FOMC Archives - The Industry Spread

Major Equities on Bearish Rout over Worries of Global Economic Slowdown

December 5, 2018 by Karthik Subramanian Leave a Comment Filed Under: Market News, Market News - US Open Tagged: economic slowdown, EURUSD, FOMC

Summary: Global equity market which started the week on positive note over headlines from weekend on trade truce between China & U.S.A for next 90 days have taken a bearish tone as trading session progressed into the week. Positive influence from news that had major impact on market fizzled out shortly owing to multiple factors such as lack of clarity of trade truce and flattening Treasury yield curve which sparked recession warning. Aside from geo-political issues major markets faced their own issues which had impact on price action of equities as well.

Central banks across the globe have acknowledged signs of economic slowdown in major markets and this comes in the heel of one of the most fast pace growth in equity market history as visible from highly bullish equity performance during 2017 post which markets across the globe began to suffer as US President Donald Trump began waging trade war on multiple front. As US Greenback’s value increased in broad market supported by safe haven demand from ongoing trade wars boosted by multiple rate hike from US Fed emerging markets also suffered slowdown in economy due to major goods and commodities being priced in USD and higher exchange rate hurt business progress.

The US Dollar index (USD/DXY) has managed to retain upper hand despite slide in T.Yield as FOMC member Williams reassured that rate hike would go as planned regardless of change to forward guidance despite gloomy comments from Fed Chair Powell during his speech last week.
Slide in T.Yield resulted in fear of slowdown in US Economy which combined with dovish cues from Asian and European markets pushed US Equities on sharp fall overnight. Dow Jones Industrial Average Index lost over 700 points during slide in yesterday’s trading session.
Hopes of positive outcome post 90-day Sino-U.S. trade truce continues to dwindle as no positive signs of progress or additional details were released post the weekend headlines.
Fear of slowdown in global economy and cues from Wall Street’s overnight decline has influenced bearish price action across Asian and European equity markets.

On the Lookout:

Brexit – Brexit legal advice from the Attorney General is scheduled to release today as PM May suffered another road block in her attempt to gain support to her Brexit deal as her government is now held in contempt of Parliament over its refusal to release legal advice and attempts to hide the same. This move also resulted in a new amendment being passed to give UK parliament more power over Brexit if PM May’s deal fails to gain vote of approval.
Protest in France – In a televised address, PM Edouard Philippe announced that Fuel tax raise which led to weeks of violent protests in France has now been postponed for six months. He also said that the next planned raise in the so-called carbon tax on vehicle fuel which had been due to come in on 1 January and planned increases in gas and electricity prices this winter would be halted, and that a toughening of the rules for vehicle emissions tests would also be postponed to allow consultations across the country to see what accompanying measures might be introduced to ease the burden for the worst-off.
Crude Oil – Oil prices declined 1% today, weighed down by raising US inventories and a plunge in global stock markets amid concerns over an economic slowdown ahead of OPEC summit scheduled to occur this weekend. Oil prices were pressured by a weekly report from the American Petroleum Institute (API) that said U.S. crude inventories raised by 5.4 million barrels in the week to Nov. 30, to 448 million barrels, in a sign that U.S. oil markets are in a growing glut.
Economic Data Release & Events – U.S. stock markets will be closed today in observance of a national day of mourning for President George H. W. Bush. UK market sees the release of BOE FPC Minutes & Services PMI while Canadian market sees release of BOC interest rate decision and rate statement.

Trading Perspective:

AUD/USD – The AUD/USD pair held on the dismal Aussie macro data-led weakness and remained heavily offered near weekly lows which were further aggravated by strong demand for US Greenback in broad market supported by hawkish comment from FOMC member Williams and bearish rout in equity market. It would now be interesting to see if the pair is able to find any buying interest at lower levels or the ongoing slide marks the end of the recent up-move amid fading optimism over the US-China trade truce.
USD/JPY – The USD/JPY pair caught some bids on early Asian market hours and managed to recover a part of the previous session’s sharp fall to two-week lows that saw the pair slip over 100 pips owing to bearish influence from T.Yield curve inversion, positive comments from Fed Williams helped limit downside move. However bearish rout in Wall Street & other major global equity markets continue to underpin demand for Japanese Yen.
EUR/USD – The EUR/USD pair erases entire losses and looks to regain the 1.1350 barrier in early European market hours despite the risk-off action seen on the European equity markets and broad based USD demand as liquidity is expected to be thin in US market hours owing to market holiday while EURO bulls are also supported by upbeat Eurozone macro data giving the pair a temporary upward boost in price action.

Outlook for the U.S. Economy and Monetary Policy

October 29, 2018 by industryspread Leave a Comment Filed Under: Central Bank Annoucements Tagged: breakeven inflation rates, capital spending, FOMC, income tax, investment, job market, monetary policy, Open Market, Productivity, Richard H. Clarida, U.S. economy

Outlook for the U.S. Economy and Monetary Policy

Vice Chairman Richard H. Clarida

At Peterson Institute for International Economics, Washington, D.C.

“I see some familiar faces in the audience, and I am delighted to be at Peterson today to offer my first public remarks since being sworn in last month as Vice Chairman of the Federal Reserve Board. As some of you know, I have been a student of U.S. monetary policy for more than 30 years. So, for me, personally, it is a distinct honor and real privilege to have the opportunity to serve with my colleagues on the Board of Governors and, along with the 12 Reserve Bank presidents, on the Federal Open Market Committee (FOMC).

Now, of course, I fully realize that I have participated in just one FOMC meeting to date, so my remarks today will not come with a patina earned from long experience as a monetary policymaker. That said, I thought it might be of interest to share my thinking on the current state of the U.S. economy, to explain how it informed my support for the FOMC’s policy decision last month, and to discuss my views on the way forward for U.S. monetary policy.¹

The Economic Expansion in Year 10
The U.S. economic expansion, now in its 10th year, is marked by strong growth in the gross domestic product (GDP) and a job market that has been surprising on the upside for nearly two years. It is impossible today to know with much precision how much of the pickup in growth and the decline in unemployment that we have seen over the past two years is structural and how much is cyclical. Most likely, both factors are at work. That said, based on my reading of the accumulating evidence, I believe that trend growth in the economy may well be faster and the structural rate of unemployment lower than I would have thought several years ago. Let me elaborate.

First, let’s look at the demand side of the economy. Consider the benchmark revisions to the household saving rate. Recently revised Commerce Department data now show that the aggregate household saving rate is running at 6.7 percent of disposable income. This revised estimate is nearly double the previous estimate. The higher level suggests that, in contrast to the previous economic expansion from 2001 to 2007, when households were borrowing to maintain consumption while income growth slowed, households today, at least in the aggregate, are well positioned to maintain or even increase consumption relative to gains in income. To me, at this stage in the business cycle, a historically high household saving rate is a tailwind for the economy, not a headwind. And, of course, recent reductions in personal income tax rates are also a tailwind for the economy.

Productivity and investment data provide another vantage point from which to assess both the demand and supply sides of the current expansion. Over the past few years, we have seen some pickup in productivity growth, albeit from a very depressed pace. By contrast, at a comparable stage in both the 2001-07 and 1982-90 economic expansions, productivity growth (as measured by an eight-quarter moving average) was actually slowing relative to its contemporaneous peak-to-present pace.

I should also note that this recent pickup in productivity has coincided with a rebound in business investment, and that this increase in capital spending has been evident in both the equipment and intellectual property categories; it is not just an “oil patch” story. Business investment is being supported by recent changes in the tax code that lower the cost of capital as well as by continued strong profitability of U.S. companies. While capital investment is one important source of productivity growth and recent data on this front are encouraging, predicting future‑‑or even identifying past‑‑inflection points in productivity growth is notoriously difficult. Although it may be tempting simply to extrapolate a decade of disappointing productivity data into a distant future, a pickup in trend productivity growth is a possibility that deserves close monitoring.²

Let me now turn to the job market and inflation outlook. Average monthly job gains continue to outpace the increase needed to provide jobs for new entrants to the labor force over the longer run. At 3.7 percent in September, the unemployment rate has not been this low since 1969. In addition, after remaining stubbornly sluggish throughout much of the expansion, wage growth is picking up. A sustained rise in inflation-adjusted, or “real,” wages at or above the pace of productivity growth is typical in an economy operating in the vicinity of full employment, and we are starting to see some evidence of this. I certainly hope it continues. Now, some might see a rise in wages as leading to upside inflationary pressures, but here, again, the experience of earlier cycles is instructive. In the past two U.S. expansions, gains in real wages in excess of productivity growth were not accompanied by a material rise in price inflation.

Of course, this time may be different, and as with growth, the job market could perform better or worse than the baseline outlook. However, for now, the increase in wages has been broadly consistent with the pickup in productivity growth that I have just discussed, and a rise in the still-low rate of labor force participation among the prime-age population provides scope for the job market to strengthen further without generating inflationary pressures.

This outlook for the labor market also reflects my view that the structural, or longer-run, rate of unemployment‑‑that is, the unemployment rate consistent with stable inflation over the longer run–may be somewhat lower than I would have thought several years ago. What this means is that, even with today’s very low unemployment rate, the labor market might not be as tight‑‑and inflationary pressures not as strong‑‑as I once would have thought. I am certainly not alone in this thinking. Over the past several years, most FOMC participants have been reducing their individual estimates of the longer-run level of the unemployment rate. The median assessment of FOMC participants fell from around 5-1/2 percent five years ago to 4-1/2 percent in the projections published last month. Outside estimates, such as those from the Congressional Budget Office and the Blue Chip Economic Indicators survey, show a similar pattern of downward revisions. This makes sense. With unemployment falling and wage gains thus far in line with productivity and expected inflation, the traditional indicators of cost-push price pressure are not flashing red right now.

Both total and core personal consumption expenditure inflation are now running close to the FOMC’s 2 percent objective. When thinking about the inflation outlook, I pay attention to market-based measures of inflation compensation from the TIPS (Treasury Inflation-Protected Securities) market as well as to surveys of inflation expectations. These “breakeven inflation rates” are simply the difference between yields on traditional Treasury securities and those on TIPS with comparable maturities. While these market-based measures are not perfect and need to be adjusted for liquidity and term premium factors, they can provide a useful signal about market inflation expectations, which can be combined with signals from surveys of expected inflation to get a read on inflation expectations. Breakeven inflation rates have only recently risen to a range that is in line‑‑but just barely‑‑with the expectation that inflation will remain close to our 2 percent inflation goal over the medium-to-longer run. Survey-based measures of inflation expectations also appear consistent with the Fed’s inflation goal.

In short, the labor market today is robust, and inflation is at or close to the Fed’s 2 percent inflation goal. Thus, the economy is as near as it has been in a decade to meeting both of the Fed’s dual-mandate objectives, which suggests to me that monetary policy at this stage of the economic expansion should be aimed at sustaining growth and employment at levels consistent with keeping inflation at or close to the 2 percent rate consistent with price stability. By contrast, until this year, the appropriate focus of policy had been to return employment and inflation to levels consistent with our dual-mandate objectives. With the economy now operating at or close to mandate-consistent levels for inflation and unemployment, the risks that monetary policy must balance are now more symmetric and less skewed to the downside.

Policy Remains Accommodative
I supported the FOMC’s decision last month to raise the target for the federal funds rate to a range of 2 to 2-1/4 percent. With the economy growing briskly, the labor market operating in the vicinity of full employment, and inflation running close to 2 percent, I saw our decision as another step in removing the extraordinary degree of accommodation put in place in the aftermath of the Global Financial Crisis. However, even after our September decision, I believe U.S. monetary policy remains accommodative. The funds rate is just now‑‑for the first time in a decade‑‑above the Fed’s inflation objective, but the inflation-adjusted real funds rate remains below the range of estimates for the longer-run neutral real rate, often referred to as r*, computed from the projections submitted by Board members and the Reserve Bank presidents.

This longer-run r*, like the natural rate of unemployment, is both unobserved and time varying‑‑and thus must be inferred as a signal extracted from noisy macro and financial data. That said, and notwithstanding the imprecision with which r* is estimated, it remains to me a relevant consideration as I assess the current stance and best path forward for policy. The reason for this is because, as Milton Friedman argued in his classic American Economic Association presidential address, a central bank that seeks to consistently keep real interest rates below r* will eventually face rising inflation and inflation expectations, while a central bank that seeks to keep real interest rates above r* will eventually face falling inflation and inflation expectations.³ My own and others’ research suggests that the failure of the Fed to respect this principle contributed to the Great Inflation of the 1970s, while the incorporation of this principle into Fed policy in the 1990s and 2000s contributed to the achievement of stable and low inflation during and since those years.⁴ So, even though estimates of r* are imprecise, I do not believe they should be ignored. Instead, when thinking about monetary policy, I believe it is best not to ignore entirely an admittedly imprecise estimate of r* today, but instead to update that estimate as new data on inflation, inflation expectations, employment, growth, and productivity arrive.

Moreover, because monetary policy operates with a lag, and with inflation presently close to the 2 percent goal, it will be especially important to monitor inflation expectations closely‑‑using both surveys and financial market data‑‑to best calibrate the pace and destination for policy normalization. It will also be important to monitor both model-based and financial-market‑based estimates of expected future inflation-indexed real interest rates (for example, 5-year real rates 5 years forward)‑‑suitably adjusted for term premium and liquidity effects‑‑as one indicator of longer-run r*. Before the financial crisis, these 5-year real rates 5 years forward averaged around 2 percent after a term premium and liquidity adjustment. Since 2015, they have averaged about 0.50 percent but recently have approached 0.75 percent, also after a term and liquidity premium adjustment. Given that real interest rates and economic growth tend to move together over the longer run, one possible source of these upward revisions in forward real rates could be that financial market participants may have become more optimistic about the growth potential of our economy. Evidence also suggests that the term premium that investors require to hold longer-maturity bonds has risen as well.

The Way Forward
If the data come in as I expect, I believe that some further gradual adjustment in the federal funds rate will be appropriate. As I mentioned earlier, I believe monetary policy today remains accommodative, and that, with the economy now operating at or close to mandate-consistent levels for inflation and unemployment, the risks that monetary policy must balance are now more symmetric and less skewed to the downside. Raising rates too quickly could unnecessarily shorten the economic expansion while moving too slowly could result in rising inflation and inflation expectations down the road that could be costly to reverse.

As I calibrate, in the months ahead, the pace and ultimate destination for monetary policy adjustments that will best allow the Fed to achieve its dual-mandate objectives, it will be important to me to evaluate a wide range of economic and financial market indicators to complement the predictions yielded by model-based scenarios. As I look ahead, if strong growth and robust employment gains were to continue into 2019 and be accompanied by a material rise in actual and expected inflation, that circumstance would indicate to me that additional policy normalization might well be required beyond what I currently expect. By contrast, if strong growth and employment gains were to continue and be accompanied by stable inflation, inflation expectations, and expectations for Fed policy, that situation, to me, would argue against raising short-term interest rates by more than I currently expect.

Conclusion
In closing, with the economy operating as close as it has in a decade to the Federal Reserve’s dual-mandate objectives of price stability and maximum employment, I believe monetary policy at this stage of the economic expansion should be aimed at sustaining growth and maximum employment at levels consistent with keeping inflation at or close to the 2 percent objective. Even after our most recent policy decision to raise the range for the federal funds rate by 1/4 percentage point, monetary policy remains accommodative, and I believe some further gradual adjustment in the policy rate range will likely be appropriate. That said, at this stage in the business cycle, I believe it will be especially important to monitor a wide range of data to continually assess and calibrate the level of the policy rate that is consistent with meeting our objectives on a sustained basis.

Federal Reserve Issues FOMC Statement

September 28, 2018 by industryspread Leave a Comment Filed Under: Central Bank Annoucements Tagged: Economic Activity, FED, federal funds, Federal Open Market, Federal Reserve, FOMC, investment, labor market, risks

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.

FED: Semiannual Monetary Policy Report To The Congress

July 18, 2018 by industryspread Leave a Comment Filed Under: Central Bank Annoucements Tagged: Economic Situation, economy, FED, financial system, FOMC, Interest Rates, Jerome H. Powell, job market, Monetary Policy Report, report, unemployment rate

Jerome H. Powell

Good morning. Chairman Crapo, Ranking Member Brown, and other members of the Committee, I am happy to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress.

Let me start by saying that my colleagues and I strongly support the goals the Congress has set for monetary policy–maximum employment and price stability. We also support clear and open communication about the policies we undertake to achieve these goals. We owe you, and the public in general, clear explanations of what we are doing and why we are doing it. Monetary policy affects everyone and should be a mystery to no one. For the past three years, we have been gradually returning interest rates and the Fed’s securities holdings to more normal levels as the economy strengthens. We believe this is the best way we can help set conditions in which Americans who want a job can find one, and in which inflation remains low and stable.

I will review the current economic situation and outlook and then turn to monetary policy.

Current Economic Situation and Outlook

Since I last testified here in February, the job market has continued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Federal Open Market Committee, or FOMC, thinks will best achieve our price stability and employment objectives over the longer run. The latest figure was boosted by a significant increase in gasoline and other energy prices.

An average of 215,000 net new jobs were created each month in the first half of this year. That number is somewhat higher than the monthly average for 2017. It is also a good deal higher than the average number of people who enter the work force each month on net. The unemployment rate edged down 0.1 percentage point over the first half of the year to 4.0 percent in June, near the lowest level of the past two decades. In addition, the share of the population that either has a job or has looked for one in the past month–the labor force participation rate–has not changed much since late 2013. This development is another sign of labor market strength. Part of what has kept the participation rate stable is that more working-age people have started looking for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the labor force.

Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for African Americans and Hispanics have fallen sharply over the past few years and are now near their lowest levels since the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for whites. And while three-fourths of whites responded in a recent Federal Reserve survey that they were doing at least okay financially in 2017, only two-thirds of African Americans and Hispanics responded that way.

Incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy–or gross domestic product–rose at a moderate annual rate of 2 percent in the first quarter after adjusting for inflation. However, the latest data suggest that economic growth in the second quarter was considerably stronger than in the first. The solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago.

I will turn now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent.

Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, interest rates, and financial conditions more broadly, remain favorable to growth. Second, our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses. Third, federal tax and spending policies likely will continue to support the expansion. And, fourth, the outlook for economic growth abroad remains solid despite greater uncertainties in several parts of the world. What I have just described is what we see as the most likely path for the economy. Of course, the economic outcomes we experience often turn out to be a good deal stronger or weaker than our best forecast. For example, it is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate.

Monetary Policy

Over the first half of 2018 the FOMC has continued to gradually reduce monetary policy accommodation. In other words, we have continued to dial back the extra boost that was needed to help the economy recover from the financial crisis and recession. Specifically, we raised the target range for the federal funds rate by 1/4 percentage point at both our March and June meetings, bringing the target to its current range of 1-3/4 to 2 percent. In addition, last October we started gradually reducing the Federal Reserve’s holdings of Treasury and mortgage-backed securities. That process has been running smoothly. Our policies reflect the strong performance of the economy and are intended to help make sure that this trend continues. The payment of interest on balances held by banks in their accounts at the Federal Reserve has played a key role in carrying out these policies, as the current Monetary Policy Report explains. Payment of interest on these balances is our principal tool for keeping the federal funds rate in the FOMC’s target range. This tool has made it possible for us to gradually return interest rates to a more normal level without disrupting financial markets and the economy.

As I mentioned, after many years of running below our longer-run objective of 2 percent, inflation has recently moved close to that level. Our challenge will be to keep it there. Many factors affect inflation–some temporary and others longer lasting. Inflation will at times be above 2 percent and at other times below. We say that the 2 percent objective is “symmetric” because the FOMC would be concerned if inflation were running persistently above or below our objective.

The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago. That said, they still are not rising as fast as in the years before the crisis. One explanation could be that productivity growth has been low in recent years. On a brighter note, moderate wage growth also tells us that that the job market is not causing high inflation.

With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that–for now–the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data.

For guideposts on appropriate policy, the FOMC routinely looks at monetary policy rules that recommend a level for the federal funds rate based on the current rates of inflation and unemployment. The July Monetary Policy Report gives an update on monetary policy rules and their role in our policy discussions. I continue to find these rules helpful, although using them requires careful judgment.

Thank you. I will now be happy to take your questions.

FOMC: Discount and Advance Rates, Monetary Policy Implementation

July 12, 2018 by industryspread Leave a Comment Filed Under: Central Bank Annoucements Tagged: Advance Rates, Discount, federal reserve banks, FOMC, monetary policy, Monetary Policy Implementation, primary credit rate

DISCOUNT AND ADVANCE RATES — Requests by six Reserve Banks to maintain the existing primary credit rate and requests by six Reserve Banks to increase the rate; requests to renew the secondary and seasonal credit formulas.

Existing rate and formulas approved.
June 4, 2018.
————————————————————————-

Today, Board members discussed economic and financial developments and issues related to possible policy actions. In connection with this discussion, Board members considered discounts and advances under the primary credit program (the primary credit rate) and discussed, on a preliminary basis, their individual assessments of the appropriate rate and its communication, which would be discussed at the joint meeting of the Board and the Federal Open Market Committee (FOMC) next week.

Subject to review and determination by the Board of Governors, the directors of the Federal Reserve Banks of Atlanta and San Francisco had voted on May 24, 2018, and the directors of the Federal Reserve Banks of New York, Philadelphia, Chicago, and St. Louis had voted on May 31, to establish the primary credit rate at the existing level (2-1/4 percent). The directors of the Federal Reserve Banks of Cleveland, Kansas City, and Dallas had voted on May 24, and the directors of the Federal Reserve Banks of Boston, Richmond, and Minneapolis had voted on May 31, to establish a rate of 2-1/2 percent (an increase from 2-1/4 percent).

Overall, Federal Reserve Bank directors were positive about the economic outlook. Many directors reported solid economic activity in their Districts, including increased inventory and capital investment by businesses. Directors commented on still-tight labor markets, and some directors noted increasing pressures on wages, particularly for certain types of skilled workers. Some directors expressed concerns about potential risks associated with international developments and trade policy. Inflation was at or near the Federal Open Market Committee’s 2 percent objective.

The directors of six Reserve Banks favored establishing the primary credit rate at the current level of 2-1/4 percent, in light of current and expected economic conditions. The directors of six Reserve Banks favored increasing the primary credit rate to 2-1/2 percent. These directors judged that an increase in short-term interest rates was warranted at this time in light of solid economic growth, tight labor markets, and inflation at or near the FOMC’s target rate of 2 percent.

No sentiment was expressed by the Board at today’s meeting for changing the primary credit rate at this time, and the Board approved the establishment of the primary credit rate at the existing level of 2-1/4 percent. (NOTE: At the joint Board-FOMC meeting on May 2, 2018, the Board had approved the establishment of the primary credit rate at its existing level of 2-1/4 percent.)

The Board’s action today on the primary credit rate also included renewal of the existing formulas for calculating the rates applicable to discounts and advances under the secondary and seasonal credit programs. As specified by the formula for the secondary credit rate, this rate would be set 50 basis points above the primary credit rate. As specified by the formula for the seasonal credit rate, this rate would be reset every two weeks as the average of the daily effective federal funds rate and the rate on three-month CDs over the previous 14 days, rounded to the nearest 5 basis points.

Voting for this action: Chairman Powell, Vice Chairman for Supervision Quarles, and Governor Brainard.

Background: Office of the Secretary memorandum, June 1, 2018
Implementation: Transmissions from Ms. Misback to the Reserve Banks, June 4, 2018.

MONETARY POLICY IMPLEMENTATION — Increase in the interest rate on reserve balances and in the primary credit rate; renewal of secondary and seasonal credit formulas.

Approved.
June 13, 2018.
————————————————————–

In a joint meeting of the Federal Open Market Committee (FOMC) and the Board today, the FOMC decided to raise the target range for the federal funds rate by 25 basis points, to 1-3/4 to 2 percent, effective June 14, 2018. To support the Committee’s decision to raise the target range for the federal funds rate, the Board approved raising the interest rate paid on required and excess reserve balances to 1.95 percent, effective June 14, 2018. Setting the interest rate paid on required and excess reserve balances 5 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range.

Subject to review and determination by the Board of Governors, the directors of eleven Federal Reserve Banks had voted to establish an increase in the rate for discounts and advances under the primary credit program (the primary credit rate). The directors of the Federal Reserve Banks of Boston, Richmond, and Minneapolis had voted on May 31, 2018, and the directors of the Federal Reserve Banks of Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco had voted on June 7, to establish a primary credit rate of 2-1/2 percent (an increase from 2-1/4 percent). (NOTE: At its meeting on June 4, 2018, the Board had approved the establishment of the primary credit rate at its existing level of 2-1/4 percent.)

At today’s meeting, there was consensus for a 25-basis-point increase, and the Board approved an increase in the primary credit rate from 2-1/4 percent to 2-1/2 percent, effective June 14, 2018, for the eleven Reserve Banks that had voted for such an increase. The Board’s action today on the primary credit rate also included renewal of the existing formulas for calculating the rates applicable to discounts and advances under the secondary and seasonal credit programs. As specified by the formula for the secondary credit rate, this rate would be set 50 basis points above the primary credit rate. As specified by the formula for the seasonal credit rate, this rate would continue to be reset every two weeks as the average of the daily effective federal funds rate and the rate on three-month CDs over the previous 14 days, rounded to the nearest 5 basis points.

It was understood that a press release and an accompanying document on monetary policy implementation would be issued to announce the increases in the interest rate on reserve balances and the primary credit rate. In addition, the Secretary was authorized to inform the Federal Reserve Bank of New York, on its establishment of a primary credit rate of 2-1/2 percent, of the Board’s approval and determination, effective on the later of June 14, 2018, or the date the Reserve Bank informed the Secretary of its request. (NOTE: Subsequently, the Secretary informed the New York Reserve Bank of the Board’s approval of its establishment of a primary credit rate of 2-1/2 percent, effective June 14, 2018.)

Voting for these actions: Chairman Powell, Vice Chairman for Supervision

Background: Quarles, and Governor Brainard.
Implementation: FOMC Statement (with attached Implementation Note), June 13; press release, June 14; transmissions from Ms. Misback to the Reserve Banks, June 13 and 14; and Federal Register documents (Docket Nos. R-1611 and R-1610, RINs 7100-AF07 and 7100-AF08), June 15, 2018.

Monetary Policy at a Time of Uncertainty and Tight Labor Markets

June 23, 2018 by industryspread Leave a Comment Filed Under: Central Bank Annoucements Tagged: Central Bank, Central Banking, economy, Federal Reserve System, FOMC, Inflation, labor market, monetary policy, Phillips curve, U.S. economy, unemployment

Chairman Jerome H. Powell

At “Price and Wage-Setting in Advanced Economies,” an ECB Forum on Central Banking, Sintra, Portugal

Watch Live

Jerome H. Powell, Chairman of the Board of Governors of the Federal Reserve System

Nine years into an expansion that has sometimes proceeded slowly, the U.S. economy is performing very well. Growth is meaningfully above most estimates of its long-term trend–though admittedly, that trend is not as strong as we would like it to be. The labor market is particularly robust, with unemployment at its lowest level since April 2000. Inflation has moved up close to our 2 percent objective, although we have yet to see it remain near that objective on a sustained basis.

Today, most Americans who want jobs can find them. High demand for workers should support wage growth and labor force participation–the latter a measure on which the United States now lags most other advanced economies.¹ A tight labor market may also lead businesses to invest more in technology and training, which should support productivity growth. And groups such as some racial and ethnic minorities that still have higher unemployment and lower participation rates could see increasing benefits from a tight labor market.² In short, there is a lot to like about low unemployment.

Achieving our statutory goal of maximum employment in a context of price stability and financial stability is both our responsibility and our challenge. Earlier in the expansion, as the economy recovered, the need for highly accommodative monetary policy was clear. But with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.

Current Labor Market Conditions
At 3.8 percent, the unemployment rate is below most estimates of its long-run level, which are now clustered in the mid-4s. Many other labor market indicators also suggest an economy near full employment. To name just a few, these indicators include an elevated level of job vacancies. For the first time since the Labor Department began collecting the data in 2000, there are now more job vacancies than there are people counted as unemployed. In addition, the rate at which workers are quitting their jobs is elevated, a sign that workers are able to find another job when they seek one. And surveys show that businesses are finding it difficult to fill vacancies, and that households perceive jobs as plentiful.

Some other indicators are less clear. The labor force participation rate of prime-age workers has moved up in recent years but remains below pre-crisis levels.³ In addition, wage growth has been moderate, consistent with low productivity growth but also an indication that the labor market is not excessively tight.

Looking ahead, the job market is likely to strengthen further. Real gross domestic product in the United States is now reported to have risen 2-3/4 percent over the past four quarters, well above most estimates of its long-run trend. Expansionary fiscal policy is expected to add to aggregate demand over the next few years. Many forecasters expect the unemployment rate to fall into the mid-3s and to remain there for an extended period. If that comes to pass, it will mean the lowest unemployment in the United States since the late 1960s.

A historical comparison
Because we have so little experience with very low unemployment, it is interesting to compare today’s labor market with that earlier period. Unemployment was below 4 percent from February 1966 through January 1970. During that time, inflation as measured by the price index for personal consumption expenditures increased from below 2 percent in 1965 to about 5 percent in 1970. In hindsight, unemployment is now widely thought to have been unsustainably low at that time and to have contributed to escalating inflation.

But how significant is this precedent for today? The U.S. economy has changed in many ways over the past 50 years. By some estimates, the natural rate of unemployment is substantially lower now.⁴ For example, the Congressional Budget Office now estimates that the natural rate was about 5‑3/4 percent (and rising) in the late 1960s, compared with 4-3/4 percent at present.⁵

Rising education levels do point to a decline in the natural rate since the 1960s, because more highly educated people are less likely to be unemployed. The share of the population with a college degree has risen from less than 15 percent in the late 1960s to nearly 40 percent now, and the share with less than a high school degree has declined from 45 percent to about 5 percent.⁶ Another important difference from the 1960s is that inflation has been low and stable for an extended period, which has better anchored inflation expectations. Today policymakers have a greater appreciation of the role expectations play in inflation dynamics and a clearer commitment to maintaining low and stable inflation.

Unfortunately, with the passage of a half-century and important changes in the structure of our economy and in central bank practices, in my view the historical comparison does not shed as much light as we might have hoped.

Questions prompted by a tight labor market
The lack of useful historical precedent leaves us with some uncertainty about the answers to several important and challenging questions. First, estimates of the natural rate of unemployment by Federal Open Market Committee (FOMC) participants and others have drifted lower as unemployment has declined without much apparent reaction from inflation. How reliable are these estimates? Natural rate estimates have always been uncertain, and may be even more so now as inflation has become less responsive to the unemployment rate.⁷ The anchoring of expectations is a welcome development and has likely played a role in flattening the Phillips curve. But a flatter Phillips curve makes it harder to assess whether movements in inflation reflect the cyclical position of the economy or other influences.

Second, what would be the consequences for inflation if unemployment were to run well below the natural rate for an extended period? The flat Phillips curve suggests that the implications for inflation might not be large, although a very tight labor market could lead to larger, nonlinear effects. Research on this question is ambiguous, again reflecting the limited historical experience.⁸ We should also remember that where inflation expectations are well anchored, it is likely because central banks have kept inflation under control. If central banks were instead to try to exploit the nonresponsiveness of inflation to low unemployment and push resource utilization significantly and persistently past sustainable levels, the public might begin to question our commitment to low inflation, and expectations could come under upward pressure. So far, we see no signs of this. If anything, some measures of longer-term inflation expectations in the United States have edged lower in recent years.

Third, can persistently strong economic conditions pose financial stability risks? Of course, strong economic conditions are a good thing! Such conditions can make the financial system better able to absorb shocks through strong balance sheets and investor confidence. But we have often seen confidence become overconfidence and lead to excessive borrowing and risk-taking, leaving the financial system more vulnerable. Indeed, the fact that the two most recent U.S. recessions stemmed principally from financial imbalances, not high inflation, highlights the importance of closely monitoring financial conditions. Today I see U.S. financial stability vulnerabilities as moderate and broadly in line with their long-run averages. While some asset prices are high by historical standards, I do not see broad signs of excessive borrowing or leverage. In addition, banks have far greater levels of capital and liquidity than before the crisis.

Fourth, while persistently strong economic conditions can pose risks to inflation and perhaps financial stability, we can also ask whether there may be lasting benefits. As I mentioned, a tight labor market could draw more people into the labor force. In fact, as the labor market has tightened, more workers have been moving back to work and off disability rolls.⁹ There could also be benefits to productivity and potential growth. All told, though, the persistence of any such “positive hysteresis” benefits is uncertain, since, again, the historical evidence is sparse and inconclusive.

Conclusion

As is often the case, in the current environment, significant uncertainty attends the process of making monetary policy. Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal funds rate remains strong and broadly supported among FOMC participants.

1. See Organisation for Economic Co-operation and Development (2018), Economic Survey of the United States 2018 (Paris: OECD). Return to text

2. These groups tend to both suffer most from labor market downturns and benefit most from improving labor markets. Return to text

3. The labor force participation rate is defined as the number of people either with a job or who have actively looked for work within the past four weeks, as a share of the total population. Prime-age refers to individuals from 25 to 54 years old. Return to text

4. The natural rate of unemployment is the unemployment rate over the longer term that is consistent with low and stable inflation. It comprises both the “frictional” unemployment of people who are temporarily between jobs or searching as they have reentered the labor force and the more “structural” unemployment of people whose skills or physical location are not a good match for the jobs available. For more discussion, see Janet L. Yellen (2017), “The Goals of Monetary Policy and How We Pursue Them,” speech delivered at the Commonwealth Club, San Francisco, January 18. Return to text

5. Contemporaneous estimates of the natural rate (or “full employment”) from the late 1960s were lower than current estimates for that period. For example, the Economic Report of the President from 1968 defined potential output as occurring when the unemployment rate is 4 percent. See Executive Office of the President of the United States (1968), Economic Report of the President (PDF) (Washington: U.S. Government Printing Office, February), p. 61. Return to text

6. Other changes in the workforce since the late 1960s seem less likely to have much affected the natural rate of unemployment. There are many more women in the workforce now, but while women used to have higher unemployment rates than men, that is no longer the case. And while younger workers tend to have less stable employment patterns and higher unemployment rates than older workers, the working population is, on net, only a little bit older now than it was in the late 1960s. (The average age of people in the workforce declined through the 1970s as more of the baby-boom generation entered their working years, but it increased subsequently.) Return to text

7. For evidence on the changing effects of labor market utilization on inflation, internationally as well as in the United States, see Olivier Blanchard, Eugenio Cerutti, and Lawrence Summers (2015), “Inflation and Activity–Two Explorations and Their Monetary Policy Implications (PDF),” in Inflation and Unemployment in Europe, proceedings of the 2015 ECB Forum on Central Banking (Sintra, Portugal: European Central Bank), pp. 25-46. Regarding uncertainty about estimates of the natural rate, a classic reference is Douglas Staiger, James H. Stock, and Mark W. Watson (1997), “How Precise Are Estimates of the Natural Rate of Unemployment?” in Christina D. Romer and David H. Romer, eds., Reducing Inflation: Motivation and Strategy (Chicago: University of Chicago Press), pp. 195-246. Return to text

8. For one recent example, see Nathan R. Babb and Alan K. Detmeister (2017), “Nonlinearities in the Phillips Curve for the United States: Evidence Using Metropolitan Data,” Finance and Economics Discussion Series 2017-070 (Washington: Board of Governors of the Federal Reserve System, June), http://dx.doi.org/10.17016/FEDS.2017.070. Return to text

9. See Ernie Tedeschi (2018), “Will Employment Keep Growing? Disabled Workers Offer a Clue,” The Upshot, New York Times, March 15. Return to text

Minutes of the Federal Open Market Committee, May 1-2, 2018

May 24, 2018 by industryspread Leave a Comment Filed Under: Central Bank Annoucements Tagged: economic conditions, FED, federal funds, Federal Open Market Committee, FOMC, Jerome H. Powell, labor market, monetary policy, reghub

Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

Fed President in New York Calls for Floor Monetary Policy

April 19, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: federal funds rate, financial stability, Floor Monetary Policy, floor system, FOMC, monetary policy, New York Fed

The New York Fed Governor signaled his support for so-called “floor system” of monetary policy.

William Dudley was speaking at Lehman College in New York City in a speech entitled Important Choices for the Federal Reserve in the Years Ahead.

During this speech, he signaled his support for a floor system of monetary policy.

“Over the longer term, the FOMC will also need to address a number of other important issues. These include: 1) Determining the appropriate long-term implementation framework for U.S. monetary policy, and 2) deciding whether the strategic framework underlying monetary policy decisions needs to be adjusted to mitigate the risks associated with getting pinned at the effective lower bound for short-term interest rates.

“For the first issue, I see two options: return to the “corridor”-type system that was in place prior to the financial crisis or remain with the framework that has been in place since the crisis—namely, a ‘floor’ system. In a corridor system, reserves in the banking system are scarce, and the federal funds rate is set by adjusting the supply of reserves through open market operations to balance demand and supply at the FOMC’s target range. In contrast, in a floor system, reserves are abundant, so that the interest rate the Federal Reserve pays on excess reserves, or IOER, is the primary tool used to control the federal funds rate.

“In my view, the case for retaining the current floor system is very compelling for a number of reasons. First, it is operationally much less complex than a corridor system. In the current regime, the setting of IOER is largely sufficient to maintain the federal funds rate within the FOMC’s target range, as we have seen over the past few years. In contrast, a corridor system requires forecasting the many exogenous factors that affect the amount of bank reserves outstanding, and then engaging in open market operations on a near daily basis to keep reserves at a level consistent with the FOMC’s target range. This task would likely be more difficult now because of greater fluctuation in these exogenous factors relative to when the corridor regime was last in place.

“Second, a corridor system constrains the Federal Reserve’s ability to provide the types of lender-of-last-resort backstops that can help support financial stability.”

Banks are often trading assets with the Federal Reserve, Dudley noted. Often, those trades involve assets which count differently against reserves, and he believes the floor system provides more flexibility.

William Dudley, President of Federal Reserve Bank of New York and vice-chairman of the Federal Open Market Committee

“The initial auctions of the Term Auction Facility, or TAF, were kept relatively small, in part, because of concerns that larger programs would make it more difficult for the manager of the System Open Market Account (me, in that particular case) to drain sufficient reserves to offset the TAF reserve additions. Similarly, the Term Securities Lending Facility (TSLF)—which involved the swap of Treasury collateral from the Federal Reserve against lower-quality collateral held by primary dealers—was introduced in large part because collateral swaps, unlike cash loans, did not affect the amount of reserves in the banking system. My overall point is that broad-based, open-ended lender-of-last-resort facilities are more difficult to accommodate in a corridor system because of the need to drain any reserve additions to keep the federal funds rate close to the FOMC’s target.”

Banks, especially since the implementation of Basel, have all sorts of requirements for capital reserves, with certain assets being treated differently.

Dudley said the corridor system doesn’t provide enough flexibility to make these trades.

Dudley noted later that the predominant view among the Federal Reserve aligns with his, though no final decision has been made.

“Although the FOMC has not made a final decision about a future framework for implementing monetary policy, meeting minutes confirm that participants recognize the advantages of a floor system. As the November 2016 FOMC minutes note: ‘Meeting participants commented on the advantages of using an approach to policy implementation in which active management of the supply of reserves would not be required….[S]uch an approach was seen as likely to be relatively simple and efficient to administer, relatively straightforward to communicate, and effective in enabling interest rate control across a wide range of circumstances.’”

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