CMP Associates Regulation Blog: “Economic Activity Appears to Have Slowed,” Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Stagnating Real Private Fixed Investment, United States Housing Collapse, Decline of United States Homeownership, World Cyclical Slow Growth and Global Recession Risk: Part IV

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“Economic Activity Appears to Have Slowed,” Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Stagnating Real Private Fixed Investment, United States Housing Collapse, Decline of United States Homeownership, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IIA United States Housing Collapse

IIB United States House Prices

IIC Decline of United States Homeownership

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

IV Global Inflation. There is oscillating inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.0	0.9	-1.9 FD -0.1	5.0
Japan	0.7	-0.1	-3.8	3.3
China	6.7	2.3	-4.3
UK	2.1	0.5* CPIH 0.7	-0.9 output 0.2** input -6.5	5.1
Euro Zone	1.6	0.0	-4.2	10.2
Germany	1.3	0.1	-3.0	4.2
France	1.3	-0.1	-4.2	10.0
Nether-lands	1.2	0.5	-10.5	6.4
Finland	0.7	0.0	-3.5	9.3
Belgium	1.4	1.6	-6.0	8.5
Portugal	1.3	0.5	-2.9	12.1
Ireland	NA	-0.6	-3.2	8.6
Italy	1.0	-0.2	-4.1	11.4
Greece	-0.8	-0.7	-9.9	24.4
Spain	3.5	-1.0	-5.7	20.4

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics

**Core

CPI https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/mar2016

PPI https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/producerpriceinflation/march2016

EUROSTAT http://ec.europa.eu/eurostat National Statistical Offices: http://www.bls.gov/bls/other.htm

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These policies and views are discussed initially followed with appropriate analysis.

Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):

“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.

Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.

The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”

Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:

“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”

The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):

“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.”

Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.

Unconventional monetary policy, or reinvestment of principal in securities and issue of bank reserves to maintain policy interest rates near zero, will remain in perpetuity, or QE→∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE→∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at around 2.0 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.1 percent on average in the cyclical expansion in the 27 quarters from IIIQ2009 to IQ2016. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IQ2016 (http://www.bea.gov/newsreleases/national/gdp/2016/pdf/gdp1q16_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989 4.7 percent from IQ1983 to IIQ1989, 4.7 percent from IQ1983 to IIIQ1989 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IVQ2015 would have accumulated to 27.6 percent. GDP in IQ2016 would be $19,129.5 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2636.8 billion than actual $16,492.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.6 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-monetary.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/twenty-five-million-unemployed-or.html). US GDP in IQ2016 is 13.8 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,492.7 billion in IQ2016 or 10.0 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Mar 1919 to Mar 2016. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 108.2316 in Dec 2007 to 140.3764 in Mar 2016. The actual index NSA in Mar 2016 is 103.2208, which is 26.5 percent below trend. Manufacturing output grew at average 2.1 percent between Dec 1986 and Dec 2015. Using trend growth of 2.1 percent per year, the index would increase to 128.4709 in Mar 2016. The output of manufacturing at 103.2208 in Mar 2016 is 19.7 percent below trend under this alternative calculation.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 215,000 in Mar 2016 and private payroll employment increased 195,000. The average monthly number of nonfarm jobs created from Mar 2014 to Mar 2015 was 246,500 using seasonally adjusted data, while the average number of nonfarm jobs created from Mar 2015 to Mar 2016 was 233,500, or decrease by 5.3 percent. The average number of private jobs created in the US from Mar 2014 to Mar 2015 was 235,417, using seasonally adjusted data, while the average from Mar 2015 to Mar 2016 was 223,417, or decrease by 5.1 percent. This blog calculates the effective labor force of the US at 165.553 million in Mar 2015 and 167.332 million in Mar 2016 (Table I-4), for growth of 1.779 million at average 148,250 per month. The difference between the average increase of 223,417 new private nonfarm jobs per month in the US from Mar 2015 to Mar 2016 and the 148,250 average monthly increase in the labor force from Mar 2015 to Mar 2016 is 75,167 monthly new jobs net of absorption of new entrants in the labor force. There are 24.452 million in job stress in the US currently. Creation of 75,167 new jobs per month net of absorption of new entrants in the labor force would require 325 months to provide jobs for the unemployed and underemployed (24.452 million divided by 75,167) or 27 years (325 divided by 12). The civilian labor force of the US in Mar 2016 not seasonally adjusted stood at 158.854 million with 8.116 million unemployed or effectively 16.594 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 167.332 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.11 years (1 million divided by product of 75,167 by 12, which is 902,004). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.943 million (0.05 times labor force of 158.854 million). New net job creation would be 0.173 million (8.116 million unemployed minus 7.943 million unemployed at rate of 5 percent) that at the current rate would take 0.2 years (0.173 million divided by 902,004). Under the calculation in this blog, there are 16.594 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 167.332 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 8.227 million jobs net of labor force growth that at the current rate would take 9.1 years (16.594 million minus 0.05(167.332 million) = 8.227 million divided by 902,004 using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in Mar 2016 was 150.738 million (NSA) or 3.423 million more people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 252.768 million in Mar 2016 or by 20.810 million. The number employed increased 2.3 percent from Jul 2007 to Mar 2016 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 9.0 percent. The ratio of employment to population in Jul 2007 was 63.5 percent (147.315 million employment as percent of population of 231.958 million). The same ratio in Mar 2016 would result in 160.508 million jobs (0.635 multiplied by noninstitutional civilian population of 252.768 million). There are effectively 9.770 million fewer jobs in Mar 2016 than in Jul 2007, or 160.508 million minus 150.738 million. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

There is current interest in past theories of “secular stagnation.” Alvin H. Hansen (1939, 4, 7; see Hansen 1938, 1941; for an early critique see Simons 1942) argues:

“Not until the problem of full employment of our productive resources from the long-run, secular standpoint was upon us, were we compelled to give serious consideration to those factors and forces in our economy which tend to make business recoveries weak and anaemic (sic) and which tend to prolong and deepen the course of depressions. This is the essence of secular stagnation-sick recoveries which die in their infancy and depressions which feed on them-selves and leave a hard and seemingly immovable core of unemployment. Now the rate of population growth must necessarily play an important role in determining the character of the output; in other words, the com-position of the flow of final goods. Thus a rapidly growing population will demand a much larger per capita volume of new residential building construction than will a stationary population. A stationary population with its larger proportion of old people may perhaps demand more personal services; and the composition of consumer demand will have an important influence on the quantity of capital required. The demand for housing calls for large capital outlays, while the demand for personal services can be met without making large investment expenditures. It is therefore not unlikely that a shift from a rapidly growing population to a stationary or declining one may so alter the composition of the final flow of consumption goods that the ratio of capital to output as a whole will tend to decline.”

The argument that anemic population growth causes “secular stagnation” in the US (Hansen 1938, 1939, 1941) is as misplaced currently as in the late 1930s (for early dissent see Simons 1942). There is currently population growth in the ages of 16 to 24 years but not enough job creation and discouragement of job searches for all ages (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-reducing.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html).

Second, long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions.

US economic growth has been at only 2.1 percent on average in the cyclical expansion in the 27 quarters from IIIQ2009 to IQ2016. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IQ2016 (http://www.bea.gov/newsreleases/national/gdp/2016/pdf/gdp1q16_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989 4.7 percent from IQ1983 to IIQ1989, 4.7 percent from IQ1983 to IIIQ1989 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IVQ2015 would have accumulated to 27.6 percent. GDP in IQ2016 would be $19,129.5 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2636.8 billion than actual $16,492.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.6 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-monetary.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/twenty-five-million-unemployed-or.html). US GDP in IQ2016 is 13.8 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,492.7 billion in IQ2016 or 10.0 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.2 percent per year from Mar 1919 to Mar 2016. Growth at 3.2 percent per year would raise the NSA index of manufacturing output from 108.2316 in Dec 2007 to 140.3764 in Mar 2016. The actual index NSA in Mar 2016 is 103.2208, which is 26.5 percent below trend. Manufacturing output grew at average 2.1 percent between Dec 1986 and Dec 2015. Using trend growth of 2.1 percent per year, the index would increase to 128.4709 in Mar 2016. The output of manufacturing at 103.2208 in Mar 2016 is 19.7 percent below trend under this alternative calculation. The economy of the US can be summarized in growth of economic activity or GDP as fluctuating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.6 percent in 2011, 2.2 percent in 2012, 1.5 percent in 2013, 2.4 percent in 2014 and 2.4 percent in 2015. The following calculations show that actual growth is around 2.1 percent per year. The rate of growth of 1.2 percent in the entire cycle from 2007 to 2015 is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May). Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

	GDP
Long-Term
1929-2015	3.2
1947-2015	3.2
Whole Cycles
1980-1989	3.5
2006-2015	1.3
2007-2015	1.2
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.2
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IVQ1985 IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983-IIIQ1987 IQ1983 to IVQ1987 IQ1983 to IQ1988 IQ1983 to IIQ1988 IQ1983 to IIIQ1988 IQ1983 to IVQ1988 IQ1983 to IQ1989 IQ1983 to IIQ1989 IQ1983 to IIIQ1989	5.9 5.7 5.4 5.2 5.0 5.0 4.9 5.0 4.9 4.9 4.8 4.8 4.8 4.7 4.7
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IQ2016	2.1
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2015	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2015	1.6	0.8

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace around 2.1 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Sixteen Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014, the four quarters of Q2015 and the first quarter of 2016 accumulated to 8.6 percent. This growth is equivalent to 2.0 percent per year, obtained by dividing GDP in IQ2016 of $16,492.7 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/17: {[($16,492.7/$15,190.3)^4/17 -1]100 = 2.0 percent}.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IQ2014 to IQ2016 accumulated to 2.0 percent that is equivalent to 2.0 percent in a year. This is obtained by dividing GDP in IQ2016 of $16,492.7 billion by GDP in IQ2016 of $16,177.3 billion and compounding by 4/4: {[($16,492.7 /$16,177.3)^4/4 -1]100 = 2.0%}. The US economy grew 2.0 percent in IQ2016 relative to the same quarter a year earlier in IQ2016. Growth was at annual equivalent 4.6 percent in IIQ2014 and 4.3 percent IIIQ2014 and only at 2.1 percent in IVQ2014. GDP grew at annual equivalent 0.6 percent in IQ2015, 3.9 percent in IIQ2015, 2.0 percent in IIIQ2015 and 1.4 percent in IVQ2015. GDP grew at annual equivalent 0.5 percent in IQ2016. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is in the borderline of contraction, and negative in IQ2014. US GDP fell 0.2 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 3.0 percent in seasonally adjusted annual rate (SAAR).

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,991.8	NA	0.4	1.9
IVQ2011	15,190.3	1.3	1.1	1.7
IQ2012	15,291.0	2.0	0.7	2.8
IIQ2012	15,362.4	2.5	0.5	2.5
IIIQ2012	15,380.8	2.6	0.1	2.4
IVQ2012	15,384.3	2.6	0.0	1.3
IQ2013	15,457.2	3.1	0.5	1.1
IIQ2013	15,500.2	3.4	0.3	0.9
IIIQ2013	15,614.4	4.2	0.7	1.5
IVQ2013	15,761.5	5.1	0.9	2.5
IQ2014	15,724.9	4.9	-0.2	1.7
IIQ2014	15,901.5	6.1	1.1	2.6
IIIQ2014	16,068.8	7.2	1.1	2.9
IVQ2014	16,151.4	7.7	0.5	2.5
IQ2015	16,177.3	7.9	0.2	2.9
IIQ2015	16,333.6	9.0	1.0	2.7
IIIQ2015	16,414.0	9.5	0.5	2.1
IVQ2015	16,470.6	9.9	0.3	2.0
IQ2016	16,492.7	10.0	0.1	2.0
Cumulative ∆% IQ2012 to IQ2016	8.6		8.6
Annual Equivalent ∆%	2.0		2.0

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart GDP of the US Bureau of Economic Analysis provides the rates of growth of GDP at SAAR (seasonally adjusted annual rate) in the 17 quarters from IQ2012 to IQ2016. Growth has been fluctuating.

Chart GDP, Seasonally Adjusted Quarterly Rates of Growth of United States GDP, ∆%

Source: US Bureau of Economic Analysis

http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE→∞, or reinvestment of principal in securities and issue of bank reserves to maintain interest rates at zero, cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm). The FOMC updated in the statement at its meeting on Dec 16, 2015 with maintenance of the current level of the balance sheet and liftoff of interest rates (http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm) followed by the statement of the meeting on Apr 27, 2016 (http://www.federalreserve.gov/newsevents/press/monetary/20160427a.htm):

“Press Release

Release Date: April 27, 2016

For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only 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.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent” (emphasis added).

There are several important issues in this statement.

Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.”

Open-ended Quantitative Easing or QE_∞ with End of Bond Purchases and Continuing Reinvestment of Principal in Securities. Earlier programs are continued with reinvestment of principal in securities and bank reserves at $2,353.3 billion on Apr 27, 2016 (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1): “The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”
Maintenance of interest rates: “Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
New Advance Guidance. “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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only 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” (emphasis added).
Policy Commitment with Maximum Employment. The emphasis of policy is in maintaining full employment: “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.”
World Financial and Economic Conditions. There is concern with the world economy and financial markets: “The Committee continues to closely monitor inflation indicators and global economic and financial developments” (emphasis added).
Appearance of growth slowing: “growth in economic activity appears to have slowed” (emphasis added).

Focus is shifting from tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at ¼ to ½ percent and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Markets overreacted to the so-called “paring” of outright purchases to $25 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at ¼ to ½ percent with gradual consideration of further rate increases (http://www.federalreserve.gov/newsevents/press/monetary/20160427a.htm): “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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only 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” (emphasis added).

How long is “considerable time”? At the press conference following the meeting on Mar 19, 2014, Chair Yellen answered a question of Jon Hilsenrath of the Wall Street Journal explaining “In particular, the Committee has endorsed the view that it anticipates that will be a considerable period after the asset purchase program ends before it will be appropriate to begin to raise rates. And of course on our present path, well, that's not utterly preset. We would be looking at next, next fall. So, I think that's important guidance” (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140319.pdf). Many focused on “next fall,” ignoring that the path of increasing rates is not “utterly preset.”

At the press conference following the meeting on Dec 17, 2014, Chair Yellen answered a question by Jon Hilseranth of the Wall Street Journal explaining “patience” (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20141217.pdf):

“So I did say that this statement that the committee can be patient should be interpreted as meaning that it is unlikely to begin the normalization process, for at least the next couple of meetings. Now that doesn't point to any preset or predetermined time at which normalization is -- will begin. There are a range of views on the committee, and it will be dependent on how incoming data bears on the progress, the economy is making. First of all, I want to emphasize that no meeting is completely off the table in the sense that if we do see faster progress toward our objectives than we currently expect, then it is possible that the process of normalization would occur sooner than we now anticipated. And of course the converse is also true. So at this point, we think it unlikely that it will be appropriate, that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization. A number of committee participants have indicated that in their view, conditions could be appropriate by the middle of next year. But there is no preset time.”

Chair Yellen explained the removal of the word “patience” from the advanced guidance at the press conference following the FOMC meeting on Mar 18, 2015(http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150318.pdf):

“In other words, just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient. Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2 percent inflation.”

At a speech on Mar 31, 2014, Chair Yellen analyzed labor market conditions as follows (http://www.federalreserve.gov/newsevents/speech/yellen20140331a.htm):

“And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.

Let me explain what I mean by that word "slack" and why it is so important.

Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. With 6.7 percent unemployment, it might seem that there must be a lot of slack in the U.S. economy, but there are reasons why that may not be true.”

Yellen (2014Aug22) provides comprehensive review of the theory and measurement of labor markets. Monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Yellen (2014Aug22) finds that the unemployment rate is not sufficient in determining slack:

“One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed. This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.”

Yellen (2014Aug22) restates that the FOMC determines monetary policy on newly available information and interpretation of labor markets and inflation and does not follow a preset path:

“But if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter. Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate. As I have noted many times, monetary policy is not on a preset path. The Committee will be closely monitoring incoming information on the labor market and inflation in determining the appropriate stance of monetary policy.”

Yellen (2014Aug22) states that “Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction.”

The minutes of the meeting of the Federal Open Market Committee (FOMC) on Sep 16-17, 2014, reveal concern with global economic conditions (http://www.federalreserve.gov/monetarypolicy/fomcminutes20140917.htm):

“Most viewed the risks to the outlook for economic activity and the labor market as broadly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag.”

There is similar concern in the minutes of the meeting of the FOMC on Dec 16-17, 2014 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20141217.htm):

“In their discussion of the foreign economic outlook, participants noted that the implications of the drop in crude oil prices would differ across regions, especially if the price declines affected inflation expectations and financial markets; a few participants said that the effect on overseas employment and output as a whole was likely to be positive. While some participants had lowered their assessments of the prospects for global economic growth, several noted that the likelihood of further responses by policymakers abroad had increased. Several participants indicated that they expected slower economic growth abroad to negatively affect the U.S. economy, principally through lower net exports, but the net effect of lower oil prices on U.S. economic activity was anticipated to be positive.”

Chair Yellen analyzes the view of inflation (http://www.federalreserve.gov/newsevents/speech/yellen20140416a.htm):

“Inflation, as measured by the price index for personal consumption expenditures, has slowed from an annual rate of about 2-1/2 percent in early 2012 to less than 1 percent in February of this year. This rate is well below the Committee's 2 percent longer-run objective. Many advanced economies are observing a similar softness in inflation.

To some extent, the low rate of inflation seems due to influences that are likely to be temporary, including a deceleration in consumer energy prices and outright declines in core import prices in recent quarters. Longer-run inflation expectations have remained remarkably steady, however. We anticipate that, as the effects of transitory factors subside and as labor market gains continue, inflation will gradually move back toward 2 percent.”

There is a critical phrase in the statement of Sep 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm): “but mortgage rates have risen further.” Did the increase of mortgage rates influence the decision of the FOMC not to taper? Is FOMC “communication” and “guidance” successful? Will the FOMC increase purchases of mortgage-backed securities if mortgage rates increase?

A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2016/01/unconventional-monetary-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/peaking-valuations-of-risk-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2014/01/theory-and-reality-of-secular.html). Matt Jarzemsky, writing on “Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 17,773.64 on Fri Apr 29, 2016, which is higher by 25.5 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 25.2 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial assets have been approaching or exceeding historical highs. Perhaps one of the most critical statements on policy is the answer to a question of Peter Barnes by Chair Janet Yellen at the press conference following the meeting on Jun 18, 2014 (page 19 at http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140618.pdf):

So I don't have a sense--the committee doesn't try to gauge what is the right level of equity prices. But we do certainly monitor a number of different metrics that give us a feeling for where valuations are relative to things like earnings or dividends, and look at where these metrics stand in comparison with previous history to get a sense of whether or not we're moving to valuation levels that are outside of historical norms, and I still don't see that. I still don't see that for equity prices broadly” (emphasis added).

In a speech at the IMF on Jul 2, 2014, Chair Yellen analyzed the link between monetary policy and financial risks (http://www.federalreserve.gov/newsevents/speech/yellen20140702a.htm):

“Monetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system. This possibility does not obviate the need for monetary policy to focus primarily on price stability and full employment--the costs to society in terms of deviations from price stability and full employment that would arise would likely be significant. In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, weak underwriting of loans, deficiencies in risk measurement and risk management, and the use of exotic financial instruments that redistributed risk in nontransparent ways.”

Yellen (2014Jul14) warned again at the Committee on Banking, Housing and Urban Affairs on Jul 15, 2014:

“The Committee recognizes that low interest rates may provide incentives for some investors to “reach for yield,” and those actions could increase vulnerabilities in the financial system to adverse events. While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance. More broadly, the financial sector has continued to become more resilient, as banks have continued to boost their capital and liquidity positions, and growth in wholesale short-term funding in financial markets has been modest” (emphasis added).

Greenspan (1996) made similar warnings:

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy” (emphasis added).

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. What is the success in evaluating deviations of valuations of risk financial assets from “historical norms”? What are the consequences on economic activity and employment of deviations of valuations of risk financial assets from those “historical norms”? What are the policy tools and their effectiveness in returning valuations of risk financial assets to their “historical norms”?

The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. There are high costs and risks of this policy because indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

The Communiqué of the Istanbul meeting of G20 Finance Ministers and Central Bank Governors on February 10, 2015, sanctions the need of unconventional monetary policy with warning on collateral effects (http://www.g20.utoronto.ca/2015/150210-finance.html):

“We agree that consistent with central banks' mandates, current economic conditions require accommodative monetary policies in some economies. In this regard, we welcome that central banks take appropriate monetary policy action. The recent policy decision by the ECB aims at fulfilling its price stability mandate, and will further support the recovery in the euro area. We also note that some advanced economies with stronger growth prospects are moving closer to conditions that would allow for policy normalization. In an environment of diverging monetary policy settings and rising financial market volatility, policy settings should be carefully calibrated and clearly communicated to minimize negative spillovers.”

Professor Raguram G Rajan, governor of the Reserve Bank of India, which is India’s central bank, warned about risks in high valuations of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor Rajan demystifies in the interview “competitive easing” by major central banks as equivalent to competitive devaluation. Rajan (2005) anticipated the risks of the world financial crisis. Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor (1993, 1998LB, 1999, 1998LB, 1999, 2007JH, 2008Nov, 2009, 2012JMCB, 2014Jan3) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities http://cmpassocregulationblog.blogspot.com/2014/07/financial-irrational-exuberance.html http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html).

The FOMC provides guidelines on the process of normalization of monetary policy at the meeting on Dec 16, 2015 (http://www.federalreserve.gov/newsevents/press/monetary/20151216a1.htm):

“The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on December 16, 2015:

The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015.
As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:¹

"Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting.

The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."

More information regarding open market operations may be found on the Federal Reserve Bank of New York's website.

In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 percent, effective December 17, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.

This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.”

In the Semiannual Monetary Policy Report to Congress on Feb 24, 2015, Chair Yellen analyzes the timing of interest rate increases (http://www.federalreserve.gov/newsevents/testimony/yellen20150224a.htm):

“The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting. Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.”

In testimony on the Semiannual Monetary Policy Report to the Congress before the Committee on Financial Services, US House of Representatives, on Feb 11, 2014, Chair Janet Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20140211a.htm):

“Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. That said, purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. In December of last year and again this January, the Committee said that its current expectation--based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments--is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal. I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level (emphasis added).”

At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states needs and intentions of policy:

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time.

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

In testimony before the Committee on the Budget of the US Senate on May 8, 2004, Chair Yellen provides analysis of the current economic situation and outlook (http://www.federalreserve.gov/newsevents/testimony/yellen20140507a.htm):

“The economy has continued to recover from the steep recession of 2008 and 2009. Real gross domestic product (GDP) growth stepped up to an average annual rate of about 3-1/4 percent over the second half of last year, a faster pace than in the first half and during the preceding two years. Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.

Conditions in the labor market have continued to improve. The unemployment rate was 6.3 percent in April, about 1-1/4 percentage points below where it was a year ago. Moreover, gains in payroll employment averaged nearly 200,000 jobs per month over the past year. During the economic recovery so far, payroll employment has increased by about 8-1/2 million jobs since its low point, and the unemployment rate has declined about 3-3/4 percentage points since its peak.

While conditions in the labor market have improved appreciably, they are still far from satisfactory. Even with recent declines in the unemployment rate, it continues to be elevated. Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly--another signal that a substantial amount of slack remains in the labor market.

Inflation has been quite low even as the economy has continued to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable. That said, the Federal Open Market Committee (FOMC) recognizes that inflation persistently below 2 percent--the rate that the Committee judges to be most consistent with its dual mandate--could pose risks to economic performance, and we are monitoring inflation developments closely.

Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 percent. A faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen. Moreover, U.S. financial conditions remain supportive of growth in economic activity and employment.”

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (10

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.

The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”

Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σ_y and prices σ_p. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities http://cmpassocregulationblog.blogspot.com/2014/07/financial-irrational-exuberance.html http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html).

The key policy is maintaining the fed funds rate between ¼ and ½ percent with gradual increases. Accelerated increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness. Jon Hilsenrath, writing on “New view into Fed’s response to crisis,” on Feb 21, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303775504579396803024281322?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). If there were an infallible science of central banking, models and forecasts would provide accurate information to policymakers on the future course of the economy in advance. Such forewarning is essential to central bank science because of the long lag between the actual impulse of monetary policy and the actual full effects on income and prices many months and even years ahead (Romer and Romer 2004, Friedman 1961, 1953, Culbertson 1960, 1961, Batini and Nelson 2002). The transcripts of the Fed meetings in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm) analyzed by Jon Hilsenrath demonstrate that Fed policymakers frequently did not understand the current state of the US economy in 2008 and much less the direction of income and prices. The conclusion of Friedman (1953) is that monetary impulses increase financial and economic instability because of lags in anticipating needs of policy, taking policy decisions and effects of decisions. This is a fortiori true when untested unconventional monetary policy in gargantuan doses shocks the economy and financial markets.

In remarkable anticipation in 2005, Professor Raghuram G. Rajan (2005) warned of low liquidity and high risks of central bank policy rates approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career as an academic economist in finance and was chief economist of the International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed Raghuram G Rajan, who is the current Governor of the Reserve Bank of India, which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this interview, Rajan argues that central banks should avoid unintended consequences on emerging market economies of inflows and outflows of capital triggered by monetary policy. Portfolio reallocations induced by combination of zero interest rates and risk events stimulate carry trades that generate wide swings in world capital flows. Professor Rajan, in an interview with Kartik Goyal of Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of breakdown of global policy coordination. Professor Raguram G Rajan, governor of the Reserve Bank of India, which is India’s central bank, warned about risks in high valuations of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor Rajan demystifies in the interview “competitive easing” by major central banks as equivalent to competitive devaluation.

The Swiss National Bank (SNB) announced on Jan 15, 2015, the termination of its peg of the exchange rate of the Swiss franc to the euro (http://www.snb.ch/en/mmr/speeches/id/ref_20150115_tjn/source/ref_20150115_tjn.en.pdf):

“The Swiss National Bank (SNB) has decided to discontinue the minimum exchange rate of

CHF 1.20 per euro with immediate effect and to cease foreign currency purchases associated with enforcing it.”

The SNB also lowered interest rates to nominal negative percentages (http://www.snb.ch/en/mmr/speeches/id/ref_20150115_tjn/source/ref_20150115_tjn.en.pdf):

“At the same time as discontinuing the minimum exchange rate, the SNB will be lowering the interest rate for balances held on sight deposit accounts to –0.75% from 22 January. The exemption thresholds remain unchanged. Further lowering the interest rate makes Swiss-franc investments considerably less attractive and will mitigate the effects of the decision to discontinue the minimum exchange rate. The target range for the three-month Libor is being lowered by 0.5 percentage points to between –1.25% and –0.25%.”

The Swiss franc rate relative to the euro (CHF/EUR) appreciated 18.7 percent on Jan 15, 2015. The Swiss franc rate relative to the dollar (CHF/USD) appreciated 17.7 percent. Central banks are taking measures in anticipation of the quantitative easing by the European Central Bank.

On Jan 22, 2015, the European Central Bank (ECB) decided to implement an “expanded asset purchase program” with combined asset purchases of €60 billion per month “until at least Sep 2016 (http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html). The objective of the program is that (http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html):

“Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%.”

The President of the ECB, Mario Draghi, explains the coordination of asset purchases with NCBs (National Central Banks) of the euro area and risk sharing (http://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html):

“In March 2015 the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key. Some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme. As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Eurosystem’s monetary policy. The Eurosystem will make use of decentralised implementation to mobilise its resources. With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.”

The President of the ECB, Mario Draghi, rejected the possibility of seigniorage in the new asset purchase program, or central bank financing of fiscal expansion (http://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html):

“As I just said, it would be a big mistake if countries were to consider that the presence of this programme might be an incentive to fiscal expansion. They would undermine the confidence, so it’s not directed to monetary financing at all. Actually, it’s been designed as to avoid any monetary financing.”

The President of the ECB, Mario Draghi, does not find effects of monetary policy in inflating asset prices (http://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html):

“On the first question, we monitor closely any potential instance of risk to financial stability. So we're very alert to that risk. So far we don't see bubbles. There may be some local episodes of certain specific markets where prices are going up fast. But to have a bubble, besides having that, one should also identify, detect an increase, dramatic increase in leverage or in bank credit, and we don't see that now. However, we, as I said, we are alert. If bubbles are of a local nature, they should be addressed by local instruments, namely macro-prudential instruments rather than by monetary policy.”

The DAX index of German equities increased 1.3 percent on Jan 22, 2015 and 2.1 percent on Jan 23, 2015. The euro depreciated from EUR 1.1611/USD (EUR 0.8613/USD) on Wed Jan 21, 2015, to EUR 1.1206/USD (EUR 0.8924/USD) on Fri Jan 23, 2015, or 3.6 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. Risk aversion erodes devaluation of the dollar.

Dan Strumpf and Pedro Nicolaci da Costa, writing on “Fed’s Yellen: Stock Valuations ‘Generally are Quite High,’” on May 6, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-cites-progress-on-bank-regulation-1430918155?tesla=y ), quote Chair Yellen at open conversation with Christine Lagarde, Managing Director of the IMF, finding “equity-market valuations” as “quite high” with “potential dangers” in bond valuations. The DJIA fell 0.5 percent on May 6, 2015, after the comments and then increased 0.5 percent on May 7, 2015 and 1.5 percent on May 8, 2015.

Fri May 1

Mon 4

Tue 5

Wed 6

Thu 7

Fri 8

DJIA

18024.06

-0.3%

1.0%

18070.40

0.3%

17928.20

-0.5%

-0.8%

17841.98

-1.0%

-0.5%

17924.06

-0.6%

0.5%

18191.11

0.9%

1.5%

There are two approaches in theory considered by Bordo (2012Nov20) and Bordo and Lane (2013). The first approach is in the classical works of Milton Friedman and Anna Jacobson Schwartz (1963a, 1987) and Karl Brunner and Allan H. Meltzer (1973). There is a similar approach in Tobin (1969). Friedman and Schwartz (1963a, 66) trace the effects of expansionary monetary policy into increasing initially financial asset prices: “It seems plausible that both nonbank and bank holders of redundant balances will turn first to securities comparable to those they have sold, say, fixed-interest coupon, low-risk obligations. But as they seek to purchase these they will tend to bid up the prices of those issues. Hence they, and also other holders not involved in the initial central bank open-market transactions, will look farther afield: the banks, to their loans; the nonbank holders, to other categories of securities-higher risk fixed-coupon obligations, equities, real property, and so forth.”

The second approach is by the Austrian School arguing that increases in asset prices can become bubbles if monetary policy allows their financing with bank credit. Professor Michael D. Bordo provides clear thought and empirical evidence on the role of “expansionary monetary policy” in inflating asset prices (Bordo2012Nov20, Bordo and Lane 2013). Bordo and Lane (2013) provide revealing narrative of historical episodes of expansionary monetary policy. Bordo and Lane (2013) conclude that policies of depressing interest rates below the target rate or growth of money above the target influences higher asset prices, using a panel of 18 OECD countries from 1920 to 2011. Bordo (2012Nov20) concludes: “that expansionary money is a significant trigger” and “central banks should follow stable monetary policies…based on well understood and credible monetary rules.” Taylor (2007, 2009) explains the housing boom and financial crisis in terms of expansionary monetary policy. Professor Martin Feldstein (2016), at Harvard University, writing on “A Federal Reserve oblivious to its effects on financial markets,” on Jan 13, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/a-federal-reserve-oblivious-to-its-effect-on-financial-markets-1452729166), analyzes how unconventional monetary policy drove values of risk financial assets to high levels. Quantitative easing and zero interest rates distorted calculation of risks with resulting vulnerabilities in financial markets.

Another hurdle of exit from zero interest rates is “competitive easing” that Professor Raghuram Rajan, governor of the Reserve Bank of India, characterizes as disguised “competitive devaluation” (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). The fed has been considering increasing interest rates. The European Central Bank (ECB) announced, on Mar 5, 2015, the beginning on Mar 9, 2015 of its quantitative easing program denominated as Public Sector Purchase Program (PSPP), consisting of “combined monthly purchases of EUR 60 bn [billion] in public and private sector securities” (http://www.ecb.europa.eu/mopo/liq/html/pspp.en.html). Expectation of increasing interest rates in the US together with euro rates close to zero or negative cause revaluation of the dollar (or devaluation of the euro and of most currencies worldwide). US corporations suffer currency translation losses of their foreign transactions and investments (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) while the US becomes less competitive in world trade (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), Government Intervention in Globalization (2008c)). The DJIA fell 1.5 percent on Mar 6, 2015 and the dollar revalued 2.2 percent from Mar 5 to Mar 6, 2015. The euro has devalued 38.9 percent relative to the dollar from the high on Jul 15, 2008 to Apr 29, 2016.

Fri 27 Feb

Mon 3/2

Tue 3/3

Wed 3/4

Thu 3/5

Fri 3/6

USD/ EUR

1.1197

1.6%

0.0%

1.1185

0.1%

1.1176

0.2%

0.1%

1.1081

1.0%

0.9%

1.1030

1.5%

0.5%

1.0843

3.2%

1.7%

Chair Yellen explained the removal of the word “patience” from the advanced guidance at the press conference following the FOMC meeting on Mar 18, 2015 (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150318.pdf):

Exchange rate volatility is increasing in response of “impatience” in financial markets with monetary policy guidance and measures:

Fri Mar 6

Mon 9

Tue 10

Wed 11

Thu 12

Fri 13

USD/ EUR

1.0843

3.2%

1.7%

1.0853

-0.1%

1.0700

1.3%

1.4%

1.0548

2.7%

1.4%

1.0637

1.9%

-0.8%

1.0497

3.2%

1.3%

Fri Mar 13

Mon 16

Tue 17

Wed 18

Thu 19

Fri 20

USD/ EUR

1.0497

3.2%

1.3%

1.0570

-0.7%

1.0598

-1.0%

-0.3%

1.0864

-3.5%

-2.5%

1.0661

-1.6%

1.9%

1.0821

-3.1%

-1.5%

Fri Apr 24

Mon 27

Tue 28

Wed 29

Thu 30

May Fri 1

USD/ EUR

1.0874

-0.6%

-0.4%

1.0891

-0.2%

1.0983

-1.0%

-0.8%

1.1130

-2.4%

-1.3%

1.1223

-3.2%

-0.8%

1.1199

-3.0%

0.2%

In a speech at Brown University on May 22, 2015, Chair Yellen stated (http://www.federalreserve.gov/newsevents/speech/yellen20150522a.htm):

“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain.”

The US dollar appreciated 3.8 percent relative to the euro in the week of May 22, 2015:

Fri May 15

Mon 18

Tue 19

Wed 20

Thu 21

Fri 22

USD/ EUR

1.1449

-2.2%

-0.3%

1.1317

1.2%

1.1150

2.6%

1.5%

1.1096

3.1%

0.5%

1.1113

2.9%

-0.2%

1.1015

3.8%

0.9%

The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, warned on Jun 4, 2015, that: (http://blog-imfdirect.imf.org/2015/06/04/u-s-economy-returning-to-growth-but-pockets-of-vulnerability/):

“The Fed’s first rate increase in almost 9 years is being carefully prepared and telegraphed. Nevertheless, regardless of the timing, higher US policy rates could still result in significant market volatility with financial stability consequences that go well beyond US borders. I weighing these risks, we think there is a case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident. Even after the first rate increase, a gradual rise in the federal fund rates will likely be appropriate.”

The President of the European Central Bank (ECB), Mario Draghi, warned on Jun 3, 2015 that (http://www.ecb.europa.eu/press/pressconf/2015/html/is150603.en.html):

“But certainly one lesson is that we should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility…the Governing Council was unanimous in its assessment that we should look through these developments and maintain a steady monetary policy stance.”

The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time. The projections of most of my FOMC colleagues indicate that they have similar expectations for the likely path of the federal funds rate. But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

There is essentially the same view in the Testimony of Chair Yellen in delivering the Semiannual Monetary Policy Report to the Congress on Jul 15, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20150715a.htm).

At the press conference after the meeting of the FOMC on Sep 17, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150917.pdf 4):

“The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets. Developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads, have tightened overall financial conditions to some extent. These developments may restrain U.S. economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.”

Some equity markets fell on Fri Sep 18, 2015:

Fri Sep 11

Mon 14

Tue 15

Wed 16

Thu 17

Fri 18

DJIA

16433.09

2.1%

0.6%

16370.96

-0.4%

16599.85

1.0%

1.4%

16739.95

1.9%

0.8%

16674.74

1.5%

-0.4%

16384.58

-0.3%

-1.7%

Nikkei 225

18264.22

2.7%

-0.2%

17965.70

-1.6%

18026.48

-1.3%

0.3%

18171.60

-0.5%

0.8%

18432.27

0.9%

1.4%

18070.21

-1.1%

-2.0%

DAX

10123.56

0.9%

-0.9%

10131.74

0.1%

10188.13

0.6%

10227.21

1.0%

0.4%

10229.58

1.0%

0.0%

9916.16

-2.0%

-3.1%

Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. Chair Yellen, in a lecture on “Inflation dynamics and monetary policy,” on Sep 24, 2015 (http://www.federalreserve.gov/newsevents/speech/yellen20150924a.htm), states that (emphasis added):

· “The economic outlook, of course, is highly uncertain”

· “Considerable uncertainties also surround the outlook for economic activity”

· “Given the highly uncertain nature of the outlook…”

Is there a “science” or even “art” of central banking under this extreme uncertainty in which policy does not generate higher volatility of money, income, prices and values of financial assets?

Lingling Wei, writing on Oct 23, 2015, on China’s central bank moves to spur economic growth,” published in the Wall Street Journal (http://www.wsj.com/articles/chinas-central-bank-cuts-rates-1445601495), analyzes the reduction by the People’s Bank of China (http://www.pbc.gov.cn/ http://www.pbc.gov.cn/english/130437/index.html) of borrowing and lending rates of banks by 50 basis points and reserve requirements of banks by 50 basis points. Paul Vigna, writing on Oct 23, 2015, on “Stocks rally out of correction territory on latest central bank boost,” published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2015/10/23/stocks-rally-out-of-correction-territory-on-latest-central-bank-boost/), analyzes the rally in financial markets following the statement on Oct 22, 2015, by the President of the European Central Bank (ECB) Mario Draghi of consideration of new quantitative measures in Dec 2015 (https://www.youtube.com/watch?v=0814riKW25k&rel=0) and the reduction of bank lending/deposit rates and reserve requirements of banks by the People’s Bank of China on Oct 23, 2015. The dollar revalued 2.8 percent from Oct 21 to Oct 23, 2015, following the intended easing of the European Central Bank. The DJIA rose 2.8 percent from Oct 21 to Oct 23 and the DAX index of German equities rose 5.4 percent from Oct 21 to Oct 23, 2015.

Fri Oct 16

Mon 19

Tue 20

Wed 21

Thu 22

Fri 23

USD/ EUR

1.1350

0.1%

0.3%

1.1327

0.2%

1.1348

0.0%

-0.2%

1.1340

0.1%

1.1110

2.1%

2.0%

1.1018

2.9%

0.8%

DJIA

17215.97

0.8%

0.4%

17230.54

0.1%

17217.11

0.0%

-0.1%

17168.61

-0.3%

17489.16

1.6%

1.9%

17646.70

2.5%

0.9%

Dow Global

2421.58

0.3%

0.6%

2414.33

-0.3%

2411.03

-0.4%

-0.1%

2411.27

-0.4%

0.0%

2434.79

0.5%

1.0%

2458.13

1.5%

1.0%

DJ Asia Pacific

1402.31

1.1%

0.3%

1398.80

-0.3%

1395.06

-0.5%

-0.3%

1402.68

0.0%

0.5%

1396.03

-0.4%

-0.5%

1415.50

0.9%

1.4%

Nikkei 225

18291.80

-0.8%

1.1%

18131.23

-0.9%

18207.15

-0.5%

0.4%

18554.28

1.4%

1.9%

18435.87

0.8%

-0.6%

18825.30

2.9%

2.1%

Shanghai

3391.35

6.5%

1.6%

3386.70

-0.1%

3425.33

1.0%

1.1%

3320.68

-2.1%

-3.1%

3368.74

-0.7%

1.4%

3412.43

0.6%

1.3%

DAX

10104.43

0.1%

0.4%

10164.31

0.6%

10147.68

0.4%

-0.2%

10238.10

1.3%

0.9%

10491.97

3.8%

2.5%

10794.54

6.8%

2.9%

Ben Leubsdorf, writing on “Fed’s Yellen: December is “Live Possibility” for First Rate Increase,” on Nov 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-december-is-live-possibility-for-first-rate-increase-1446654282) quotes Chair Yellen that a rate increase in “December would be a live possibility.” The remark of Chair Yellen was during a hearing on supervision and regulation before the Committee on Financial Services, US House of Representatives (http://www.federalreserve.gov/newsevents/testimony/yellen20151104a.htm) and a day before the release of the employment situation report for Oct 2015 (Section I). The dollar revalued 2.4 percent during the week. The euro has devalued 38.9 percent relative to the dollar from the high on Jul 15, 2008 to Apr 29, 2016.

Fri Oct 30

Mon 2

Tue 3

Wed 4

Thu 5

Fri 6

USD/ EUR

1.1007

0.1%

-0.3%

1.1016

-0.1%

1.0965

0.4%

0.5%

1.0867

1.3%

0.9%

1.0884

1.1%

-0.2%

1.0742

2.4%

1.3%

The release on Nov 18, 2015 of the minutes of the FOMC (Federal Open Market Committee) meeting held on Oct 28, 2015 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20151028.htm) states:

“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions [for interest rate increase] could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period… It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow.”

Markets could have interpreted a symbolic increase in the fed funds rate at the meeting of the FOMC on Dec 15-16, 2015 (http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm) followed by “shallow” increases, explaining the sharp increase in stock market values and appreciation of the dollar after the release of the minutes on Nov 18, 2015:

Fri Nov 13

Mon 16

Tue 17

Wed 18

Thu 19

Fri 20

USD/ EUR

1.0774

-0.3%

0.4%

1.0686

0.8%

1.0644

1.2%

0.4%

1.0660

1.1%

-0.2%

1.0735

0.4%

-0.7%

1.0647

1.2%

0.8%

DJIA

17245.24

-3.7%

-1.2%

17483.01

1.4%

17489.50

1.4%

0.0%

17737.16

2.9%

1.4%

17732.75

2.8%

0.0%

17823.81

3.4%

0.5%

DAX

10708.40

-2.5%

-0.7%

10713.23

0.0%

10971.04

2.5%

2.4%

10959.95

2.3%

-0.1%

11085.44

3.5%

1.1%

11119.83

3.8%

0.3%

In testimony before The Joint Economic Committee of Congress on Dec 3, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20151203a.htm), Chair Yellen reiterated that the FOMC (Federal Open Market Committee) “anticipates that even after employment and inflation are near mandate-consistent levels, economic condition may, for some time, warrant keeping the target federal funds rate below the Committee views as normal in the longer run.” Todd Buell and Katy Burne, writing on “Draghi says ECB could step up stimulus efforts if necessary,” on Dec 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/draghi-says-ecb-could-step-up-stimulus-efforts-if-necessary-1449252934), analyze that the President of the European Central Bank (ECB), Mario Draghi, reassured financial markets that the ECB will increase stimulus if required to raise inflation the euro area to targets. The USD depreciated 3.1 percent on Thu Dec 3, 2015 after weaker than expected measures by the European Central Bank. DJIA fell 1.4 percent on Dec 3 and increased 2.1 percent on Dec 4. DAX fell 3.6 percent on Dec 3.

Fri Nov 27

Mon 30

Tue 1

Wed 2

Thu 3

Fri 4

USD/ EUR

1.0594

0.5%

0.2%

1.0565

0.3%

1.0634

-0.4%

-0.7%

1.0616

-0.2%

0.2%

1.0941

-3.3%

-3.1%

1.0885

-2.7%

0.5%

DJIA

17798.49

-0.1%

17719.92

-0.4%

17888.35

0.5%

1.0%

17729.68

-0.4%

-0.9%

17477.67

-1.8%

-1.4%

17847.63

0.3%

2.1%

DAX

11293.76

1.6%

-0.2%

11382.23

0.8%

11261.24

-0.3%

-1.1%

11190.02

-0.9%

-0.6%

10789.24

-4.5%

-3.6%

10752.10

-4.8%

-0.3%

At the press conference following the meeting of the FOMC on Dec 16, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20151216.pdf page 8):

“And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent, and as we've emphasized, gradual manner. It's been a long time since the Federal Reserve has raised interest rates, and I think it's prudent to be able to watch what the impact is on financial conditions and spending in the economy and moving in a timely fashion enables us to do this.”

The implication of this statement is that the state of the art is not accurate in analyzing the effects of monetary policy on financial markets and economic activity. The US dollar appreciated and equities fluctuated:

Fri Dec 11

Mon 14

Tue 15

Wed 16

Thu 17

Fri 18

USD/ EUR

1.0991

-1.0%

-0.4%

1.0993

0.0%

1.0932

0.5%

0.6%

1.0913

0.7%

0.2%

1.0827

1.5%

0.8%

1.0868

1.1%

-0.4%

DJIA

17265.21

-3.3%

-1.8%

17368.50

0.6%

17524.91

1.5%

0.9%

17749.09

2.8%

1.3%

17495.84

1.3%

-1.4%

17128.55

-0.8%

-2.1%

DAX

10340.06

-3.8%

-2.4%

10139.34

-1.9%

10450.38

-1.1%

3.1%

10469.26

1.2%

0.2%

10738.12

3.8%

2.6%

10608.19

2.6%

-1.2%

On January 29, 2016, the Policy Board of the Bank of Japan introduced a new policy to attain the “price stability target of 2 percent at the earliest possible time” (https://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf). The new framework consists of three dimensions: quantity, quality and interest rate. The interest rate dimension consists of rates paid to current accounts that financial institutions hold at the Bank of Japan of three tiers zero, positive and minus 0.1 percent. The quantitative dimension consists of increasing the monetary base at the annual rate of 80 trillion yen. The qualitative dimension consists of purchases by the Bank of Japan of Japanese government bonds (JGBs), exchange traded funds (ETFs) and Japan real estate investment trusts (J-REITS). The yen devalued sharply relative to the dollar and world equity markets soared after the new policy announced on Jan 29, 2016:

Fri 22

Mon 25

Tue 26

Wed 27

Thu 28

Fri 29

JPY/ USD

118.77

-1.5%

-0.9%

118.30

0.4%

118.42

0.3%

-0.1%

118.68

0.1%

-0.2%

118.82

0.0%

-0.1%

121.13

-2.0%

-1.9%

DJIA

16093.51

0.7%

1.3%

15885.22

-1.3%

16167.23

0.5%

1.8%

15944.46

-0.9%

-1.4%

16069.64

-0.1%

0.8%

16466.30

2.3%

2.5%

Nikkei

16958.53

-1.1%

5.9%

17110.91

0.9%

16708.90

-1.5%

-2.3%

17163.92

1.2%

2.7%

17041.45

0.5%

-0.7%

17518.30

3.3%

2.8%

Shanghai

2916.56

0.5%

1.3

2938.51

0.8%

2749.79

-5.7%

-6.4%

2735.56

-6.2%

-0.5%

2655.66

-8.9%

-2.9%

2737.60

-6.1%

3.1%

DAX

9764.88

2.3%

2.0%

9736.15

-0.3%

9822.75

0.6%

0.9%

9880.82

1.2%

0.6%

9639.59

-1.3%

-2.4%

9798.11

0.3%

1.6%

In testimony on the Semiannual Monetary Policy Report to the Congress on Feb 10-11, 2016, Chair Yellen (http://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm) states: “U.S. real gross domestic product is estimated to have increased about 1-3/4 percent in 2015. Over the course of the year, subdued foreign growth and the appreciation of the dollar restrained net exports. In the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of just 3/4 percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment.”

Jon Hilsenrath, writing on “Yellen Says Fed Should Be Prepared to Use Negative Rates if Needed,” on Feb 11, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/yellen-reiterates-concerns-about-risks-to-economy-in-senate-testimony-1455203865), analyzes the statement of Chair Yellen in Congress that the FOMC (Federal Open Market Committee) is considering negative interest rates on bank reserves. The Wall Street Journal provides yields of two and ten-year sovereign bonds with negative interest rates on shorter maturities where central banks pay negative interest rates on excess bank reserves:

Sovereign Yields 2/12/16	Japan	Germany	USA
2 Year	-0.168	-0.498	0.694
10 Year	0.076	0.262	1.744

On Mar 10, 2016, the European Central Bank (ECB) announced (1) reduction of the refinancing rate by 5 basis points to 0.00 percent; decrease the marginal lending rate to 0.25 percent; reduction of the deposit facility rate to 0,40 percent; increase of the monthly purchase of assets to €80 billion; include nonbank corporate bonds in assets eligible for purchases; and new long-term refinancing operations (https://www.ecb.europa.eu/press/pr/date/2016/html/pr160310.en.html). The President of the ECB, Mario Draghi, stated in the press conference (https://www.ecb.europa.eu/press/pressconf/2016/html/is160310.en.html): “How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases…We don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.”

The dollar devalued relative to the euro and open stock markets traded lower after the announcement on Mar 10, 2016, but stocks rebounded on Mar 11:

Fri 4

Mon 7

Tue 8

Wed 9

Thu10

Fri 11

USD/ EUR

1.1006

-0.7%

-0.4%

1.1012

-0.1%

1.1013

-0.1%

0.0%

1.0999

0.1%

1.1182

-1.6%

-1.7%

1.1151

-1.3%

0.3%

DJIA

17006.77

2.2%

0.4%

17073.95

0.4%

16964.10

-0.3%

-0.6%

17000.36

0.0%

0.2%

16995.13

-0.1%

0.0%

17213.31

1.2%

1.3%

DAX

9824.17

3.3%

0.7%

9778.93

-0.5%

0.5%

9692.82

-1.3%

-0.9%

9723.09

-1.0%

0.3%

9498.15

-3.3%

-2.3%

9831.13

0.1%

3.5%

Professor Ronald I. McKinnon (2013Oct27), writing on “Tapering without tears—how to end QE3,” on Oct 27, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304799404579153693500945608?KEYWORDS=Ronald+I+McKinnon), finds that the major central banks of the world have fallen into a “near-zero-interest-rate trap.” World economic conditions are weak such that exit from the zero interest rate trap could have adverse effects on production, investment and employment. The maintenance of interest rates near zero creates long-term near stagnation. The proposal of Professor McKinnon is credible, coordinated increase of policy interest rates toward 2 percent. Professor John B. Taylor at Stanford University, writing on “Economic failures cause political polarization,” on Oct 28, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303442004579121010753999086?KEYWORDS=John+B+Taylor), analyzes that excessive risks induced by near zero interest rates in 2003-2004 caused the financial crash. Monetary policy continued in similar paths during and after the global recession with resulting political polarization worldwide.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Dec 16, 2015. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IQ2016 is analyzed in Section I (Section I and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-monetary.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/twenty-five-million-unemployed-or.html). The Bureau of Economic Analysis provides the estimate of IQ2016 GDP (Section I and earlier http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in Section IV (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-monetary.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/twenty-five-million-unemployed-or.html). The report on “Personal Income and Outlays” was released on Mar 28, 2016 (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-monetary.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/twenty-five-million-unemployed-or.html). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for Mar was released on Apr 1, 2016 (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-monetary.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/twenty-five-million-unemployed-or.html). “The longer-run projections are the rates of growth, unemployment, and inflation to which a policymaker expects the economy to converge over time—maybe in five or six years—in the absence of further shocks and under appropriate monetary policy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20131218.pdf).

It is instructive to focus on 2016 and 2017 because 2018 and longer term are too far away. There is not much information even on what will happen in 2016-2017 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Mar 16, 2016 and the second row “PR” the projection of the Dec 16, 2015 meeting. The projections for 2014 are those released in the Sep 2014 and Dec 2014 meetings. There are three changes in the view.

1. Growth “∆% GDP.” The FOMC decreases the forecast of GDP growth in 2016. The FOMC projects GDP growth in 2016 from 2.3 to 2.5 percent at the meeting in Dec 2015, decreasing to 2.1 to 2.3 percent at the meeting in Mar 2016. The FOMC projects GDP growth in 2017 at 2.0 to 2.3 percent in the Dec 2015 meeting and 2.0 to 2.3 percent in the Mar 16, 2016, meeting.

2. Rate of Unemployment “UNEM%.” The FOMC did not change the forecast of the rate of unemployment for 2016 from 4.6 to 4.8 percent at the meeting on Dec 16, 2015 to 4.6 to 4.8 percent at the meeting on Mar 16, 2016. The projection for 2016 increased to the range of 4.5 to 4.9 percent in Mar 2016 from 4.3 to 4.9 in Dec 2015. Projections of the rate of unemployment are moving closer to around 5 percent or lower with 4.5 to 5.0 percent in 2018 after the meeting on Mar 16, 2016.

3. Inflation “∆% PCE Inflation.” The FOMC lowered the forecast prices of personal consumption expenditures (PCE) inflation for 2016 to 1.0 to 1.6 percent at the meeting on Mar 16, 2016. There are no projections exceeding 2.0 percent in the central tendency. The longer run projection is at 2.0 percent.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is similar mild inflation in the projection for 2016 to 1.4 to 1.7 at the meeting on Mar 16, 2016. In 2017, there is no change in the projection from 1.7 to 2.0 percent at the meeting on Dec 16, 2015 to 1.7 to 2.0 percent on Mar 16, 2015. The rate of change of the core PCE is below 2.0 percent in the central tendency with 2.1 percent at the top of the range in 2016.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Dec 16, 2015 and Mar 16, 2016

∆% GDP

UNEM %

∆% PCE Inflation

∆% Core PCE Inflation

Central
Tendency

2014
Sep PR

2.3 to 2.4
2.0 to 2.2

5.8
5.9 to 6.0

1.2 to 1.3
1.5 to 1.7

1.5 to 1.6
1.5 to 1.6

2015

Sep PR

2.1

2.0 to 2.3

5.0

5.0 to 5.1

0.4

0.3 to 0.5

1.3

1.3 to 1.4

2016

Dec PR

2.1 to 2.3

2.3 to 2.5

4.6 to 4.8

1.0 to 1.6

1.2 to 1.7

1.4 to 1.7

1.5 to 1.7

2017

Dec PR

2.0 to 2.3

4.5 to 4.7

4.6 to 4.8

1.7 to 2.0

1.8 to 2.0

1.7 to 2.0

2018

Dec PR

1.8 to 2.1

1.8 to 2.2

4.5 to 5.0

4.6 to 5.0

1.9 to 2.0

Longer Run

Dec PR

1.8 to 2.1

1.8 to 2.2

4.7 to 5.0

4.8 to 5.0

2.0

Range

2014
Sep PR

NA
1.8 to 2.3

5.7 to 5.8
5.7 to 6.1

1.2 to 1.6
1.5 to 1.8

1.5 to 1.6
1.5 to 1.8

2015

Sep PR

2.0 to 2.2

1.9 to 2.5

5.0

4.9 to 5.2

0.3 to 0.5

0.3 to 1.0

1.2 to 1.4

1.2 to 1.7

2016

Dec PR

1.9 to 2.5

2.0 to 2.7

4.5 to 4.9

4.3 to 4.9

1.0 to 1.6

1.2 to 2.1

1.4 to 2.1

2017

Dec PR

1.7 to 2.3

1.8 to 2.5

4.3 to 4.9

4.5 to 5.0

1.6 to 2.0

1.7 to 2.0

1.6 to 2.0

2018

Dec PR

1.8 to 2.3

1.7 to 2.4

4.3 to 5.0

4.5 to 5.3

1.8 to 2.0

1.7 to 2.1

1.8 to 2.0

1.7 to 2.1

Longer Run

Dec PR

1.8 to 2.4

1.8 to 2.3

4.7 to 5.8

2.0

Notes: UEM: unemployment; PR: Projection

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.pdf

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150318.pdf

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150617.pdf

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150917.pdf

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20151216.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20160316.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2016, 2017, 2018 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20160316.pdf). This table is consistent with the guidance statement of the FOMC that rates will remain at low levels. For 2016, 10 participants expect the rate between 0.5 and 1 percent and 7 participants between 1 and 1.5 percent. In the long term, all 17 participants expect the fed funds rate in the range of 3.0 to 4.0 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board

Members and Federal Reserve Bank Presidents Participating in FOMC, Mar 16, 2015

Source: Board of Governors of the Federal Reserve System, FOMC

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20160316.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2015 to 2017. It is evident from Table IV-4 that the prevailing view of the FOMC is for interest rates to continue at low levels until 2015 but with some increase. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2. The FOMC states that rates will continue to be low even after return of the economy to potential growth.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, Sep 17, 2015

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2015	13
2016	3
2017	1

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150917.pdf

Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table IV-5A provides the consumer price index of Japan, with inflation of minus 0.1 percent in 12 months ending in Mar 2016 and increase of 0.1 percent NSA (not-seasonally-adjusted) in Mar 2016. The increase of the tax on value added of consumption on Apr 1, 2014, was the driver of CPI inflation in Japan in Apr-May 2014. Inflation of consumer prices in the first three months of 2013 annualizes at 0.4 percent NSA. Inflation in Mar-Dec 2013 not seasonally adjusted annualizes at 1.9 percent. There are negative percentage changes in most of the 12-month rates in 2011 with the exception of Jul and Aug both with 0.2 percent and stability in Sep. All 12-month rates of inflation in the first five months of 2013 are negative. Inflation in the 12 months ending in Jun 2013 was 0.2 percent and 0.7 percent in the 12 months ending in Jul 2013. Inflation increased to 0.9 percent in the 12 months ending in Aug 2013 and 1.1 percent in the 12 months ending in Sep 2013. Inflation was 1.1 percent in the 12 months ending in Oct 2013 and 1.5 percent in the 12 months ending in Nov 2013. Inflation was 1.6 percent in the 12 months ending in Dec 2013 and 1.4 percent in the 12 months ending in Jan 2014. Inflation was 1.5 percent in the 12 months ending in Feb 2014 and 1.6 percent in the 12 months ending in Mar 2014. Inflation was 3.4 percent in the 12 months ending in Apr 2014 and 3.7 percent in the 12 months ending in May 2014, mostly because of the increase in the sales tax. Inflation in 12 months ending in Mar 2015 was 2.3 percent, decreasing to 0.6 percent in the 12 months ending in Apr 2015 and minus 0.1 percent in the 12 months ending in Mar 2016. There are ten years of deflation, three of zero inflation and only eight of inflation in the annual rate of inflation from 1995 to 2015. This experience is entirely different from that of the US that shows long-term inflation. There is only one annual negative change of the CPI all items of the US in Table IV-5A, minus 0.4 percent in 2009 but following 3.8 percent in 2008 because of carry trades from policy rates moving to zero in 2008 during a global contraction that were reversed because of risk aversion in late 2008 and early 2009, causing decreasing commodity prices. Inflation is currently low in the US and worldwide primarily because of the collapse of commodity prices in reversal of carry trades induced by zero interest rates. Both the US and Japan experienced high rates of inflation during the US Great Inflation of the 1970s (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan. Fear of deflation as had occurred during the Great Depression and in Japan was used as an argument for the first round of unconventional monetary policy with 1 percent interest rates from Jun 2003 to Jun 2004. The 1 percent interest rate combined with quantitative easing in the form of withdrawal of supply of 30-year securities by suspension of the auction of 30-year Treasury bonds with the intention of reducing mortgage rates. For fear of deflation, see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.htm

Table IV-5A, Japan, Consumer Price Index, All Items ∆%

	∆% Month NSA	∆% 12-Month NSA
Mar 2016	0.1	-0.1
Feb	0.1	0.3
Jan	-0.4	0.0
Dec 2015	-0.1	0.2
Nov	-0.3	0.3
Oct	-0.1	0.3
Sep	0.1	0.0
Aug	0.2	0.2
Jul	-0.1	0.2
Jun	-0.2	0.4
May	0.3	0.5
Apr	0.4	0.6
Mar	0.4	2.3
Feb	-0.2	2.2
Jan	-0.2	2.4
Dec 2014	0.1	2.4
Nov	-0.4	2.4
Oct	-0.3	2.9
Sep	0.2	3.2
Aug	0.2	3.3
Jul	0.0	3.4
Jun	-0.1	3.6
May	0.4	3.7
Apr	2.1	3.4
Mar	0.3	1.6
Feb	0.0	1.5
Jan	-0.2	1.4
Dec 2013	0.1	1.6
Nov	0.0	1.5
Oct	0.1	1.1
Sep	0.3	1.1
Aug	0.3	0.9
Jul	0.2	0.7
Jun	0.0	0.2
May	0.1	-0.3
Apr	0.3	-0.7
Mar	0.2	-0.9
Feb	-0.2	-0.7
Jan	0.1	-0.3
Dec 2012	0.0	-0.1
Nov	-0.4	-0.2
Oct	0.0	-0.4
Sep	0.1	-0.3
Aug	0.1	-0.4
Jul	-0.3	-0.4
Jun	-0.5	-0.2
May	-0.3	0.2
Apr	0.1	0.4
Mar	0.5	0.5
Feb	0.2	0.3
Jan	0.2	0.1
Dec 2011	0.0	-0.2
Nov	-0.6	-0.5
Oct	0.1	-0.2
Sep	0.0	0.0
Aug	0.1	0.2
Jul	0.0	0.2
Jun	-0.2	-0.4
May	0.0	-0.4
Apr	0.1	-0.4
Mar	0.3	-0.5
Feb	0.0	-0.5
Jan	-0.1	-0.6
Dec 2010	–0.3	0.0
	CPI All Items USA	CPI All Items Japan
Annual
2015	0.1	0.8
2014	1.6	2.7
2013	1.5	0.4
2012	2.1	0.0
2011	3.2	-0.3
2010	1.6	-0.7
2009	-0.4	-1.4
2008	3.8	1.4
2007	2.8	0.0
2006	3.2	0.3
2005	3.4	-0.3
2004	2.7	0.0
2003	2.3	-0.3
2002	1.6	-0.9
2001	2.8	-0.7
2000	3.4	-0.7
1999	2.2	-0.3
1998	1.6	0.6
1997	2.3	1.8
1996	3.0	0.1
1995	2.8	-0.1
1994	2.6	0.7
1993	3.0	1.3
1992	3.0	1.6
1991	4.2	3.3
1990	5.4	3.1
1989	4.8	2.3
1988	4.1	0.7
1987	3.6	0.1
1986	1.9	0.6
1985	3.6	2.0
1984	4.3	2.3
1983	3.2	1.9
1982	6.2	2.8
1981	10.3	4.9
1980	13.5	7.7
1979	11.3	3.7
1978	7.6	4.2
1977	6.5	8.1
1976	5.8	9.4
1975	9.1	11.7
1974	11.0	23.2
1973	6.2	11.7
1972	3.2	4.9
1971	4.4	6.3

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

Annual percentage changes of the CPI of Japan and individual segments are in Table IV-5B. The CPI of all items increased 0.8 percent and 0.5 percent excluding fresh food. The CPI excluding food, alcoholic beverages and energy increased 1.0 percent. The CPI of fuel, light and water charges decreased 2.6 percent.

Table IV-5B, Japan, Consumer Price Index, ∆%

Annual 2015	Year ∆%
CPI All Items	0.8
CPI Excluding Fresh Food	0.5
CPI Excluding Food, Alcoholic Beverages and Energy	1.0
CPI Goods	0.8
CPI Services	0.8
CPI Excluding Imputed Rent	1.0
CPI Fuel, Light, Water Charges	-2.6
CPI Transport & Communications	-1.9

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

Chart IV-1A of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the major consumer price indexes of Japan on an annual basis. There is inflexion of the trend of decline of the index of all items and the index of all items excluding fresh food in 2013 and 2014 with increases into 2015.

Chart IV-1A, Japan, Consumer Price Index All Items, Consumer Price Index All Items Less Fresh Food and Consumer Price Index All Items Less Food, Alcoholic Beverages and Energy, Annual, 2001-2015

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

Chart IV-2A of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides annual percentage changes of the consumer price index all items, excluding fresh food and excluding food, alcoholic beverages and energy. The indexes of all items and excluding fresh food increased in 2014 and 2015.

Chart IV-2A, Japan, Japan, Consumer Price Index, Percentage Changes Relative to Prior Year, 2001-2015

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

Japan’s Statistics Bureau of the Ministry of Internal Affairs and Communications provides the consumer price index for all items and regions of Japan monthly from 1971 to 2013 with 2010=100, shown in Chart IV-3A. There was inflation in Japan during the 1970s and 1980s similar to other countries and regions. The index shows stability after the 1990s with sporadic cases of deflation. Slower growth with sporadic inflation has been characterized as a “lost decade” in Japan (see Pelaez and Pelaez, The Global Recession Risk (2007), 82-115).

Chart IV-3A, Japan, Consumer Price Index All Items, All Japan, Index 2010=100, Monthly, 1970-2013

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

Chart IV-4A of the US Bureau of Labor Statistics provides the US consumer price index NSA from 1916 to 2016. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart IV-4A, US, Consumer Price Index, All Items, NSA, 1917-2016

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/

Chart IV-5A of the Statistics Bureau of the Ministry of Internal Affairs and Communications of Japan provides 12-month percentage changes of the consumer price index for all items and regions of Japan monthly from 1971 to 2013. Japan experienced the same inflation waves of the United States during the Great Inflation of the 1970s followed by similar low inflation after the inflation-control increase of interest rates in the early 1980s. Numerous cases of negative inflation or deflation are observed after the 1990s.

Chart IV-5A, Japan, CPI All Items, All Japan, 12-Month ∆%, 1971-2013

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

Chart IV-6A of the US Bureau of Labor Statistics provides 12-month percentage changes of the US consumer price index from 1916 to 2016. There are actually three waves of inflation in the second half of the 1960s, in the mid-1970s and again in the late 1970s. Table IV-5A provides similar inflation waves in the economy of Japan with 11.7 percent in 1973, 23.2 percent in 1974 and 11.7 percent in 1975. The Great Inflation of the 1970s is analyzed in various comments of this blog (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and in Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). Inflation rates then stabilized in the US in a range with only two episodes above 5 percent. There are isolated cases of deflation concentrated over extended periods only during the 1930s. There is no case in United States economic history for unconventional monetary policy because of fear of deflation. There are cases of long-term deflation without lost decades or depressions.

Delfim Netto (1958) partly reprinted in Pelaez (1973) conducted two classical nonparametric tests (Mann 1945, Wallis and Moore 1941; see Kendall and Stuart 1968) with coffee-price data in the period of free markets from 1857 to 1906 with the following conclusions (Pelaez, 1976a, 280):

“First, the null hypothesis of no trend was accepted with high confidence; secondly, the null hypothesis of no oscillation was rejected also with high confidence. Consequently, in the nineteenth century international prices of coffee fluctuated but without long-run trend. This statistical fact refutes the extreme argument of structural weakness of the coffee trade.”

The conventional theory that the terms of trade of Brazil deteriorated over the long term is without reality (Pelaez 1976a, 280-281):

“Moreover, physical exports of coffee by Brazil increased at the high average rate of 3.5 per cent per year. Brazil's exchange receipts from coffee-exporting in sterling increased at the average rate of 3.5 per cent per year and receipts in domestic currency at 4.5 per cent per year. Great Britain supplied nearly all the imports of the coffee economy. In the period of the free coffee market, British export prices declined at the rate of 0.5 per cent per year. Thus, the income terms of trade of the coffee economy improved at the relatively satisfactory average rate of 4.0 per cent per year. This is only a lower bound of the rate of improvement of the terms of trade. While the quality of coffee remained relatively constant, the quality of manufactured products improved significantly during the fifty-year period considered. The trade data and the non-parametric tests refute conclusively the long-run hypothesis. The valid historical fact is that the tropical export economy of Brazil experienced an opportunity of absorbing rapidly increasing quantities of manufactures from the "workshop" countries. Therefore, the coffee trade constituted a golden opportunity for modernization in nineteenth-century Brazil.”

Imlah (1958) provides decline of British export prices at 0.5 percent in the nineteenth century and there were no lost decades, depressions or unconventional monetary policies in the highly dynamic economy of England that provided the world’s growth impulse. The experience of the United Kingdom with deflation and economic growth is relevant and rich. Yearly percentage changes of the composite index of prices of the United Kingdom of O’Donoghue and Goulding (2004) provide strong evidence. There are 73 declines of inflation in the 145 years from 1751 to 1896. Prices declined in 50.3 percent of 145 years. Some price declines were quite sharp and many occurred over several years. O’Donoghue and Goulding (2004) also provide inflation data for the UK from 1929 to 1934. Deflation was much sharper in continuous years in earlier periods than during the Great Depression. The United Kingdom could not have led the world in modern economic growth if there were meaningful causality from deflation to depression.

Chart IV-6A, US, Consumer Price Index, All Items, NSA, 12-Month Percentage Change 1916-2016

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/

Chart IV-7A provides the US consumer price index excluding food and energy from 1957 (when it first becomes available) to 2016. There is long-term inflation in the US without episodes of deflation that would justify symmetric inflation targets to increase inflation from low levels.

Chart IV-7A, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2016

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/

Chart IV-8A provides 12-month percentage changes of the consumer price index excluding food and energy from 1958 (when it first becomes available) to 2016. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.

Chart IV-8A, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2016

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/

More detail on the consumer price index of Japan in Mar 2016 is in Table IV-6A. Items rich in commodities, such as minus 8.5 percent in fuel, light and water charges in 12 months with decrease of 0.7 percent in the month, have driven inflation in the 12 months ending in Mar 2016. There were effects of the increase in the tax on the value added of consumption throughout most segments. Fiscal and monetary policies promoting devaluation of the yen are influencing inflation in Japan. There is similar behavior in the preliminary estimate for Apr 2016 in the Ku Area of Tokyo with decrease of 1.3 percent of fuel, light and water charges and decrease of 13.0 percent in 12 months. There is 12-month decrease of 3.0 percent of CPI transport and communications. The CPI excluding fresh food, which is the inflation indicator of the Bank of Japan, decreased 0.3 percent in the 12 months ending in Mar 2016. There is mild inflation in the CPI excluding food, alcoholic beverages and energy with 0.7 percent in the 12 months ending in in Mar 2016 and increase of 0.3 percent in Mar 2016. The CPI excluding imputed rent increased 0.1 percent in Mar 2016 and changed 0.0 percent in 12 months. The all-items CPI estimate for Apr 2016 of the Ku-Area of Tokyo shows change of 0.0 percent in Apr 2016 and decrease of 0.4 percent in 12 months.

Table IV-6A, Japan, Consumer Price Index, ∆%

2015	Mar 2016/Feb 2016 ∆%	Year ∆%
CPI All Items	0.1	-0.1
CPI Excluding Fresh Food	0.1	-0.3
CPI Excluding Food, Alcoholic Beverages and Energy	0.3	0.7
CPI Goods	0.0	-0.5
CPI Services	0.1	0.4
CPI Excluding Imputed Rent	0.1	0.0
CPI Fuel, Light, Water Charges	-0.7	-8.5
CPI Transport & Communications	-0.1	-3.0
Ku-Area Tokyo	Apr 2016/Mar 2016 ∆%	Year ∆%
CPI Ku-Area Tokyo All Items	0.0	-0.4
All Items less Fresh Food	0.1	-0.3
CPI Excluding Food, Alcoholic Beverages and Energy	0.3	0.6
Fuel, Light, Water Charges Ku Area Tokyo	-1.3	-13.0

Note: Ku-area Tokyo CPI data preliminary for Mar 2016

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/cpi/index.htm

There are waves of inflation of producer prices in France as everywhere in the world economy (http://cmpassocregulationblog.blogspot.com/2016/04/contracting-united-states-industrial.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/monetary-policy-and-competitive.html), as shown in Table IV-7. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trades from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 10.4 percent. In the second wave, producer prices fell 0.2 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun 2011 of minus 1.8 percent. In the third wave from Jul to Sep 2011, annual equivalent producer price inflation was 3.7 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation was 2.8 percent. In the fifth wave Jan-Mar 2012, average annual inflation rose to 6.2 percent during carry trades from zero interest rates to commodity futures. In the sixth wave in Apr-Jun 2012, annual equivalent inflation fell at the rate of 4.3 percent during unwinding of carry trades because of increasing risk aversion. In the seventh wave, carry trades returned under more relaxed risk aversion with producer price inflation in France at 7.4 percent in annual equivalent in Jul-Oct 2012. In the eighth wave, return of risk aversion caused unwinding carry trade and annual equivalent inflation of minus 4.1 percent in Nov-Dec 2012. In the ninth wave, inflation returned with annual equivalent 4.9 percent in Jan-Mar 2013. In the tenth wave, annual equivalent inflation was minus 10.7 percent in Apr-Jun 2013. In the eleventh wave, annual equivalent inflation was 8.7 percent in Jul 2013 and 4.5 percent in Jul-Sep 2013. In the twelfth wave, annual equivalent inflation in Oct 2013 was minus 2.4 percent. In the thirteenth wave, inflation in Nov 2013 was 0.6 percent, primarily because of increases in electricity rates (http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20131227), which is 6.2 percent in annual equivalent and 4.9 percent in annual equivalent in Nov-Dec 2013. In the fourteenth wave, inflation was minus 4.0 percent in annual equivalent in Jan-Aug 2014. In the fifteenth wave, annual equivalent inflation was 7.4 percent in Sep 2014. In the sixteenth wave, annual equivalent inflation was minus 7.0 percent in Oct 2014-Jan 2015. In the seventeenth wave, inflation was 6.2 percent in annual equivalent in Feb-Mar 2015. In the eighteenth wave, annual equivalent inflation was minus 4.7 percent in Apr-May 2015. In the nineteenth wave, annual equivalent inflation was 0.0 percent in Jun-Jul 2015. In the twentieth wave, annual equivalent inflation was minus 11.4 percent in Aug 2015. In the twenty-first wave, annual equivalent inflation was 1.2 percent in Sep-Nov 2015. In the twenty-second wave, annual equivalent inflation was minus 13.0 percent in Dec 2015-Jan 2016. In the twenty-third wave, annual equivalent inflation was minus 5.8 percent in Feb 2016. In the twenty-fourth wave, annual equivalent inflation was 3.7 percent in Mar 2016. Insee measures decline of 16.5 percent of prices of refined petroleum products in Dec 2015 (http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20160129). The bottom part of Table IV-5 shows producer price inflation at 3.2 percent in the 12 months ending in Dec 2005 and again at 4.6 percent in the 12 months ending in Dec 2007. Producer prices fell in 2009 during the global contraction and decline of commodity prices but returned at 4.3 percent in the 12 months ending in Dec 2010.

Table IV-7, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Mar 2016	0.3	-4.0
AE ∆% Mar	3.7
Feb	-0.5	-4.2
AE ∆% Feb	-5.8
Jan	-1.1	-2.8
Dec 2015	-1.2	-2.7
AE ∆% Dec-Jan	-13.0
Nov	0.2	-2.4
Oct	0.1	-2.6
Sep	0.0	-2.6
AE ∆% Sep-Nov	1.2
Aug	-1.0	-2.1
AE ∆% Aug	-11.4
Jul	-0.2	-1.4
Jun	0.2	-1.5
AE ∆% Jun-Jul	0.0
May	-0.5	-1.6
Apr	-0.3	-1.6
AE ∆% Apr-May	-4.7
Mar	0.0	-1.9
Feb	1.0	-2.2
AE ∆% Feb-Mar	6.2
Jan	-1.0	-3.4
Dec 2014	-0.9	-2.8
Nov	0.0	-1.7
Oct	0.1	-1.1
AE ∆% Oct-Jan	-7.0
Sep	0.6	-1.4
AE ∆% Sep	7.4
Aug	-0.4	-1.6
Jul	-0.3	-1.2
Jun	0.1	-0.2
May	-0.5	-0.6
Apr	-0.6	-1.3
Mar	-0.3	-1.9
Feb	-0.2	-1.5
Jan	-0.5	-0.9
AE ∆% Jan-Aug	-4.0
Dec 2013	0.2	0.2
Nov	0.6	-0.5
AE ∆% Nov-Dec	4.9
Oct	-0.2	-1.3
AE ∆% Oct	-2.4
Sep	0.4	-0.6
Aug	0.0	-0.7
Jul	0.7	0.3
AE ∆% Jul-Sep	4.5
Jun	-0.3	0.1
May	-1.2	-0.2
Apr	-1.3	0.4
AE ∆% Apr-Jun	-10.7
Mar	0.1	1.8
Feb	0.5	2.1
Jan	0.6	2.1
AE ∆% Jan-Mar	4.9
Dec 2012	-0.5	2.0
Nov	-0.2	2.2
AE ∆% Nov-Dec	-4.1
Oct	0.5	2.8
Sep	0.3	2.8
Aug	1.0	2.8
Jul	0.6	1.8
AE ∆% Jul-Oct	7.4
Jun	-0.6	1.8
May	-0.6	2.3
Apr	0.1	2.8
AE ∆% Apr-Jun	-4.3
Mar	0.5	3.6
Feb	0.5	4.0
Jan	0.5	4.2
AE ∆% Jan-Mar	6.2
Dec 2011	-0.2	4.5
Nov	0.4	5.2
Oct	0.5	5.3
AE ∆% Oct-Dec	2.8
Sep	0.3	5.4
Aug	0.0	5.6
Jul	0.6	5.7
AE ∆% Jul-Sep	3.7
Jun	-0.1	5.4
May	-0.2	5.7
AE ∆% May-Jun	-1.8
Apr	1.0	6.0
Mar	0.8	5.7
Feb	0.7	5.2
Jan	0.8	4.6
AE ∆% Jan-Apr	10.4
Dec 2010		4.3
Dec 2009		-2.9
Dec 2008		0.8
Dec 2007		4.6
Dec 2006		2.6
Dec 2005		3.2
Dec 2004		3.0
Dec 2003		0.3
Dec 2002		1.2
Dec 2001		-0.7
Dec 2000		3.9

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20160429

Chart IV-9 of the Institut National de la Statistique et des Études Économiques of France provides the producer price index for the internal market in France from Jan 1999 to Mar 2016. The index also captures the low price environment of the early 2000s that was used as an argument of fear of deflation. For fear of deflation, see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. During the first round of unconventional monetary policy of low interest rates and withdrawal of duration in bond markets by suspension of auctions of the 30-year Treasury bond, inflation accelerated from 2004 to 2007. When policy interest rates were moved toward zero in 2008, carry trades during a global recession caused sharp increases in commodity prices and price indexes worldwide. Inflation collapsed in the risk panic from the latter part of 2008 into the first part of 2009. Carry trades induced by zero interest rates have caused a trend of inflation with oscillations during period of risk aversion (http://cmpassocregulationblog.blogspot.com/2016/04/contracting-united-states-industrial.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/monetary-policy-and-competitive.html).

Chart IV-9, France, Producer Prices for the Internal Market, Jan 1999-Mar 2016, 2010=100

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20160429

France’s producer price index for the domestic market is in Table IV-8 for Mar 2016. The segment mining, including electricity, decreased 0.6 percent in Mar 2016 and fell 6.0 percent in 12 months. The segment of prices of coke and refined petroleum increased 15.5 percent in Mar 2016 and decreased 33.3 percent in 12 months. Manufacturing prices, with the highest weight in the index, increased 0.5 percent in Mar and decreased 3.4 percent in 12 months. Waves of inflation originating in carry trades from unconventional monetary policy of zero interest rates (http://cmpassocregulationblog.blogspot.com/2016/04/contracting-united-states-industrial.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/monetary-policy-and-competitive.html) tend to deteriorate sales prices of productive activities relative to prices of inputs and commodities with adverse impact on operational margins and thus on production, investment and hiring.

Table IV-8, France, Producer Price Index for the Domestic Market, %

Mar 2016	Weight	Month ∆%	12 Month ∆%
Total	1000	0.3	-4.0
Mining	194	-0.6	-6.0
Manufactured	806	0.5	-3.4
Food Products, Beverages, Tobacco	186	-0.3	-1.0
Coke and Refined Petroleum	56	15.5	-33.3
Electrical, Electronic	72	0.2	-0.4
Transport	111	0.0	0.2
Other Mfg	380	0.0	-2.1

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20160429

Chart IV-10 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components rose to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices followed by another mild trend of increase and moderation in Dec 2011 and then renewed inflation in the first quarter of 2012 with a new pause in Apr 2012, decline in May-Jun 2012, the jump in Jul-Oct 2012 and the decline in Nov-Dec 2012 followed by increase in Jan-Feb 2013. Prices stabilized in Mar 2013 and collapsed in Apr-Jun 2013. Inflation returned in Jul 2013 with sharp increase in energy prices and in Aug-Sep 2013. Prices fell in Oct 2013 with reversals of exposures in commodities and increased in Nov 2013 because of increases in electricity rates. Similar increases in electricity rates drive price increases in Nov 2015. Sharp declines of refined petroleum products influenced the decline of producer prices in Dec 2015-Feb 2016 with increases in Mar 2016. There is downward trend with oscillations in the commodity price shock.

Chart IV-10, France, Producer Price Indexes

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20160429

Italy’s producer price inflation in Table IV-9 also has the same waves in 2011 and into 2012-2016 observed for many countries (http://cmpassocregulationblog.blogspot.com/2016/04/contracting-united-states-industrial.html). The annual equivalent producer price inflation in the first wave Jan-Apr 2011, annual equivalent inflation was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was 1.8 percent in annual equivalent rate in May-Jun 2011. In the third wave, annual equivalent inflation was 4.9 percent in Jul-Sep 2011. With the return of risk aversion in the fourth wave coinciding with the worsening sovereign debt crisis in Europe, annual equivalent inflation was 2.0 percent in Oct-Dec 2011. Inflation accelerated in the fifth wave in Jan and Feb 2012 to annual equivalent 8.1 percent. In the sixth wave, annual equivalent inflation in Mar-Apr 2012 was at 6.8 percent. In the seventh wave, risk aversion originating in world economic slowdown and financial turbulence softened carry trades with annual equivalent inflation falling to minus 0.6 percent in May-Jun 2012. In the eighth wave, more aggressive carry trades into commodity futures exposures resulted in increase of inflation at annual equivalent 9.4 percent in Jul-Aug 2012. In the ninth wave, risk aversion caused unwinding carry trades with annual equivalent inflation of minus 5.2 percent in Sep 2012-Jan 2013. Inflation returned in the tenth wave at 1.2 percent annual equivalent in Feb-Mar 2013. In the eleventh wave, industrial prices fell at annual equivalent 3.5 percent in Apr-May 2013. In the twelfth wave, inflation returned at annual equivalent 4.9 percent in Jun 2013 and 0.3 percent in Jun-Sep 2013. In the thirteenth wave, annual equivalent inflation was minus 2.7 percent in Oct-2013 to May 2014. In the fourteenth wave, annual equivalent inflation was 2.4 percent in Jun 2014. In the fifteenth wave, annual equivalent inflation was minus 3.5 percent in Jul-Aug 2014. In the sixteenth wave, annual equivalent inflation returned at 1.2 percent in Sep 2014. In the seventeenth wave, annual equivalent inflation fell at 3.5 percent in Oct-Nov 2014. In the eighteenth wave, annual equivalent inflation fell at 14.0 percent in Dec 2014-Jan 2015. In the nineteenth wave, annual equivalent inflation increased at 3.7 percent in Feb-Mar 2015. In the twentieth wave, annual equivalent inflation fell at 2.4 percent in Apr 2015. In the twenty-first wave, annual equivalent increased at 3.7 percent in May 2015. In the twenty-second wave, annual equivalent inflation fell at 4.4 percent in Jun-Sep 2015. In the twenty-third wave, producer prices fell at annual equivalent 4.7 percent in Oct-Nov 2015. In the twenty-fourth wave, producer prices fell at annual equivalent 7.3 percent in Dec 2015-Feb 2016. In the twenty-fifth wave, annual equivalent inflation was 2.4 percent in Mar 2016.

Table IV-9, Italy, Industrial Prices, Internal Market

	Month ∆%	12-Month ∆%
Mar 2016	0.2	-3.9
AE ∆% Mar	2.4
Feb	-0.5	-4.1
Jan	-0.8	-3.0
Dec 2015	-0.6	-3.9
AE ∆% Dec-Feb	-7.3
Nov	-0.5	-4.1
Oct	-0.3	-3.7
AE ∆% Oct-Nov	-4.7
Sep	-0.3	-3.9
Aug	-0.6	-3.5
Jul	-0.5	-3.0
Jun	-0.2	-3.0
AE ∆% Jun-Sep	-4.4
May	0.3	-2.6
AE ∆% May	3.7
Apr	-0.2	-3.0
AE ∆% Apr	-2.4
Mar	0.0	-3.0
Feb	0.6	-3.2
AE ∆% Feb-Mar	3.7
Jan	-1.7	-3.8
Dec 2014	-0.8	-2.1
AE ∆% Dec-Jan	-14.0
Nov	-0.1	-1.5
Oct	-0.5	-1.5
AE ∆% Oct-Nov	-3.5
Sep	0.1	-2.0
AE ∆% Sep	1.2
Aug	-0.1	-2.1
Jul	-0.5	-1.9
AE ∆% Jul-Aug	-3.5
Jun	0.2	-1.8
AE ∆% Jun	2.4
May	-0.1	-1.7
Apr	-0.2	-1.7
Mar	-0.2	-1.9
Feb	-0.1	-1.7
Jan	0.0	-1.5
Dec 2013	-0.1	-2.1
Nov	-0.1	-2.3
Oct	-1.0	-2.5
AE ∆% Oct-May	-2.7
Sep	0.0	-2.2
Aug	0.1	-2.4
Jul	-0.4	-1.5
Jun	0.4	-0.7
AE ∆% Jun-Sep	0.3
May	-0.1	-1.1
Apr	-0.5	-1.1
AE ∆% Apr-May	-3.5
Mar	0.0	0.0
Feb	0.2	0.5
AE ∆% Feb-Mar	1.2
Jan	-0.6	0.7
Dec 2012	-0.3	2.4
Nov	-0.3	2.8
Oct	-0.7	3.5
Sep	-0.3	4.2
AE ∆% Sep-Jan	-5.2
Aug	1.1	4.5
Jul	0.4	3.8
AE ∆% Jul-Aug	9.4
Jun	0.0	4.2
May	-0.1	4.4
AE ∆% May-Jun	-0.6
Apr	0.6	4.6
Mar	0.5	4.8
AE ∆% Mar-Apr	6.8
Feb	0.5	5.2
Jan	0.8	5.2
AE ∆% Jan-Feb	8.1
Dec 2011	0.1	5.5
Nov	0.4	6.0
Oct	0.0	6.1
AE ∆% Oct-Dec	2.0
Sep	0.0	5.3
Aug	0.4	5.4
Jul	0.8	5.2
AE ∆% Jul-Sep	4.9
Jun	0.2	4.6
May	0.1	4.6
AE ∆% May-Jun	1.8
Apr	0.9	5.1
Mar	0.9	5.0
Feb	0.4	4.5
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Year
2015		-3.4
2014		-1.8
2013		-1.3
2012		4.2
2011		5.1
2010		3.1
2009		-5.4
2008		5.8
2007		3.3
2006		5.3
2005		4.0
2004		2.8
2003		1.6
2002		0.1
2001		2.0

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/185484

Chart IV-11 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Oct 2012 with increases of 0.7 percent in the month of Jan 2013 and 0.5 percent in Feb 2013 followed by stability in Mar 2013. Inflation turned negative in Apr-May 2013 with marginal increase in Jun 2013 followed by decline in Jul-Dec 2013. Inflation in 12 months fell in Jan-Mar 2014 and at lower rate in Apr-May 2014. Mild inflation returned in Jun 2014 followed by decline in Jul 2014, increase in Oct 2014 and decline in Nov-Dec 2014. There is continuing decline of inflation in Jan 2015 followed by increase in Feb 2015, decrease in Mar-Apr 2015 and increase in May 2015. Prices fell in Jun 2015-Feb 2016 and increased in Mar 2016.

Chart IV-11, Italy, Producer Price Index 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Table IV-10 provides monthly and 12-month inflation of producer prices in Italy by segments. Durable goods prices increased 0.6 percent in Mar and increased 0.3 percent in 12 months. Nondurable goods prices decreased 0.2 percent in Mar and decreased 0.9 percent in 12 months. Energy prices increased 0.7 percent in Mar and declined 9.3 percent in 12 months.

Table IV-10, Italy, Producer Price Index for the Internal Market, ∆%

	Mar 16/Feb 16	Mar 16/Mar 15
Consumer Goods	-0.1	-0.8
Durable	0.6	0.3
Nondurable	-0.2	-0.9
Capital Goods	0.0	0.3
Intermediate Goods	-0.2	-2.0
Energy	0.7	-9.3
Total Ex Energy	-0.1	-1.0
Total	0.2	-3.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/185484

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-11. Annual equivalent inflation in the first four months of 2011 from Jan to Apr was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and was minus 0.8 percent in annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 to Aug 2013 was 2.0 percent. In the twelfth wave, annual equivalent inflation was minus 3.2 percent in Sep-Nov 2013 during reallocations of investment portfolios away from commodity futures. In the thirteenth wave, inflation returned in annual equivalent 2.4 percent in Dec 2013-Jan 2014. In the fourteenth wave, annual equivalent inflation fell at 1.2 percent in Feb 2014. In the fifteenth wave, annual equivalent inflation was 1.8 percent in Mar-Apr 2014. In the sixteenth wave, annual equivalent inflation was minus 1.2 percent in May 2014. In the seventeenth wave, annual equivalent inflation was 1.2 percent in Jun 2014. In the eighteenth wave, annual equivalent inflation was minus 1.2 percent in Jul 2014. In the nineteenth wave, annual equivalent inflation was 2.4 percent in Aug 2014. In the twentieth wave, annual equivalent inflation was minus 4.7 percent in Sep 2014. In the twenty-first wave, annual equivalent inflation returned at 1.2 percent in Oct 2014. In the twenty-second wave, annual equivalent inflation fell at 2.4 percent in Nov 2014-Jan 2015. In the twenty-third wave, annual equivalent rose to 2.4 percent in Feb-Jun 2015. In the twenty-fourth wave, annual equivalent inflation fell at 1.2 percent in Jul 2015. In the twenty-fifth wave, annual equivalent inflation was 2.4 percent in Aug 2015. In the twenty-six wave, consumer prices fell at 4.7 percent annual equivalent in Sep 2015. In the twenty-seventh wave, annual equivalent inflation was 2.4 percent in Oct 2015. In the twenty-eighth wave, consumer prices fell at 2.4 percent annual equivalent in Nov 2015-Jan 2016. In the twenty-ninth wave, annual equivalent inflation fell at 2.4 percent in Jan-Feb 2016. In the thirtieth wave, annual equivalent inflation was at 1.2 percent in Mar-Apr 2016. There are worldwide shocks to economies by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion (http://cmpassocregulationblog.blogspot.com/2016/04/contracting-united-states-industrial.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/monetary-policy-and-competitive.html).

Table IV-11, Italy, Consumer Price Index

	Month	12 Months
Apr 2016	0.0	-0.4
Mar	0.2	-0.2
AE ∆% Mar-Apr	1.2
Feb	-0.2	-0.3
Jan	-0.2	0.3
AE ∆% Jan-Feb	-2.4
Dec 2015	0.0	0.1
Nov	-0.4	0.1
AE ∆% Nov-Dec	-2.4
Oct	0.2	0.3
AE ∆% Oct	2.4
Sep	-0.4	0.2
AE ∆% Sep	-4.7
Aug	0.2	0.2
AE ∆% Aug	2.4
Jul	-0.1	0.2
AE ∆% Jul	-1.2
Jun	0.2	0.2
May	0.1	0.1
Apr	0.2	-0.1
Mar	0.1	-0.1
Feb	0.4	-0.1
AE ∆% Feb-Jun	2.4
Jan	-0.4	-0.6
Dec 2014	0.0	0.0
Nov	-0.2	0.2
AE ∆% Nov-Jan	-2.4
Oct	0.1	0.1
AE ∆% Oct	1.2
Sep	-0.4	-0.2
AE ∆% Sep	-4.7
Aug	0.2	-0.1
AE ∆% Aug	2.4
Jul	-0.1	0.1
AE ∆% Jul	-1.2
Jun	0.1	0.3
AE ∆% Jun	1.2
May	-0.1	0.5
AE ∆% May	-1.2
Apr	0.2	0.6
Mar	0.1	0.4
AE ∆% Mar-Apr	1.8
Feb	-0.1	0.5
AE ∆% Feb	-1.2
Jan	0.2	0.7
Dec 2013	0.2	0.7
AE ∆% Dec 2013-Jan 2014	2.4
Nov	-0.3	0.7
Oct	-0.2	0.8
Sep	-0.3	0.9
AE ∆% Sep-Nov	-3.2
Aug	0.4	1.2
Jul	0.1	1.2
Jun	0.3	1.2
May	0.0	1.1
Apr	0.0	1.1
Mar	0.2	1.6
Feb	0.1	1.9
Jan	0.2	2.2
Dec 2012	0.2	2.3
AE ∆% Dec 2012-Aug 2013	2.0
Nov	-0.2	2.5
Oct	0.0	2.6
Sep	0.0	3.2
AE ∆% Sep-Nov	-0.8
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Aug	3.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2015		0.1
2014		0.2
2013		1.2
2012		3.0
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/185472

Chart IV-12 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012, 2.3 percent in Dec 2012, 2.2 percent in Jan 2013, 1.9 percent in Feb 2013 and 1.6 percent in Mar 2013. Consumer prices increased 1.1 percent in the 12 months ending in Apr-May 2013 and 1.2 percent in Jun-Jul 2013. In Aug 2013, consumer prices increased 1.2 percent in 12 months. Consumer prices increased 0.9 percent in the 12 months ending in Sep 2013 and 0.8 percent in the 12 months ending in Oct 2013. Consumer price inflation increased 0.7 percent in the 12 months ending in Nov 2013 and 0.7 percent in the 12 months ending in Dec 2013. Consumer prices increased 0.7 percent in the 12 months ending in Jan 2014 and 0.5 percent in the 12 months ending in Feb 2014. Consumer prices increased 0.4 percent in the 12 months ending in Mar 2014 and 0.6 percent in the 12 months ending in Apr 2014. Consumer prices increased 0.5 percent in the 12 months ending in May 2014 and 0.3 percent in the 12 months ending in Jun 2014. Consumer prices increased 0.1 percent in the 12 months ending in Jul 2014 and fell 0.1 percent in the 12 months ending in Aug 2014. Consumer prices fell 0.2 percent in the 12 months ending in Sep 2014 and increased 0.1 percent in the 12 months ending in Oct 2014. Consumer prices increased 0.2 percent in the 12 months ending in Nov 2014 and changed 0.0 percent in the 12 months ending in Dec 2014. Consumer prices fell 0.6 percent in the 12 months ending in Jan 2015 and decreased 0.1 percent in the 12 months ending in Feb 2015. Consumer prices fell 0.1 percent in the 12 months ending in Mar 2015 and decreased 0.1 percent in the 12 months ending in Apr 2015. Consumer prices increased 0.1 percent in the 12 months ending in May 2015 and increased 0.2 percent in the 12 months ending in Jun 2015. Consumer prices increased 0.2 percent in the 12 months ending in Jul 2015 and increased 0.2 percent in the 12 months ending in Aug 2015. Consumer prices increased 0.2 percent in the 12 months ending in Sep 2015 and increased 0.3 percent in the 12 months ending in Oct 2015. Consumer prices increased 0.1 percent in the 12 months ending in Nov 2015 and increased 0.1 percent in the 12 months ending in Dec 2015. Consumer prices increased 0.3 percent in the 12 months ending in Jan 2016 and fell 0.3 percent in the 12 months ending in Feb 2016. Consumer prices fell 0.2 percent in the 12 months ending in Mar 2016 and fell 0.4 percent in the 12 months ending in Apr 2016.

Chart IV-12, Italy, Consumer Price Index 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Table IV-12 provides month and 12-month percentage changes of the consumer price of Italy by segments. Total consumer price inflation in Apr 2016 was 0.0 percent and decreased 0.4 percent in 12 months. Inflation of goods was minus 0.2 percent in Apr 2016 and minus 1.0 percent in 12 months. Prices of durable goods decreased 0.2 percent in Apr and increased 1.3 percent in 12 months, different from inflation in several countries. Prices of energy decreased 1.6 percent in Apr and decreased 7.4 percent in 12 months. Food prices increased 0.1 percent in Apr and decreased 0.1 percent in 12 months. Prices of services increased 0.3 percent in Apr and rose 0.4 percent in 12 months. Transport prices, also influenced by commodity prices, increased 0.4 percent in Apr and decreased 0.1 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion and portfolio reallocations (http://cmpassocregulationblog.blogspot.com/2016/04/contracting-united-states-industrial.html and earlier http://cmpassocregulationblog.blogspot.com/2016/03/monetary-policy-and-competitive.html).

Table IV-12, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

Apr 2016	Weights	Month ∆%	12-Month ∆%
General Index All Items	1,000,000	0.0	-0.4
I Goods	537,198	-0.2	-1.0
Food	176,293	0.1	-0.1
Energy	89,593	-1.6	-7.4
Durable	79,828	-0.2	1.3
Nondurable	67,677	-0.1	0.0
II Services	462,802	0.3	0.4
Housing	77,764	0.0	0.7
Communications	20,997	-0.2	-0.4
Transport	73,869	0.4	-0.1

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/185472

0.25 to 0.50

Longer Run