, the Treasury. In Europe, you have multiple fiscal policy entities as part of one bank."
A community member asked if, because New Mexico takes a hit with its dependence on government and energy, if there were any options to get the state out of that situation.
Coronado said it was a difficult question to answer as a central bank economist. "From an economic perspective, diversification is important. You were dependent on the government prior to 2008 and it made New Mexico stable, but you in the state have to develop strategies on how to diversify and what sector to pursue. Santa Teresa has been important, because as a border state, it has trade, too, in addition to Texas, Arizona and California, which already had the trade with Mexico."
He conceded that the challenge with commodities involves the huge swings that always occur. "Education is important, too. Is the state pursuing a way to get the human capital it needs? Infrastructure is important for businesses to decide whether to come to New Mexico. Also population growth is flat in New Mexico, which presents another challenge."
Reyes said a student had asked her about Federal Reserve internships. Coronado said the Federal Reserve has ways to interact and provide economic education at the high school and college levels. "We have four interns in El Paso, and we always have at least one from New Mexico, usually from Las Cruces during the year. But you can explore summer opportunities. Dallas has 25-30 interns there and across the system. Send us an email. Interns give us energy and flexibility."
"I came to the central bank as an intern, so I am a supporter of internships," Coronado said. "In Dallas, they have a management development program, where someone who has just finished a degree makes a two-year commitment and gets moved around departments, so they can learn what best suits them. Historically, we keep them employed after the two years. We have brought in 10 individuals into the program, with four from New Mexico."
To another question asking about what degrees the central bank looks for, Coronado said generally they are from business, with economic, general management and accounting being among them. "But we also have mechanical engineers and just hired a Ph.D. psychologist in human resources."
An audience member asked if the goal of the central bank was to get the assets below $4.5 trillion. "What is the size of the balance sheet going forward?"
Coronado said it grew in various ways, but now is predominantly mortgage-backed securities and treasuries. "For now, it will stay around the same. Going forward we need to normalize it. The questions are how soon and what does normal look like. We will likely go back to our original tools. We have to determine how to unwind investments. If the economy begins to grow fast, we will unwind them more quickly. If the economy grows slowly or stays the same, our investments will stay the same. If we don't do anything and don't reinvest, it will be 2025 before we go back to normality."
Students were invited to ask him questions after the session ended.