Sunday, July 5, 2020

Increase of Total Nonfarm Payroll Jobs by 4.800 Million and of Private Payroll Jobs by 4.767 Million in Jun 2020 In The Global Recession of Lockdown of Economic Activity in the COVID-19 Event, Beginning Recovery of United States Vehicle Sales, Forty-One Million Unemployed or Underemployed in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Sample Hurdles in Measuring Real Wages, Cyclically Stagnating Real Disposable Income Per Capita, Beginning Recovery of Personal Consumption, Financial Repression, World Cyclical Slow Growth, and Government Intervention in Globalization: Part IV


Increase of Total Nonfarm Payroll Jobs by 4.800 Million and of Private Payroll Jobs by 4.767 Million in Jun 2020 In The Global Recession of Lockdown of Economic Activity in the COVID-19 Event, Beginning Recovery of United States Vehicle Sales, Forty-One Million Unemployed or Underemployed in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Sample Hurdles in Measuring Real Wages, Cyclically Stagnating Real Disposable Income Per Capita, Beginning Recovery of Personal Consumption, Financial Repression, World Cyclical Slow Growth, and Government Intervention in Globalization

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.

I Forty-One Million Unemployed or Underemployed in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide

IA2 Number of People in Job Stress

IA3 Long-term and Cyclical Comparison of Employment

IA4 Job Creation

IB Stagnating Real Wages

II Stagnating Real Disposable Income and Consumption Expenditures

IIB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

III World Financial Turbulence

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

Foreword A. Total nonfarm payroll employment seasonally adjusted (SA) increased 4.800 million in Jun 2020 and private payroll employment increased 4.767 million. The Bureau of Labor Statistics states (https://www.bls.gov/news.release/empsit.nr0.htm): “Our analysis suggests that the net effect of these hurricanes [Harvey and Irma] was to reduce the estimate of total nonfarm payroll employment for September. There was no discernible effect on the national unemployment rate. No changes were made to either the establishment or household survey estimation procedures for the September figures.” A hurdle in analyzing the labor market is the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event (https://www.bls.gov/cps/employment-situation-covid19-faq-june-2020.pdf).

Table I-8, US, Monthly Change in Jobs, Number SA

Month

1981

1982

1983

2008

2009

2010

Private

1993

2020

Jan

299

214

179

Feb

250

251

220

Mar

-50

-1373

-1356

Apr

302

-20787

-19835

May

272

2699

3232

Jun

181

4800

4767

Source: US Bureau of Labor Statistics

https://www.bls.gov/data

Foreword B. Table VA-1B provides the seasonally adjusted annual rate of total vehicle sales in the United States. The rate decreased from 17.705 in Jun 2019 and 17.203 in Feb 2020 to 9.051 in Apr 2020 in the lockdown of economic activity in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. The rate recovered to 12.624 in May 2020 and 13.351 in Jun 2020 in gradual return to economic activity.

Table VA-1B, United States, Annual Rate, Total Vehicle Sales, Seasonally Adjusted Annual Rate

2019-01-01

17.238

2019-02-01

17.026

2019-03-01

17.773

2019-04-01

17.049

2019-05-01

17.933

2019-06-01

17.705

2019-07-01

17.442

2019-08-01

17.512

2019-09-01

17.723

2019-10-01

17.046

2019-11-01

17.447

2019-12-01

17.120

2020-01-01

17.364

2020-02-01

17.203

2020-03-01

11.779

2020-04-01

9.051

2020-05-01

12.624

2020-06-01

13.351

Source: Economic Research Division, Federal Reserve Bank of St. Louis

https://fred.stlouisfed.org/series/TOTALSA

Chart I-4 of the Economic Research Division, Federal Reserve Bank of St. Louis, provides the complete data set of SAAR of total car sales in the US. The SAAR of 9.051 in Apr 2020 is lower than the lowest rate in the global recession at 9.223 in Feb 2009.

clip_image002

Chart I-4, SA Annual Rate of Total Car Sales in the United States, Jan 1976 to Apr 2020

Source: Economic Research Division, Federal Reserve Bank of St. Louis

https://fred.stlouisfed.org/series/TOTALSA

Chart I-5 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2020. Output virtually stagnated since the late 1990s with recent increase followed by the highest decrease in the data history in the lockdown of economic activity in the COVID-19 event.

clip_image003

Chart 1-5, US, Motor Vehicles and Parts Output, 1972-2020

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/g17/Current/default.htm

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

0.3

0.1

-2.8

FD -0.8

11.1

Japan

-1.7

0.1

-2.7

2.6

China

-6.8

2.4

-3.7

UK

-1.6

0.5*

CPIH 0.7

-1.4 output
0.6**
input -10.0

3.9

Euro Zone

-3.1

0.1

-4.5

7.3

Germany

-2.3

0.5

-1.5

3.5

France

-5.0

0.4

-4.7

8.7

Nether-lands

-0.7

1.1

-5.4

3.4

Finland

-0.7

-0.1

-6.7

6.6

Belgium

-2.5

-0.2

-5.3

5.6

Portugal

-2.3

-0.6

-5.8

6.3

Ireland

4.5

-0.8

-1.6

5.4

Italy

-5.4

-0.3

-6.7

6.3

Greece

-0.9

-0.7

-9.4

16.1

Spain

-4.1

-0.9

-8.4

14.8

Sources: Country statistical agencies

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/may2020

PPI

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/producerpriceinflation/may2020

EUROSTAT https://ec.europa.eu/eurostat National Statistical Offices: https://www.bls.gov/bls/other.htm https://www.census.gov/programs-surveys/international-programs/about/related-sites.html

Table IV-1 shows the simultaneous occurrence of low growth, low/accelerating inflation of consumer prices, decline followed by increase of producer prices and unemployment in advanced economies. US GDP contracted at 5.0 percent in seasonally adjusted rate (SAAR) in IQ2020 and increased 0.3 percent in IQ2020 relative to IQ2019 (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.html). Japan’s GDP decreased at the seasonally adjusted annual rate (SAAR) of minus 2.2 percent in IQ2020 ( https://cmpassocregulationblog.blogspot.com/2020/06/recovery-in-jun-2020-of-manufacturing.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/recovery-without-hiring-twenty-million.html). The UK GDP contracted at 2.0 percent in IQ2020 relative to IVQ2019 and GDP decreased 1.6 percent in IQ2020 relative to IQ2019 (https://cmpassocregulationblog.blogspot.com/2020/05/united-states-inflation-rules.html and earlier https://cmpassocregulationblog.blogspot.com/2020/04/united-states-imbalances-of-internal.html). The Euro Zone contracted at 3.6 percent in IQ2020 and contracted 3.1 percent in IQ2020 relative to IQ2019 (https://cmpassocregulationblog.blogspot.com/2020/06/global-recession-with-output-in-us.html and earlier https://cmpassocregulationblog.blogspot.com/2020/03/sharp-contraction-of-valuations-of-risk.html). These are global recession rates. The rates of unemployment are quite high:

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 below what would be without central bank intervention, will remain in perpetuity, or QE→∞, changing to a “growth mandate.” The FOMC was implementing gradual reduction of the portfolio of government securities in the balance sheet of the Fed beginning in Oct 2017. 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 43 quarters from IIIQ2009 to IQ2020 and in the global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. 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 third estimate of GDP for IQ2020 (https://www.bea.gov/sites/default/files/2020-06/gdp1q20_3rd.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 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 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, 4.6 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ2019, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993, 3.6 percent from IQ1983 to IIQ1993, 3.6 percent from IQ1983 to IIIQ1993 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). 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 IQ2020 and in the global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event would have accumulated to 43.6 percent. GDP in IQ2020 would be $22,634.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $3656.8 billion than actual $18,977.4 billion. There are more than three trillion dollars of GDP less than at trend, explaining the 41.3 million unemployed or underemployed equivalent to actual unemployment/underemployment of 23.9 percent of the effective labor force with the largest part originating in the global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event (Section I and earlier https://cmpassocregulationblog.blogspot.com/2020/06/creation-of-three-million-private.html). Unemployment is decreasing while employment is increasing in initial adjustment of the lockdown of economic activity in the global recession resulting from the COVID-19 event (https://www.bls.gov/cps/employment-situation-covid19-faq-june-2020.pdf). US GDP in IQ2020 is 16.2 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,977.4 billion in IQ2020 or 20.4 percent at the average annual equivalent rate of 1.5 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 2.9 percent per year from May 1919 to May 2020. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.4475 in May 2020. The actual index NSA in May 2020 is 87.3585 which is 43.4 percent below trend. The underperformance of manufacturing in May 2020 originates partly in the earlier global recession augmented by the current global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 162.0699 in May 2020. The actual index NSA in May 2020 is 87.3585, which is 46.1 percent below trend. Manufacturing output grew at average 1.4 percent between Dec 1986 and May 2020. Using trend growth of 1.4 percent per year, the index would increase to 128.7047 in May 2020. The output of manufacturing at 87.3585 in May 2020 is 32.1 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 88.2710 in May 2020 or 2.2 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 163.5246 in May 2020. The NAICS index at 88.2710 in May 2020 is 46.0 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 131.5151 in May 2020. The NAICS index at 88.2710 in May 2020 is 32.9 percent below trend under this alternative calculation.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 4.800 million in Jun 2020 and private payroll employment increased 4.767 million. The Bureau of Labor Statistics states (https://www.bls.gov/news.release/empsit.nr0.htm): “Our analysis suggests that the net effect of these hurricanes [Harvey and Irma] was to reduce the estimate of total nonfarm payroll employment for September. There was no discernible effect on the national unemployment rate. No changes were made to either the establishment or household survey estimation procedures for the September figures.” A hurdle in analyzing the labor market is the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event (https://www.bls.gov/cps/employment-situation-covid19-faq-june-2020.pdf). The average monthly number of nonfarm jobs created from Jun 2018 to Jun 2019 was 155,917 using seasonally adjusted data, while the average number of nonfarm jobs reduced from Jun 2019 to Jun 2020 was minus 1,080 or decrease by 100.7 percent. The average number of private jobs created in the US from Jun 2018 to Jun 2019 was 148,083, using seasonally adjusted data, while the average from Jun 2019 to Jun 2020 was minus 973 or decrease by 100.7 percent. This blog calculates the effective labor force of the US at 172.255 million in Jun 2020 and 171.482 million in Jun 2019 (Table I-4), for growth of 0.773 million at average 64,417 per month. This situation will continue to challenge measurement (https://www.bls.gov/cps/employment-situation-covid19-faq-june-2020.pdf) and the return to fuller employment is unpredictable.

Closing the economy to mitigate the infection of COVID-19 could deepen the global recession. Gradual reopening in May-Jun 2020 is recovering jobs. The number employed in Jun 2020 was 142.811 million (NSA) or 4.504 million fewer people with jobs relative to the peak of 147.315 million in Aug 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 260.204 million in Jun 2020 or by 28.246 million. The number employed decreased 3.1 percent from Jul 2007 to Jun 2020 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 12.2 percent. The ratio of employment to population in Jul 2007 was 63.5 percent (147.315 million employed as percent of population of 231.958 million). The same ratio in Jun 2020 would result in 165.230 million jobs (0.635 multiplied by noninstitutional civilian population of 260.204 million). There are effectively 22.419 million fewer jobs in Jun 2020 than in Jul 2007, or 165.230 million minus 142.811 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.

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. 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 43 quarters from IIIQ2009 to IQ2020 and in the global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. 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 third estimate of GDP for IQ2020 (https://www.bea.gov/sites/default/files/2020-06/gdp1q20_3rd.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 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 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, 4.6 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991, 3.7 percent from IQ1983 to IQ1992, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ2019, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993, 3.6 percent from IQ1983 to IIQ1993, 3.6 percent from IQ1983 to IIIQ1993 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). 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 IQ2020 and in the global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event would have accumulated to 43.6 percent. GDP in IQ2020 would be $22,634.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $3656.8 billion than actual $18,977.4 billion. There are more than three trillion dollars of GDP less than at trend, explaining the 41.3 million unemployed or underemployed equivalent to actual unemployment/underemployment of 23.9 percent of the effective labor force with the largest part originating in the global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event (Section I and earlier https://cmpassocregulationblog.blogspot.com/2020/06/creation-of-three-million-private.html). Unemployment is decreasing while employment is increasing in initial adjustment of the lockdown of economic activity in the global recession resulting from the COVID-19 event (https://www.bls.gov/cps/employment-situation-covid19-faq-june-2020.pdf). US GDP in IQ2020 is 16.2 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,977.4 billion in IQ2020 or 20.4 percent at the average annual equivalent rate of 1.5 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 2.9 percent per year from May 1919 to May 2020. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 154.4475 in May 2020. The actual index NSA in May 2020 is 87.3585 which is 43.4 percent below trend. The underperformance of manufacturing in May 2020 originates partly in the earlier global recession augmented by the current global recession with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19. Manufacturing grew at the average annual rate of 3.3 percent between Dec 1986 and Dec 2006. Growth at 3.3 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 108.2987 in Dec 2007 to 162.0699 in May 2020. The actual index NSA in May 2020 is 87.3585, which is 46.1 percent below trend. Manufacturing output grew at average 1.4 percent between Dec 1986 and May 2020. Using trend growth of 1.4 percent per year, the index would increase to 128.7047 in May 2020. The output of manufacturing at 87.3585 in May 2020 is 32.1 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 110.5147 in Jun 2007 to the low of 86.3800 in Apr 2009 or 21.8 percent. The NAICS manufacturing index increased from 86.3800 in Apr 2009 to 88.2710 in May 2020 or 2.2 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 106.6777 in Dec 2007 to 163.5246 in May 2020. The NAICS index at 88.2710 in May 2020 is 46.0 below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 106.6777 in Dec 2007 to 131.5151 in May 2020. The NAICS index at 88.2710 in May 2020 is 32.9 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 2.6 percent on an annual basis in 2010 to 1.6 percent in 2011, 2.2 percent in 2012, 1.8 percent in 2013, 2.5 percent in 2014 and 2.9 percent in 2015. GDP growth was 1.6 percent in 2016 and 2.4 percent in 2017. GDP growth was 2.9 percent in 2018 and 2.3 percent in 2019. The following calculations show that actual growth is around 2.1 percent per year during the expansion phase. The rate of growth of 1.7 percent in the entire cycle from 2007 to 2019 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) (https://apps.bea.gov/iTable/index_nipa.cfm) provides valuable 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

1929-2019

3.2

1947-2019

3.2

Whole Cycles

1980-1989

3.5

2006-2019

1.7

2007-2019

1.7

Cyclical Contractions ∆%

IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982

-4.8

IVQ2007 to IIQ2009

-4.0

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

IQ1983 to IVQ1989

IQ1983 to IQ1990

IQ1983 to IIQ1990

IQ1983 to IIIQ1990

IQ1983 to IVQ1990

5.9

5.7

5.3

5.1

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

4.7

4.6

4.5

4.5

4.4

4.3

4.0

IQ1983 to IQ1991

IQ1983 to IIQ1991

IQ1983 to IIIQ1991

IQ1983 to IVQ1991

IQ1983 to IQ1992

IQ1983 to IIQ1992

IQ1983 to IIIQ1992

IQ1983 to IVQ1992

IQ1983 to IQ1993

IQ1983 to IIQ1993

IQ1983 to IIIQ1993

3.8

3.8

3.8

3.7

3.7

3.7

3.7

3.8

3.7

3.6

3.6

First Four Quarters IQ1983 to IVQ1983

7.9

IIIQ2009 to IQ2020

2.1

First Four Quarters IIIQ2009 to IIQ2010

2.8

Real Disposable Income

Real Disposable Income per Capita

Long-Term

1929-2019

3.2

2.0

1947-1999

3.7

2.3

Whole Cycles

1980-1989

3.5

2.6

2006-2019

2.2

1.5

Source: Bureau of Economic Analysis

https://apps.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 Thirty-Three Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014, the four quarters of 2015, the four quarters of 2016, the four quarters of 2017, the four quarters of 2018, the four quarters of 2019 and the first quarter of 2020 accumulated to 18.6 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IQ2020 of $18,977.4 billion by GDP in IVQ2011 of $16,004.1 billion and compounding by 4/33: {[($18,9777.4/$16,004.1)4/33 -1]100 = 2.1 percent}.
  2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters from IQ2019 to IQ2020 accumulated to 0.3 percent that is equivalent to 0.3 percent in a year. This is obtained by dividing GDP in IQ2020 of $18,977.4 billion by GDP in IQ2019 of $18,927.3 billion and compounding by 4/4: {[($18,977.4/$18,927.3)4/4 -1]100 = 0.3%}. The US economy grew 0.3 percent in IQ2020 relative to the same quarter a year earlier in IQ2019 (See Table 6 at https://www.bea.gov/sites/default/files/2020-06/gdp1q20_3rd.pdf and the complete data at https://apps.bea.gov/iTable/index_nipa.cfm). Growth was at annual equivalent 5.5 percent in IIQ2014 and 5.0 percent IIIQ2014 and only at 2.3 percent in IVQ2014. GDP grew at annual equivalent 3.2 percent in IQ2015, 3.0 percent in IIQ2015, 1.3 percent in IIIQ2015 and 0.1 percent in IVQ2015. GDP grew at annual equivalent 2.0 percent in IQ2016 and at 1.9 percent annual equivalent in IIQ2016. GDP increased at 2.2 percent annual equivalent in IIIQ2016 and at 2.0 percent in IVQ2016. GDP grew at annual equivalent 2.3 percent in IQ2017 and at annual equivalent 2.2 percent in IIQ2017. GDP grew at annual equivalent 3.2 percent in IIIQ2017. GDP grew at annual equivalent 3.5 percent in IVQ2017. GDP grew at annual equivalent 2.5 percent in IQ2018, increasing at 3.5 percent annual equivalent in IIQ2018. GDP grew at annual equivalent 2.9 percent in IIIQ2018 and at 1.1 percent in IVQ2018. GDP grew at annual equivalent 3.1 percent in IQ2019 and at annual equivalent 2.0 percent in IIQ2019. GDP grew at annual equivalent 2.1 percent in IIIQ2019 and at 2.1 percent annual equivalent in IVQ2019. Growth was at annual equivalent minus 5.0 percent in IQ2020. Another important revelation of the revisions and enhancements is that GDP was flat at 0.1 in IVQ2012, which is in the borderline of contraction, and negative in IQ2014. US GDP fell 0.3 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 3.2 percent in seasonally adjusted annual rate (SAAR).

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2012 Dollars and ∆%

Real GDP, Billions Chained 2012 Dollars

∆% Relative to IVQ2007

∆% Relative to Prior Quarter

∆%
over
Year Earlier

IVQ2007

15,762.0

NA

0.6

2.0

IVQ2011

16,004.1

1.5

1.2

1.6

IQ2012

16,129.5

2.3

0.8

2.7

IIQ2012

16,198.8

2.8

0.4

2.4

IIIQ2012

16,220.7

2.9

0.1

2.5

IVQ2012

16,239.1

3.0

0.1

1.5

IQ2013

16,383.0

3.9

0.9

1.6

IIQ2013

16,403.2

4.1

0.1

1.3

IIIQ2013

16,531.7

4.9

0.8

1.9

IVQ2013

16,663.6

5.7

0.8

2.6

IQ2014

16,616.5

5.4

-0.3

1.4

IIQ2014

16,841.5

6.8

1.4

2.7

IIIQ2014

17,047.1

8.2

1.2

3.1

IVQ2014

17,143.0

8.8

0.6

2.9

IQ2015

17,277.6

9.6

0.8

4.0

IIQ2015

17,405.7

10.4

0.7

3.4

IIIQ2015

17,463.2

10.8

0.3

2.4

IVQ2015

17,468.9

10.8

0.0

1.9

IQ2016

17,556.8

11.4

0.5

1.6

IIQ2016

17,639.4

11.9

0.5

1.3

IIIQ2016

17,735.1

12.5

0.5

1.6

IVQ2016

17,824.2

13.1

0.5

2.0

IQ2017

17,925.3

13.7

0.6

2.1

IIQ2017

18,021.0

14.3

0.5

2.2

IIIQ2017

18,163.6

15.2

0.8

2.4

IVQ2017

18,322.5

16.2

0.9

2.8

IQ2018

18,438.3

17.0

0.6

2.9

IIQ2018

18,598.1

18.0

0.9

3.2

IIIQ2018

18,732.7

18.8

0.7

3.1

IVQ2018

18,783.5

19.2

0.3

2.5

IQ2019

18,927.3

20.1

0.8

2.7

IIQ2019

19,021.9

20.7

0.5

2.3

IIIQ2019

19,121.1

21.3

0.5

2.1

IVQ2019

19,222.0

22.0

0.5

2.3

IQ2020

18,977.4

20.4

-1.3

0.3

Cumulative ∆% IQ2012 to IQ2020

18.6

Annual Equivalent ∆%

2.1

Source: US Bureau of Economic Analysis https://apps.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 16 quarters from IIQ2016 to IQ2020. Growth has been fluctuating. The final data point is minus 5.0 percent in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event.

clip_image005

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

Source: US Bureau of Economic Analysis

https://www.bea.gov/data/gdp/gross-domestic-product

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 below what would be without central bank intervention, cannot be abandoned because of the fear of rising interest rates. The FOMC was implementing gradual reduction of the portfolio of government securities in the balance sheet of the Fed. 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 Jun 10, 2020 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm):

June 10, 2020

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EDT

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. 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.

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

Implementation Note issued June 10, 2020

There are several important issues in this statement.

  1. Mandate. The FOMC pursues a policy of attaining its “dual mandate:” (https://www.federalreserve.gov/aboutthefed.htm): “The Federal Reserve System is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve: “
  • conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
  • promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
  • promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
  • fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
  • promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.”
  1. Unchanged Policy Interest Rates: “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
  2. New Advance Guidance. “The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. 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” (emphasis added).
  3. Concern with Inflation and Symmetric Inflation Goal. “The Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective” (emphasis added).
  4. New Quantitative Easing and Other Measures: “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.”
  5. ”Forecast Dependent Policy. In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”

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 now currently at 0 to ¼ 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 0 to ¼ percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” There are multiple new policy measures, including purchases of Treasury securities and mortgage-backed securities for the balance sheet of the Fed (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.”

In the Opening Remarks to the Press Conference on Oct 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20191030.pdf): “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective. We believe monetary policy is in a good place to achieve these outcomes. Looking ahead, we will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the fed funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.” In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm) with significant changes (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf). In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”

In the Introductory Statement on Jul 25, 2019, in Frankfurt am Main, the President of the European Central Bank, Mario Draghi, stated (https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html): “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.

We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity.

The Federal Open Market Committee (FOMC) decided to lower the target range of the federal funds rate by 0.50 percent to 1.0 to 1¼ percent on Mar 3, 2020 in a decision outside the calendar meetings (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm):

March 03, 2020

Federal Reserve issues FOMC statement

For release at 10:00 a.m. EST

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

For media inquiries, call 202-452-2955.

Implementation Note issued March 3, 2020

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 (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2017/01/unconventional-monetary-policy-and.html and earlier 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 25,827.36 on Jul 2, 2020, which is higher by 82.3 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 81.9 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial assets had been approaching or exceeding historical highs before effects on markets in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event.

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 consisted in 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, former 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 (2016Dec 7, 2016Dec20), in Testimony to the Subcommittee on Monetary Policy and Trade Committee on Financial Services, on Dec 7, 2016, analyzes the adverse effects of unconventional monetary policy:

“My research and that of others over the years shows that these policies were not effective, and may have been counterproductive. Economic growth was consistently below the Fed’s forecasts with the policies, and was much weaker than in earlier U.S. recoveries from deep recessions. Job growth has been insufficient to raise the percentage of the population that is working above pre-recession levels. There is a growing consensus that the extra low interest rates and unconventional monetary policy have reached diminishing or negative returns. Many have argued that these policies widen the income distribution, adversely affect savers, and increase the volatility of the dollar exchange rate. Experienced market participants have expressed concerns about bubbles, imbalances, and distortions caused by the policies. The unconventional policies have also raised public policy concerns about the Fed being transformed into a multipurpose institution, intervening in particular sectors and allocating credit, areas where Congress may have a role, but not a limited-purpose independent agency of government.”

Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2015, 2012 Oct 25; 2013Oct28, 2014 Jan01, 2014Jan3, 2014Jun26, 2014Jul15, 2015, 2016Dec7, 2016Dec20 2018Nov19 http://www.johnbtaylor.com/) 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/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html).

The key policy is maintaining fed funds rate between 2 and 2¼ percent. 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. There are high costs and risks of this policy because indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

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.”

The President of the ECB Mario Draghi stated in a speech at the conference “The ECB and its Watchers XX,” in Frankfurt am Main, on Mar 27, 2019 (https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190327~2b454e4326.en.html): “We will continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed. And, if necessary, we need to reflect on possible measures that can preserve the favourable implications of negative rates for the economy, while mitigating the side effects, if any. That said, low bank profitability is not an inevitable consequence of negative rates. ECB analysis finds that the best-performing banks in the euro area in terms of return on equity between 2009 and 2017 share three key features: they have been able to significantly reduce their cost-to-income ratios; they have embarked on large-scale investments in information technology; and they have been able to diversify their revenue sources in a low interest rate environment.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity. Tom Fairless and Brian Blackstone, “ECB’s Draghi hints at drawbacks of negative rates,” Wall Street Journal, Mar 27, 2019, argue that while negative interest rates may encourage spending and investing they create adverse effects such as banks paying for reserves and holders of government bonds paying to hold them such as the current negative yields of ten-year bonds of Germany. Extremely low interest rates also encouraged artificial booms in real estate, which was one of the causes of the financial crisis and global recession (Taylor 2018Nov20, 3-4). Unconventional monetary policy of extremely low interest rates and bloated central bank balance sheet is almost impossible to reverse without causing financial crisis and recession.

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 re the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+re). Thus, g = [(r/re) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dre>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 σy and prices σp. 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/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html).

The key policy is maintaining the fed funds rate between 1¾ and 2 percent with gradual increases subsequently if needed. 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, former 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%

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 41.4 percent relative to the dollar from the high on Jul 15, 2008 to Jul 3, 2020.

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%

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):

“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.”

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%

-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%

-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%

-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%

1.2%

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%

-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%

-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%

0.1%

10188.13

0.6%

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%

0.2%

1.1348

0.0%

-0.2%

1.1340

0.1%

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%

0.1%

17217.11

0.0%

-0.1%

17168.61

-0.3%

-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%

-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%

-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%

-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%

-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%

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 41.4 percent relative to the dollar from the high on Jul 15, 2008 to Jul 3, 2020.

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%

-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%

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%

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%

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%

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%

-0.1%

17719.92

-0.4%

-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%

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%

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%

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%

-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%

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%

-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%

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%

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%

-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%

-0.1%

1.1013

-0.1%

0.0%

1.0999

0.1%

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%

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%

At the press conference after the FOMC meeting on Sep 21, 2016, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20160921.pdf ): “However, the economic outlook is inherently uncertain.” In the address to the Jackson Hole symposium on Aug 26, 2016, Chair Yellen states: “I believe the case for an increase in in federal funds rate has strengthened in recent months…And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course” (http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm). In a speech at the World Affairs Council of Philadelphia, on Jun 6, 2016 (http://www.federalreserve.gov/newsevents/speech/yellen20160606a.htm), Chair Yellen finds that “there is considerable uncertainty about the economic outlook.” There are fifteen references to this uncertainty in the text of 18 pages double-spaced. In the Semiannual Monetary Policy Report to the Congress on Jun 21, 2016, Chair Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20160621a.htm), “Of course, considerable uncertainty about the economic outlook remains.” Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. 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? What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200429a.htm): “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” In the Opening Remarks to the Press Conference on Oct 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20191030.pdf): “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective. We believe monetary policy is in a good place to achieve these outcomes. Looking ahead, we will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the fed funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.” In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC was initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm) with significant changes (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf). In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”

In the Introductory Statement on Jul 25, 2019, in Frankfurt am Main, the President of the European Central Bank, Mario Draghi, stated (https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html): “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.

We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity.

Real Disposable Personal Income

Real Personal Consumption Expenditures

Prices of Personal Consumption Expenditures

PCE Prices Excluding Food and Energy

∆%12M

∆%12M

∆%12M

∆%12M

6/2017

6/2017

6/2017

6/2017

1.2

2.4

1.4

1.5

In presenting the Semiannual Monetary Policy Report to Congress on Jul 17, 2018, the Chairman of the Board of Governors of the Federal Reserve System, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm): “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data.”

At an address to The Clearing House and The Bank Policy Institute Annual Conference (https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm), in New York City, on Nov 27, 2018, the Vice Chairman of the Fed, Richard H. Clarida, analyzes the data dependence of monetary policy. An important hurdle is critical unobserved parameters of monetary policy (https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm): “But what if key parameters that describe the long-run destination of the economy are unknown? This is indeed the relevant case that the FOMC and other monetary policymakers face in practice. The two most important unknown parameters needed to conduct‑‑and communicate‑‑monetary policy are the rate of unemployment consistent with maximum employment, u*, and the riskless real rate of interest consistent with price stability, r*. As a result, in the real world, monetary policy should, I believe, be data dependent in a second sense: that incoming data can reveal at each FOMC meeting signals that will enable it to update its estimates of r* and u* in order to obtain its best estimate of where the economy is heading.” Current robust economic growth, employment creation and inflation close to the Fed’s 2 percent objective suggest continuing “gradual policy normalization.” Incoming data can be used to update u* and r* in designing monetary policy that attains price stability and maximum employment. Clarida also finds that the current expansion will be the longest in history if it continues into 2019. In an address at The Economic Club of New York, New York City, Nov 28, 2018 (https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm), the Chairman of the Fed, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm): “For seven years during the crisis and its painful aftermath, the Federal Open Market Committee (FOMC) kept our policy interest rate unprecedentedly low--in fact, near zero--to support the economy as it struggled to recover. The health of the economy gradually but steadily improved, and about three years ago the FOMC judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates. We therefore began to raise our policy rate gradually toward levels that are more normal in a healthy economy. Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.” The market focused on policy rates “just below the broad range of estimates of the level that would be neutral for the economy—that is, neither speeding up nor slowing down growth.” There was a relief rally in the stock market of the United States:

Fri 23

Mon 26

Tue 27

Wed 28

Thu 29

Fri 30

USD/EUR

1.1339

0.7%

0.6%

1.1328

0.1%

0.1%

1.1293

0.4%

0.3%

1.1368

-0.3%

-0.7%

1.1394

-0.5%

-0.2%

1.1320

0.2%

0.6%

DJIA

24285.95

-4.4%

-0.7%

24640.24

1.5%

1.5%

24748.73

1.9%

0.4%

25366.43

4.4%

2.5%

25338.84

4.3%

-0.1%

25538.46

5.2%

0.8%

At a meeting of the American Economic Association in Atlanta on Friday, January 4, 2019, the Chairman of the Fed, Jerome H. Powell, stated that the Fed would be “patient” with interest rate increases, adjusting policy “quickly and flexibly” if required (https://www.aeaweb.org/webcasts/2019/us-federal-reserve-joint-interview). Treasury yields declined and stocks jumped.

Fri 28

Mon 31

Tue 1

Wed 2

Thu 3

Fri 4

10Y Note

2.736

2.683

2.683

2.663

2.560

2.658

2Y Note

2.528

2.500

2.500

2.488

2.387

2.480

DJIA

23062.40

2.7%

-0.3%

23327.46

1.1%

1.1%

23327.46

1.1%

0.0%

23346.24

1.2%

0.1%

22686.22

-1.6%

-2.8%

23433.16

1.6%

3.3%

Dow Global

2718.19

1.3%

0.8%

2734.40

0.6%

0.6%

2734.40

0.6%

0.0%

2729.74

0.4%

-0.2%

2707.29

-0.4%

-0.8%

2773.12

2.0%

2.4%

In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm).

Fri 25

Mon 28

Tue 29

Wed 30

Thu 31

Fri 1

DJIA

24737.20

0.1%

0.7%

24528.22

-0.8%

-0.8%

24579.96

-0.6%

0.2%

25014.86

1.1%

1.8%

24999.67

1.1%

-0.1%

25063.89

1.3%

0.3%

Dow Global

2917.27

0.5%

1.0%

2899.74

-0.6%

-0.6%

2905.29

-0.4%

0.2%

2927.10

0.3%

0.8%

2945.73

1.0%

0.6%

2947.87

1.0%

0.1%

DJ Asia Pacific

NA

NA

NA

NA

NA

NA

Nikkei

20773.56

0.5%

1.0%

20649.00

-0.6%

-0.6%

20664.64

-0.5%

0.1%

20556.54

-1.0%

-0.5%

20773.49

0.0%

1.1%

20788.39

0.1%

0.1%

Shanghai

2601.72

0.2%

0.4%

2596.98

-0.2%

-0.2%

2594.25

-0.3%

-0.1%

2575.58

-1.0%

-0.7%

2584.57

-0.7%

0.3%

2618.23

0.6%

1.3%

DAX

11281.79

0.7%

1.4%

11210.31

-0.6%

-0.6%

11218.83

-0.6%

0.1%

11181.66

-0.9%

-0.3%

11173.10

-1.0%

-0.1%

11180.66

-0.9%

0.1%

BOVESPA

97677.19

1.6%

0.0%

95443.88

-2.3%

-2.3%

95639.33

-2.1%

0.2%

96996.21

-0.7%

1.4%

97393.75

-0.3%

0.4%

97861.27

0.2%

0.5%

Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. The FOMC statement on Jun 19, 2019 analyzes uncertainty in the outlook (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190619a.htm): “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” In the Semiannual Monetary Policy Report to the Congress, on Jul 10, 2019, Chair Jerome H. Powell states (https://www.federalreserve.gov/newsevents/testimony/powell20190710a.htm): “Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data.

”(emphasis added). European Central Bank President, Mario Draghi, stated at a meeting on “Twenty Years of the ECB’s Monetary Policy,” in Sintra, Portugal, on Jun 18, 2019, that (https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190618~ec4cd2443b.en.html): “In this environment, what matters is that monetary policy remains committed to its objective and does not resign itself to too-low inflation. And, as I emphasised at our last monetary policy meeting, we are committed, and are not resigned to having a low rate of inflation forever or even for now. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required. In our recent deliberations, the members of the Governing Council expressed their conviction in pursuing our aim of inflation close to 2% in a symmetric fashion. Just as our policy framework has evolved in the past to counter new challenges, so it can again. In the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity. The harmonized index of consumer prices of the euro zone increased 1.2 percent in the 12 months ending in May 2019 and the PCE inflation excluding food and energy increased 1.6 percent in the 12 months ending in Apr 2019. Inflation below 2 percent with symmetric targets in both the United States and the euro zone together with apparently weakening economic activity could lead to interest rate cuts. Stock markets jumped worldwide in renewed risk appetite during the week of Jun 19, 2019 in part because of anticipation of major central bank rate cuts and also because of domestic factors:

Fri 14

Mon 17

Tue 18

Wed 19

Thu 20

Fri 21

DJIA

26089.61

0.4%

-0.1%

26112.53

0.1%

0.1%

26465.54

1.4%

1.4%

26504.00

1.6%

0.1%

26753.17

2.5%

0.9%

26719.13

2.4%

-0.1%

Dow Global

2998.79

0.2%

-0.4%

2999.93

0.0%

0.0%

3034.59

1.2%

1.2%

3050.80

1.7%

0.5%

3077.81

2.6%

0.9%

3081.62

2.8%

0.1%

DJ Asia Pacific

NA

NA

NA

NA

NA

NA

Nikkei

21116.89

1.1%

0.4%

21124.00

0.0%

0.0%

20972.71

-0.7%

-0.7%

21333.87

1.0%

1.7%

21462.86

1.6%

0.6%

21258.64

0.7%

-1.0%

Shanghai

2881.97

1.9%

-1.0%

2887.62

0.2%

0.2%

2890.16

0.3%

0.1%

2917.80

1.2%

1.0%

2987.12

3.6%

2.4%

3001.98

4.2%

0.5%

DAX

12096.40

0.4%

-0.6%

12085.82

-0.1%

-0.1%

12331.75

1.9%

2.0%

12308.53

1.8%

-0.2%

12355.39

2.1%

0.4%

12339.92

2.0%

-0.1%

BOVESPA

98040.06

0.2%

-0.7%

97623.25

-0.4%

-0.4%

99404.39

1.4%

1.8%

100303.41

2.3%

0.9%

100303.41

2.3%

0.0%

102012.64

4.1%

1.7%

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 (https://www.hoover.org/research/economic-failure-causes-political-polarization), 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 Jun 10, 2020. The Fed releases the data with careful explanations (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.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 IQ2020 is analyzed in Section I (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.html) and the PCE inflation data from the report on personal income and outlays in Section IV (Section II and earlier https://cmpassocregulationblog.blogspot.com/2020/06/creation-of-three-million-private.html). The Bureau of Economic Analysis provides the estimate of IQ2020 GDP (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/05/mediocre-cyclical-united-states_31.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 II and earlier https://cmpassocregulationblog.blogspot.com/2020/06/creation-of-three-million-private.html). The report on “Personal Income and Outlays” was released on Jun 26, 2020 (Section II and earlier https://cmpassocregulationblog.blogspot.com/2020/06/creation-of-three-million-private.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 Jun was released on Jul 2, 2020 (Section I and earlier https://cmpassocregulationblog.blogspot.com/2020/06/creation-of-three-million-private.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 2020 and 2021 because 2022 and longer term are too far away. There is not much information even on what will happen in 2022 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 2020-2022 shows the projection introduced after the meeting of Jun, 2020 and the second row “PR” the projection of the Dec, 2019 meeting. The projections for 2014 are those released in the Sep 2014 and Dec 2014 meetings. The projections for 2016 are those released in the Dec 2016 and Sep 2016 meetings. There are three changes in the view.

1. Growth “∆% GDP.” The FOMC projects growth in 2020 at minus 7.6 to minus 5.5 percent in the Jun 2020 meeting and at 2.0 to 2.2 percent in the Dec 2019 meeting. The FOMC projects growth in 2021 at 4.5 to 6.0 percent in the Jun 2020 meeting and at 1.8 to 2.0 percent in the Dec 2019 meeting.

2. Rate of Unemployment “UNEM%.” The FOMC changed the forecast of the rate of unemployment for 2016 from 4.7 to 4.9 percent at the meeting on Sep 21, 2016 to 4.7 to 4.8 percent at the meeting on Dec 14, 2016. Projections of the rate of unemployment are moving closer to around 5 percent or lower with 4.3 to 4.6 percent in 2018 after the meeting on Mar 15, 2017, decreasing to 4.0 to 4.3 at the Jun 14, 2017 meeting and 4.0 to 4.2 at the Sep 20, 2017 meeting. The FOMC projects the rate of unemployment in 2017 at 4.2 to 4.3 in the Sep 20, 2017 meeting and at 4.1 percent in the Dec 13, 2017 meeting. The FOMC projects the rate of unemployment at 4.0 to 4.2 in 2018 in the Sep 20, 2017 meeting and at 3.7 to 4.0 in the Dec 13, 2017 meeting. The FOMC projects the rate of unemployment at 3.9 to 4.4 in 2019 in the Sep 20, 2017 meeting and at 3.6 to 4.0 in the Dec 13, 2017 meeting. The FOMC projects the rate of unemployment in 2018 at 3.7 in the Sep 26 meeting and at 3.7 in the Dec 19 meeting. The FOMC projects the rate of unemployment in 2019 at 3.4 to 3.6 in the Sep 26 meeting and at 3.5 to 3.7 in the Dec 19 meeting. The FOMC projects the rate of unemployment at 3.5 to 3.6 percent in the Dec 1, 2019 meeting and at 3.6 to 3.7 in the Sep 18, 2019 meeting. The FOMC projects the rate of unemployment in 2020 at 3.5 to 3.7 in the Dec 11 meeting and at 3.6 to 3.8 in the Sep 18 meeting. The FOMC projects the 2020 rate of unemployment at 9.0 to 10.0 percent in the Jun 2020 meeting and at 3.5 to 3.7 percent in the Dec 2019 meeting. The FOMC projects the rate of unemployment in 2021 at 5.9 to 7.5 percent in the Jun 2020 meeting and at 3.5 to 3.9 percent in the Dec 2019 meeting.

3. Inflation “∆% PCE Inflation.” The FOMC projects prices of personal consumption expenditures (PCE) inflation for 2018 to 2.0 to 2.1 percent at the meeting on Sep 26, 2018 and at 1.8 to 1.9 percent in the Dec 19 meeting. There are projections exceeding 2.0 percent in the central tendency: 2.0 to 2.1 in 2020 and 2.0 to 2.1 in 2021 at the Dec 19 meeting. The FOMC projects PCE inflation at 1.4 to 1.5 in 2019 in the Dec 11, 2019 meeting and at 1.5 to 1.6 in the Sep 18, 2019 meeting. The FOMC projects PCE inflation at 1.8 to 1.9 in 2020 in the Dec 11, 2019 meeting and at 1.8 to 2.0 in the Sep 18, 2019 meeting. The FOMC projects PCE inflation in 2020 at 0.6 to 1.0 percent in the Jun 2020 meeting and at 1.8 to 1.9 percent in the Dec 2019 meeting. The FOMC projects PCE inflation in 2021 at 1.4 to 1.7 percent in the Jun 2020 meeting and at 2.0 to 2.1 percent in the Dec 2019 meeting.

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 1.7 to 1.8 percent at the meeting on Dec 14, 2016. In 2017, there is decrease in the projection from 1.8 to 1.9 percent at the meeting on Mar 15, 2017 to 1.6 to 1.7 percent at the meeting on Jun 14, 2017 and 1.5 to 1.6 percent at the meeting on Sep 20, 2017. The projection for 2018 in the Sep 26, 2018 meeting is 1.9 to 2.0 percent, changing to 1.8 to 1.9 at the Dec 19 meeting. The rate of change of the core PCE in 2019 is at 2.0 to 2.1 in the central tendency in the Sep 26 meeting and at 2.0 to 2.1 in 2020 at the Sep 26 meeting. The projection of core inflation for 2019 2.0 to 2.1 in 2019 in the Dec meeting and at 1.9 to 2.0 in the Mar meeting. The FOMC projects the core inflation rate in 2019 at 1.6 to 1.7 in the Dec 11, 2019 meeting and at 1.7 to 1.8 in the Sep 18, 2019 meeting. The FOMC projects the core inflation rate at 1.9 to 2.0 in 2010 in the Dec 11, 2019 meeting and at 1.9 to 2.0 in the Sep 18, 2019 meeting. The FOMC projects the core inflation rate in 2020 at 0.9 to 1.1 percent in the Jun 2020 meeting and at 1.9 to 2.0 percent in the Dec 2019 meeting. The FOMC projects the core inflation rate in 2021 at 1.4 to 1.7 percent in the Jun 2020 meeting and at 2.0 to 2.1 percent in the Dec 2019 meeting.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Sep 18, 2019 and Dec 11, 2019

∆% 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

Sep PR

1.8 to 1.9

1.7 to 1.9

4.7 to 4.8

4.7 to 4.9

1.5

1.2 to 1.4

1.7 to 1.8

1.6 to 1.8

2017

Sep PR

2.4 to 2.5

2.2 to 2.5

4.1

4.2 to 4.3

1.6 to 1.7

1.5 to 1.6

1.5

1.5 to 1.6

2018

Sep PR

3.0 to 3.1

3.0 to 3.2

3.7

3.7

1.8 to 1.9

2.0 to 2.1

1.8 to 1.9

1.9 to 2.0

2019

Sep PR

2.1 to 2.2

2.1 to 2.3

3.5 to 3.6

3.6 to 3.7

1.4 to 1.5

1.5 to 1.6

1.6 to 1.7

1.7 to 1.8

2020*

Dec PR**

-7.6 to -5.5

2.0 to 2.2

9.0 to 10.0

3.5 to 3.7

0.6 to 1.0

1.8 to 1.9

0.9 to 1.1

1.9 to 2.0

2021

Dec PR**

4.5 to 6.0

1.8 to 2.0

5.9 to 7.5

3.5 to 3.9

1.4 to 1.7

2.0 to 2.1

1.4 to 1.7

2.0 to 2.1

2022

Dec PR*

3.0 to 4.5

1.8 to 2.0

4.8 to 6.1

3.5 to 4.0

1.6 to 1.8

2.0 to 2.2

1.6 to 1.8

2.0 to 2.2

Longer Run

Dec PR**

1.7 to 2.0

1.8 to 2.0

4.0 to 4.3

3.9 to 4.3

2.0

2.0

NA

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

Sep PR

1.8 to 2.0

1.7 to 2.0

4.7 to 4.8

4.7 to 4.9

1.5 to 1.6

1.1 to 1.7

1.6 to 1.8

1.5 to 2.0

2017

Sep PR

2.4 to 2.6

2.2 to 2.7

4.1

4.2 to 4.5

1.5 to 1.7

1.5 to 1.7

1.4 to 1.5

1.4 to 1.7

2018

Sep PR

3.0 to 3.1

2.9 to 3.2

3.7

3.7 to 3.8

1.8 to 1.9

1.9 to 2.2

1.8 to 1.9

1.9 to 2.0

2019

Sep PR

2.1 to 2.3

2.1 to 2.4

3.5 to 3.6

3.5 to 3.8

1.4 to 1.7

1.4 to 1.7

1.6 to 1.8

1.6 to 1.8

2020*

Dec PR**

-10.0 t -4.2

1.8 to 2.3

7.0 to 14.0

3.3 to 3.8

0.5 to 1.2

1.7 to 2.1

0.7 to 1.3

1.7 to 2.1

2021*

Dec PR**

-1.0 to 7.0

1.7 to 2.2

4.5 to 12.0

3.3 to 4.0

1.1 to 2.0

1.8 to 2.3

1.2 to 2.0

1.8 to 2.3

2022*

Dec PR*

2.0 to 6.0

1.5 to 2.2

4.0 to 8.0

3.3 to 4.1

1.4 to 2.2

1.8 to 2.2

1.2 to 2.2

1.8 to 2.2

Longer Run

Sep PR**

1.6 to 2.2

1.7 to 2.2

3.5 to 4.7

3.5 to 4.5

2.0

2.0

NA

Notes: UEM: unemployment; PR: Projection; *PR Jun 2020; **PR Dec 2019

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

http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160615.htm

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

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20160921.pdf

https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160921.htm

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20161214.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20170315.pdf

https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20170315.htm

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20170614.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20170920.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20171213.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180321.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180926.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20181219.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190619.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190918.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20191211.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf

Variable

Median 1

2020

2021

2022

Longer run

Change in real GDP

-6.5

5.0

3.5

1.8

December projection

2.0

1.9

1.8

1.9

Unemployment rate

9.3

6.5

5.5

4.1

December projection

3.5

3.6

3.7

4.1

PCE inflation

0.8

1.6

1.7

2.0

December projection

1.9

2.0

2.0

2.0

Core PCE inflation 4

1.0

1.5

1.7

December projection

1.9

2.0

2.0

Federal funds rate

0.1

0.1

0.1

2.5

December projection

1.6

1.9

2.1

2.5

Variable

Central Tendency 2

2020

2021

2022

Longer run

Change in real GDP

-7.6--5.5

4.5-6.0

3.0-4.5

1.7-2.0

December projection

2.0-2.2

1.8-2.0

1.8-2.0

1.8-2.0

Unemployment rate

9.0-10.0

5.9-7.5

4.8-6.1

4.0-4.3

December projection

3.5-3.7

3.5-3.9

3.5-4.0

3.9-4.3

PCE inflation

0.6-1.0

1.4-1.7

1.6-1.8

2.0

December projection

1.8-1.9

2.0-2.1

2.0-2.2

2.0

Core PCE inflation 4

0.9-1.1

1.4-1.7

1.6-1.8

December projection

1.9-2.0

2.0-2.1

2.0-2.2

Federal funds rate

0.1

0.1

0.1

2.3-2.5

December projection

1.6-1.9

1.6-2.1

1.9-2.6

2.4-2.8

Variable

Range 3

2020

2021

2022

Longer run

Change in real GDP

-10.0--4.2

-1.0-7.0

2.0-6.0

1.6-2.2

December projection

1.8-2.3

1.7-2.2

1.5-2.2

1.7-2.2

Unemployment rate

7.0-14.0

4.5-12.0

4.0-8.0

3.5-4.7

December projection

3.3-3.8

3.3-4.0

3.3-4.1

3.5-4.5

PCE inflation

0.5-1.2

1.1-2.0

1.4-2.2

2.0

December projection

1.7-2.1

1.8-2.3

1.8-2.2

2.0

Core PCE inflation 4

0.7-1.3

1.2-2.0

1.2-2.2

December projection

1.7-2.1

1.8-2.3

1.8-2.2

Federal funds rate

0.1

0.1

0.1-1.1

2.0-3.0

December projection

1.6-1.9

1.6-2.4

1.6-2.9

2.0-3.3

Change in Real GDP

Percent

2020

2021

2022

Longer Run

Upper End of Range

-4.2

7.0

6.0

2.2

Upper End of Central Tendency

-5.5

6.0

4.5

2.0

Median

-6.5

5.0

3.5

1.8

Lower End of Central Tendency

-7.6

4.5

3.0

1.7

Lower End of Range

-10.0

-1.0

2.0

1.6

Unemployment rate

×

Percent

2020

2021

2022

Longer Run

Upper End of Range

14.0

12.0

8.0

4.7

Upper End of Central Tendency

10.0

7.5

6.1

4.3

Median

9.3

6.5

5.5

4.1

Lower End of Central Tendency

9.0

5.9

4.8

4.0

Lower End of Range

7.0

4.5

4.0

3.5

PCE inflation

×

Percent

2020

2021

2022

Longer run

Upper End of Range

1.2

2.0

2.2

2.0

Upper End of Central Tendency

1.0

1.7

1.8

2.0

Median

0.8

1.6

1.7

2.0

Lower End of Central Tendency

0.6

1.4

1.6

2.0

Lower End of Range

0.5

1.1

1.4

2.0

Source: Federal Reserve Bank,

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20191211.pdf

https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20191211.htm

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 2019, 2020, 2021 and the in the longer term. Table IV-3 is also in a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20191211.pdf) and in accessible material (https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20191211.htm). This table is consistent with the guidance statement of the FOMC that rates will remain at low levels. Most participants find appropriate rates above 2.375 percent in the long-run.

Table IV-3, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, Jun 11, 2020

Number of participants with projected midpoint of target range or target level

2020

2021

2022

Longer run

3.125

3.000

2

2.875

2.750

1

2.625

2.500

8

2.375

1

2.250

3

2.125

2.000

1

1.875

1.750

1.625

1.500

1.375

1.250

1.125

1

1.00

0.875

0.750

0.625

0.500

0.375

1

0.250

0.125

17

17

15

0.000

Source: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20200610.htm

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant's judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

Explanation of Economic Projections Charts

The charts show actual values and projections for three economic variables, based on FOMC participants' individual assessments of appropriate monetary policy:

  • Change in Real Gross Domestic Product (GDP)—as measured from the fourth quarter of the previous year to the fourth quarter of the year indicated.
  • Unemployment Rate—the average civilian unemployment rate in the fourth quarter of each year.
  • PCE Inflation—as measured by the change in the personal consumption expenditures (PCE) price index from the fourth quarter of the previous year to the fourth quarter of the year indicated.

Information for these variables is shown for each year from 2015 to 2022, and for the longer run.

The solid blue line, labeled "Actual," shows the historical values for each variable.

The solid red lines depict the median projection in each period for each variable. The median value in each period is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections.

The range and central tendency for each variable in each projection period are depicted in "box and whiskers" format. The blue connected horizontal and vertical lines ("whiskers") represent the range of the projections of policymakers. The bottom of the range for each variable is the lowest of all of the projections for that year or period. Likewise, the top of the range is the highest of all of the projections for that year or period. The light blue shaded boxes represent the central tendency, which is a narrower version of the range that excludes the three highest and three lowest projections for each variable in each year or period.

The longer-run projections, which are shown on the far right side of the charts, 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. Because appropriate monetary policy, by definition, is aimed at achieving the Federal Reserve's dual mandate of maximum employment and price stability in the longer run, policymakers' longer-run projections for economic growth and unemployment may be interpreted, respectively, as estimates of the economy's normal or trend rate of growth and its normal unemployment rate over the longer run. The longer-run projection shown for inflation is the rate of inflation judged to be most consistent with the Federal Reserve's dual mandate.

Explanation of Policy Path Chart

This chart is based on policymakers' assessments of appropriate monetary policy, which, by definition, is the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve's dual objectives of maximum employment and stable prices.

Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant's judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

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

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (https://apps.bea.gov/iTable/index_nipa.cfm) also provide critical information in assessing indexes of prices of personal consumption. There are waves of inflation similar to those worldwide (https://cmpassocregulationblog.blogspot.com/2020/06/mediocre-cyclical-united-states.html and earlier https://cmpassocregulationblog.blogspot.com/2020/06/recovery-in-jun-2020-of-manufacturing.html) in inflation of personal consumption expenditures (PCE) in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. Resulting fluctuations of prices confuse risk/return decisions, inducing financial instability with adverse financial and economic consequences. The first wave is in Jan-Apr 2011 when headline PCE inflation increased at the average annual equivalent rate of 4.3 percent and PCE inflation excluding food and energy (PCEX) at 2.4 percent. The drivers of inflation were increases in food prices (PCEF) at the annual equivalent rate of 8.1 percent and of energy prices (PCEE) at 32.4 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. Portfolio reallocations toward equities or other financial assets cause reversals of exposures in commodities, lowering inflation. The second wave occurred in May-Jun 2011 when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices increased 1.8 percent in annual equivalent and 1.8 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep 2011 of headline PCE inflation of 2.0 percent with subdued PCE inflation excluding food and energy of 2.0 percent while PCE food rose at 6.6 percent and PCE energy increased at 4.9 percent. In the fourth wave in Oct-Dec 2011, increased risk aversion explains the fall of the annual equivalent rate of inflation to 1.2 percent for headline PCE inflation and 2.0 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 0.8 percent in Oct-Dec 2011 while PCEE of prices of energy fell at the annual equivalent rate of 7.8 percent. In the fifth wave in Jan-Mar 2012, headline PCE in annual equivalent was 3.2 percent and 2.8 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 14.0 percent because of the jump of 1.9 percent in Feb 2012 followed by 0.5 percent in Mar 2012. In the sixth wave, renewed risk aversion caused reversal of carry trades with headline PCE inflation at the annual equivalent rate of 0.0 percent in Apr-May 2012 while PCE inflation excluding food and energy increased at the annual equivalent rate of 1.8 percent. In the seventh wave, further shocks of risk aversion resulted in headline PCE annual equivalent inflation at minus 0.6 percent in Jun-Jul 2012 with core PCE excluding food and energy at 1.2 percent. In the eighth wave, temporarily relaxed risk aversion with zero interest rates resulted in central PCE inflation at 3.7 percent annual equivalent in Aug-Sep 2012 with PCEX excluding food and energy at 1.2 percent while PCEE energy jumped at 64.7 percent annual equivalent. The program of outright monetary transactions (OTM) of the European Central Bank induced relaxed risk aversion (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). In the ninth wave, prices collapsed with reversal of carry trade positions in a new episode of risk aversion with central PCE at annual equivalent 1.2 percent in Oct 2012 to Jan 2013 and PCEX at 1.8 percent while energy prices fell at minus 9.6 percent. In the tenth wave, central PCE increased at annual equivalent 4.9 percent in Feb 2013, PCEX at 1.2 percent and PCEE at 69.6 percent. In the eleventh wave, renewed risk aversion resulted in decline in annual equivalent of general PCE prices at 1.2 percent in Mar-Apr 2013 while PCEX increased at 1.2 percent and energy prices fell at 32.3 percent. In the twelfth wave, headline PCE increased at 1.6 percent annual equivalent in May-Nov 2013 with PCEX increasing at 1.7 percent, food PCEF decreasing at 0.2 percent and energy PCEE increasing at 1.2 percent. In the thirteenth wave, general PCE increased at annual equivalent 2.1 percent in Dec 2013-Mar 2014 and PCEX at 1.5 percent. PCEE increased at 8.7 percent annual equivalent. In the fourteenth wave, central PCE inflation was 1.8 percent in annual equivalent in Apr-Jul 2014 with PCEX at 2.1 percent and energy prices decreasing at 1.8 percent. In the fifteenth wave, general PCE changed at annual equivalent 0.0 percent in Aug-Oct 2014 while PCEX increased at 0.8 percent. PCEF increased at 2.0 percent while PCEE fell at 18.6 percent. In the sixteenth wave, PCE prices fell at annual equivalent 1.8 percent in Nov-Dec 2014 while PCEX increased at 1.2 percent and energy prices fell at 41.1 percent. In the seventeenth wave, PCE prices fell at 5.8 percent annual equivalent in Jan 2015 while PCEX changed at 0.0 percent. Prices of goods, PCEG, fell at 17.6 percent annual equivalent. Energy prices PCEE fell at 69.4 percent annual equivalent and prices of food PCEF fell at 1.2 percent. In the eighteenth wave in Feb-Apr 2015, annual equivalent inflation was 2.0 percent for central PCE and 2.0 percent excluding food and energy with energy prices increasing at 8.1 percent and food prices decreasing at 1.6 percent. In the nineteenth wave, central PCE increased at 2.4 percent in May-Jul 2015 with PCEX increasing at 1.2 percent and PCEG at 2.4 percent while energy PCEE increased at 22.3 percent. In the twentieth wave, prices of PCE decreased at 1.2 percent in Aug-Sep 2015 with PCEX increasing at 1.2 percent annual equivalent and energy prices decreasing at 38.5 percent annual equivalent. In the twenty-first wave, central PCE increased at annual equivalent 0.6 percent in Oct-Nov 2015 while PCEX increased at 0.6 percent. PCEE decreased at 9.7 percent annual equivalent and PCEF decreased at 0.6 percent. In the twenty-second wave, central PCE fell at 1.2 percent annual equivalent in Dec 2015 while PCEX increased at 1.2 percent. PCEE energy fell at 25.3 percent annual equivalent and PCEG goods fell at 4.7 percent. PCEF food fell at 3.5 percent annual equivalent. In the twenty-third wave, central PCE increased at 1.2 percent in Jan 2016 while core PCEX increased at 2.4 percent. PCEE energy fell at 26.2 percent and PCEG goods fell at 3.5 percent. In the twenty-fourth wave, central PCE decreased at 1.2 percent annual equivalent in Feb 2016 while core PCE increased at 2.4 percent. PCEG fell at 7.0 percent while PCEF increased at 2.4 percent with PCEE decreasing at 52.4 percent. In the twenty-fifth wave, central PCE increased at 2.7 percent in Mar-Jun 2016 with PCEX increasing at 1.8 percent. PCEG increased at 1.8 percent and PCEF fell at 2.7 percent. PCEE increased at 36.5 percent. In the twenty-sixth wave, central PCE increased at 1.2 percent in Jul 2016 while core PCEX increased at 2.4 percent. PCEE energy prices fell at 20.6 percent and PCEF decreased at 1.2 percent. PCEG fell at 4.7 percent with PCEDG decreasing at 2.4 percent. In the twenty-seventh wave, central PCE increased at 2.0 percent in Aug-Oct 2016 with core PCEX increasing at 2.0 percent. PCEF fell at 1.2 percent and PCEE energy increased at 13.5 percent. PCEDG durable goods decreased at 2.8 percent and PCEG goods increased at 1.2 percent. PCES services increased at 2.0 percent. In the twenty-eighth wave, central PCE increased at 1.2 annual equivalent in Nov-Dec 2016 and core PCE increased at 1.2 percent. PCEE energy increased at 17.3 percent while PCEF food fell at 2.4 percent. PCEG goods changed at 0.0 percent and PCEDG durable goods fell at 4.1 percent. PCES services increased at 2.4 percent. In the twenty-ninth wave, PCE prices increased at 3.7 percent annual equivalent in Jan 2017 with PCEX increasing at 2.4 percent. PCEE energy increased at 45.9 percent while PCEF food changed at 1.2 percent. PCEG goods increased at 8.7 percent and PCEDG durable goods increased at 7.4 percent. In the thirtieth wave, central PCE changed at 0.0 percent annual equivalent in Feb-Mar 2017 with core PCEX changing at 0.6 percent. PCEF food increased at 3.0 percent while PCEE energy fell at 14.5 percent. PCEG goods fell at 3.0 percent and PCEGD durable goods fell at 4.7 percent. PCES services increased at 1.2 percent. In the thirty-first wave, PCE prices increased at 2.4 percent annual equivalent in Apr 2017 while core PCEX prices increased at 2.4 percent. PCEF increased at 2.4 percent and PCEE increased at 3.7 percent. PCEG decreased at 1.2 percent and PCEDG fell at 2.4 percent. PCES increased at 4.9 percent. In the thirty-second wave, central PCE increased at 0.8 percent annual equivalent in May-Jul 2017 while core PCEX increased at 1.6 percent. PCEG goods fell at annual equivalent 2.0 percent and PCEDG durable goods fell at 2.4 percent. PCEF foods increased at 0.4 percent while PCEE energy fell at 11.4 percent annual equivalent. In the thirty-third wave, central PCE increased at 3.0 percent annual equivalent in Aug-Sep 2017 while PCEX increased at 1.8 percent. PCEF decreased at 0.6 percent and PCEE energy increased at 59.1 percent annual equivalent. PCEG increased at 4.3 percent annual equivalent while PCEDG fell at 2.4 percent. PCES increased at 2.4 percent annual equivalent. In the thirty-fourth wave, central PCE increased at 2.4 percent annual equivalent in Oct-Dec 2017 while PCEX increased at 2.4 percent. PCEF changed at 0.0 percent and PCEE energy increased at 6.4 percent annual equivalent. PCEG changed at 0.0 percent annual equivalent while PCEDG decreased at 1.6 percent. In the thirty-fifth wave, central PCE increased at 3.0 percent annual equivalent in Jan-Feb 2018 while PCEX increased at 2.4 percent. PCEF changed at 0.0 percent and PCEE energy increased at 14.0 percent annual equivalent. PCEG increased at 6.2 percent annual equivalent while PCEDG decreased at 1.2 percent. PCES increased at 3.0 percent annual equivalent. In the thirty-sixth wave, central PCE increased at 2.0 percent annual equivalent in Mar-May 2018 while PCEX increased at 2.4 percent. PCEF increased at 1.2 percent and PCEE energy increased at 4.4 percent annual equivalent. PCEG increased at 0.8 percent annual equivalent while PCEDG decreased at 1.2 percent. PCES increased at 3.2 percent annual equivalent. In the thirty-seventh wave, central PCE increased at 1.6 percent annual equivalent in Jun-Aug 2018 while PCEX increased at 1.2 percent. PCEF increased at 0.4 percent and PCEE energy increased at 4.9 percent annual equivalent. PCEG decreased at 0.8 percent annual equivalent while PCEDG decreased at 0.8 percent. PCES increased at 2.4 percent annual equivalent. In the thirty-eighth wave, central PCE increased at 1.2 percent annual equivalent in Sep-Dec 2018 while PCEX increased at 2.1 percent. PCEF increased at 0.6 percent and PCEE energy decreased at 13.2 percent annual equivalent. PCEG decreased at 2.4 percent annual equivalent while PCEDG decreased at 1.2 percent. PCES increased at 2.7 percent annual equivalent. In the thirty-ninth wave, central PCE decreased at 1.2 percent annual equivalent in Jan 2019 while PCEX increased at 1.2 percent. PCEF increased at 2.4 percent and PCEE energy decreased at 32.3 percent annual equivalent. PCEG decreased at 1.2 percent annual equivalent while PCEDG increased at 3.7 percent. PCES decreased at 1.2 percent annual equivalent. In the fortieth wave, central PCE increased at 1.8 percent annual equivalent in Feb-Mar 2019 while PCEX increased at 0.6 percent. PCEF increased at 4.3 percent and PCEE energy increased at 27.4 percent annual equivalent. PCEG increased at 1.8 percent annual equivalent while PCEDG decreased at 4.1 percent. PCES increased at 1.8 percent annual equivalent. In the forty-first wave, central PCE increased at 3.7 percent annual equivalent in Apr 2019 while PCEX increased at 2.4 percent. PCEF decreased at 3.5 percent and PCEE energy increased at 40.9 percent annual equivalent. PCEG increased at 2.4 percent annual equivalent while PCEDG decreased at 3.5 percent. PCES increased at 4.9 percent annual equivalent. In the forty-second wave, central PCE increased at 1.6 percent annual equivalent in May-Jul 2019 while PCEX increased at 2.4 percent. PCEF increased at 0.4 percent and PCEE energy decreased at 6.0 percent annual equivalent. PCEG increased at 0.8 percent annual equivalent while PCEDG increased at 0.4 percent. PCES increased at 2.4 percent annual equivalent. In the forty-third wave, central PCE changed at 0.0 percent annual equivalent in Aug-Sep 2019 while PCEX increased at 1.2 percent. PCEF decreased at 1.2 percent and PCEE energy decreased at 18.1 percent annual equivalent. PCEG decreased at 3.5 percent annual equivalent while PCEDG decreased at 2.4 percent. PCES increased at 1.8 percent annual equivalent. In the forty-fourth wave, central PCE increased at 2.4 percent annual equivalent in Oct-Dec 2019 while PCEX increased at 1.6 percent. PCEF changed at 0.0 percent and PCEE energy increased at 18.1 percent annual equivalent. PCEG increased at 1.6 percent annual equivalent while PCEDG decreased at 4.3 percent. PCES increased at 2.4 percent annual equivalent. In the forty-fifth wave, central PCE increased at 1.2 percent annual equivalent in Jan-Feb 2020 while PCEX increased at 2.4 percent. PCEF increased at 4.9 percent and PCEE energy decreased at 15.1 percent annual equivalent. PCEG decreased at 0.6 percent annual equivalent while PCEDG increased at 1.2 percent. PCES increased at 2.4 percent annual equivalent. In the forty-sixth wave, central PCE decreased at 4.1 percent annual equivalent in Mar-Apr 2020 while PCEX decreased at 3.0 percent. PCEF increased at 19.5 percent and PCEE energy decreased at 61.3 percent annual equivalent. PCEG decreased at 10.3 percent annual equivalent while PCEDG decreased at 9.7 percent. PCES decreased at 1.2 percent annual equivalent. In the forty-seventh wave, central PCE increased at 1.2 percent annual equivalent in May 2020 while PCEX increased at 1.2 percent. PCEF increased at 10.0 percent and PCEE energy decreased at 18.6 percent annual equivalent. PCEG changed at 0.0 percent annual equivalent while PCEDG increased at 2.4 percent. PCES increased at 2.4 percent annual equivalent. Oscillating commodity prices have moderated with reallocation of financial investments to carry trades in equities.

Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption

Expenditures, Seasonally Adjusted Monthly ∆%

PCE

PCEG

PCEG
-D

PCES

PCEX

PCEF

PCEE

2020

May

0.1

0.0

0.2

0.2

0.1

0.8

-1.7

AE May

1.2

0.0

2.4

2.4

1.2

10.0

-18.6

Apr

-0.5

-0.9

-1.2

-0.2

-0.4

2.4

-9.2

Mar

-0.2

-0.9

-0.5

0.0

-0.1

0.6

-6.0

AE Mar-Apr

-4.1

-10.3

-9.7

-1.2

-3.0

19.5

-61.3

Feb

0.1

-0.1

0.2

0.2

0.2

0.5

-2.1

Jan

0.1

0.0

0.0

0.2

0.2

0.3

-0.6

AE Jan-Feb

1.2

-0.6

1.2

2.4

2.4

4.9

-15.1

2019

Dec

0.3

0.2

-0.5

0.3

0.2

-0.1

1.7

Nov

0.1

0.0

-0.4

0.1

0.1

0.0

0.8

Oct

0.2

0.2

-0.2

0.2

0.1

0.1

1.7

AE Oct-Dec

2.4

1.6

-4.3

2.4

1.6

0.0

18.1

Sep

0.0

-0.3

-0.2

0.1

0.1

0.0

-1.3

Aug

0.0

-0.3

-0.2

0.2

0.1

-0.2

-2.0

AE Aug-Sep

0.0

-3.5

-2.4

1.8

1.2

-1.2

-18.1

Jul

0.2

0.2

-0.5

0.3

0.2

-0.1

1.4

Jun

0.1

-0.1

0.5

0.2

0.3

-0.1

-2.3

May

0.1

0.1

0.1

0.1

0.1

0.3

-0.6

AE May-Jul

1.6

0.8

0.4

2.4

2.4

0.4

-6.0

Apr

0.3

0.2

-0.3

0.4

0.2

-0.3

2.9

AE Apr

3.7

2.4

-3.5

4.9

2.4

-3.5

40.9

Mar

0.2

0.3

-0.4

0.2

0.1

0.2

3.6

Feb

0.1

0.0

-0.3

0.1

0.0

0.5

0.5

AE Feb-Mar

1.8

1.8

-4.1

1.8

0.6

4.3

27.4

Jan

-0.1

-0.1

0.3

-0.1

0.0

0.2

-3.2

AE Jan

-1.2

-1.2

3.7

-1.2

1.2

2.4

-32.3

2018

Dec

0.0

-0.5

-0.1

0.3

0.2

0.1

-2.8

Nov

0.1

-0.4

0.1

0.2

0.2

0.2

-2.8

Oct

0.2

0.2

0.0

0.2

0.1

-0.1

2.0

Sep

0.1

-0.1

-0.4

0.2

0.2

0.0

-1.0

AE Sep-Dec

1.2

-2.4

-1.2

2.7

2.1

0.6

-13.2

Aug

0.0

-0.2

-0.3

0.2

0.0

-0.1

0.5

Jul

0.2

0.0

0.3

0.2

0.2

0.1

0.0

Jun

0.2

0.0

-0.2

0.2

0.1

0.1

0.7

AE Jun-Aug

1.6

-0.8

-0.8

2.4

1.2

0.4

4.9

May

0.2

0.2

-0.2

0.3

0.2

-0.2

1.5

Apr

0.2

0.2

0.0

0.2

0.2

0.3

1.0

Mar

0.1

-0.2

-0.1

0.3

0.2

0.2

-1.4

AE Mar-May

2.0

0.8

-1.2

3.2

2.4

1.2

4.4

Feb

0.2

0.0

-0.4

0.3

0.2

-0.1

0.5

Jan

0.3

0.5

0.2

0.2

0.2

0.1

1.7

AE Jan-Feb

3.0

6.2

-1.2

3.0

2.4

0.0

14.0

2017

Dec

0.2

0.1

-0.1

0.2

0.2

0.0

0.5

Nov

0.2

0.1

-0.4

0.2

0.1

-0.1

2.9

Oct

0.2

-0.2

0.1

0.3

0.3

0.1

-1.8

AE Oct-Dec

2.4

0.0

-1.6

2.8

2.4

0.0

6.4

Sep

0.3

0.5

-0.2

0.2

0.2

0.0

5.0

Aug

0.2

0.2

-0.2

0.2

0.1

-0.1

2.9

AE Aug-Sep

3.0

4.3

-2.4

2.4

1.8

-0.6

59.1

Jul

0.1

0.0

-0.2

0.1

0.1

0.2

-0.5

Jun

0.1

-0.1

-0.2

0.2

0.2

-0.2

-0.3

May

0.0

-0.4

-0.2

0.2

0.1

0.1

-2.2

AE May-Jul

0.8

-2.0

-2.4

2.0

1.6

0.4

-11.4

Apr

0.2

-0.1

-0.2

0.4

0.2

0.2

0.3

AE Apr

2.4

-1.2

-2.4

4.9

2.4

2.4

3.7

Mar

-0.1

-0.3

-0.6

0.0

-0.1

0.3

-0.8

Feb

0.1

-0.2

-0.2

0.2

0.2

0.2

-1.8

AE Feb-Mar

0.0

-3.0

-4.7

1.2

0.6

3.0

-14.5

Jan

0.3

0.7

0.6

0.2

0.2

0.1

3.2

AE Jan

3.7

8.7

7.4

2.4

2.4

1.2

45.9

2016

Dec

0.2

0.3

-0.1

0.2

0.1

-0.2

2.9

Nov

0.0

-0.3

-0.6

0.2

0.1

-0.2

-0.2

AE Nov-Dec

1.2

0.0

-4.1

2.4

1.2

-2.4

17.3

Oct

0.2

0.2

-0.2

0.2

0.2

0.0

2.4

Sep

0.1

0.1

-0.3

0.1

0.1

-0.1

1.0

Aug

0.2

0.0

-0.2

0.2

0.2

-0.2

-0.2

AE Aug-Oct

2.0

1.2

-2.8

2.0

2.0

-1.2

13.5

Jul

0.1

-0.4

-0.2

0.3

0.2

-0.1

-1.9

AE Jul

1.2

-4.7

-2.4

3.7

2.4

-1.2

-20.6

Jun

0.2

0.1

-0.5

0.2

0.1

-0.2

2.8

May

0.2

0.0

-0.4

0.3

0.2

-0.4

1.8

Apr

0.3

0.4

0.1

0.3

0.2

0.1

2.8

Mar

0.2

0.1

-0.4

0.2

0.1

-0.4

3.1

AE Mar-Jun

2.7

1.8

-3.5

3.0

1.8

-2.7

36.5

Feb

-0.1

-0.6

-0.2

0.2

0.2

0.2

-6.0

AE Feb

-1.2

-7.0

-2.4

2.4

2.4

2.4

-52.4

Jan

0.1

-0.3

0.1

0.2

0.2

-0.1

-2.5

AE Jan

1.2

-3.5

1.2

2.4

2.4

-1.2

-26.2

2015

Dec

-0.1

-0.4

-0.3

0.1

0.1

-0.3

-2.4

AE Dec

-1.2

-4.7

-3.5

1.2

1.2

-3.5

-25.3

Nov

0.1

-0.2

-0.3

0.2

0.1

-0.3

-0.9

Oct

0.0

-0.1

-0.2

0.1

0.0

0.2

-0.8

AE Oct-Nov

0.6

-1.8

-3.0

1.8

0.6

-0.6

-9.7

Sep

-0.2

-0.7

0.1

0.1

0.1

0.1

-6.0

Aug

0.0

-0.3

-0.3

0.2

0.1

0.1

-1.9

AE Aug-Sep

-1.2

-5.8

-1.2

1.8

1.2

1.2

-38.5

Jul

0.1

0.0

-0.2

0.2

0.1

0.2

0.0

Jun

0.2

0.1

-0.2

0.2

0.1

0.3

1.7

May

0.3

0.5

-0.1

0.1

0.1

0.0

3.4

AE May-Jul

2.4

2.4

-2.0

2.0

1.2

2.0

22.3

Apr

0.1

-0.2

0.1

0.2

0.2

-0.2

-1.8

Mar

0.2

0.3

-0.2

0.2

0.2

-0.3

2.4

Feb

0.2

0.3

0.2

0.1

0.1

0.1

1.4

AE Feb-Apr

2.0

1.6

0.4

2.0

2.0

-1.6

8.1

Jan

-0.5

-1.6

-0.2

0.0

0.0

-0.1

-9.4

AE Jan

-5.8

-17.6

-2.4

0.0

0.0

-1.2

-69.4

2014

Dec

-0.2

-0.9

-0.5

0.2

0.1

0.2

-5.0

Nov

-0.1

-0.7

-0.4

0.2

0.1

0.2

-3.6

AE Nov-Dec

-1.8

-9.2

-5.3

2.4

1.2

2.4

-41.1

Oct

0.0

-0.3

-0.1

0.1

0.1

0.0

-2.1

Sep

0.0

-0.2

-0.3

0.1

0.1

0.2

-1.8

Aug

0.0

-0.3

-0.2

0.1

0.0

0.3

-1.2

∆% AE Aug-Oct

0.0

-3.2

-2.4

1.2

0.8

2.0

-18.6

Jul

0.1

0.0

-0.1

0.2

0.2

0.2

-0.5

Jun

0.1

0.1

-0.1

0.1

0.1

0.0

0.2

May

0.2

0.0

-0.4

0.3

0.2

0.6

-0.4

Apr

0.2

0.2

-0.1

0.2

0.2

0.3

0.1

∆% AE Apr-Jul

1.8

0.9

-2.1

2.4

2.1

3.3

-1.8

Mar

0.2

-0.1

-0.2

0.4

0.2

0.5

0.0

Feb

0.1

-0.1

-0.3

0.1

0.1

0.3

-0.3

Jan

0.2

0.2

-0.3

0.2

0.1

0.1

1.8

2013

Dec

0.2

0.1

-0.4

0.2

0.1

0.1

1.3

∆% AE Dec-Mar

2.1

0.3

-3.5

2.7

1.5

3.0

8.7

Nov

0.2

0.0

-0.2

0.2

0.2

-0.2

0.3

Oct

0.2

-0.1

-0.2

0.3

0.2

0.1

-0.4

Sep

0.0

-0.3

-0.1

0.2

0.1

-0.1

-1.0

Aug

0.1

0.1

-0.3

0.2

0.1

0.1

0.9

Jul

0.1

0.0

-0.2

0.2

0.1

0.1

0.1

Jun

0.2

0.2

0.0

0.2

0.2

0.2

1.0

May

0.1

-0.2

-0.1

0.2

0.1

-0.3

-0.2

∆% AE May-Nov

1.6

-0.5

-1.9

2.6

1.7

-0.2

1.2

Apr

-0.1

-0.6

-0.3

0.2

0.1

0.1

-2.7

Mar

-0.1

-0.8

-0.4

0.2

0.1

0.1

-3.7

∆% AE Mar-Apr

-1.2

-8.1

-4.1

2.4

1.2

1.2

-32.3

Feb

0.4

0.7

-0.1

0.2

0.1

0.1

4.5

∆% AE Feb

4.9

8.7

-1.2

2.4

1.2

1.2

69.6

Jan

0.2

0.1

-0.1

0.2

0.2

0.1

0.1

2012

Dec

0.0

-0.4

-0.1

0.2

0.1

0.2

-1.7

Nov

-0.1

-0.6

0.0

0.2

0.1

0.2

-2.9

Oct

0.3

0.3

-0.1

0.3

0.2

0.3

1.2

∆% AE Oct-Jan

1.2

-1.7

-0.9

2.7

1.8

2.4

-9.6

Sep

0.3

0.6

-0.2

0.2

0.1

0.0

3.5

Aug

0.3

0.7

-0.2

0.2

0.1

0.0

5.0

∆% AE Aug-Sep

3.7

8.1

-2.4

2.4

1.2

0.0

64.7

Jul

0.0

-0.1

-0.1

0.1

0.1

0.0

-1.0

Jun

-0.1

-0.5

-0.3

0.2

0.1

0.2

-2.7

∆% AE Jun-Jul

-0.6

-3.5

-2.4

1.8

1.2

1.2

-20.1

May

-0.1

-0.6

-0.1

0.1

0.1

-0.1

-3.3

Apr

0.1

0.0

-0.3

0.2

0.2

0.1

-0.1

∆% AE Apr- May

0.0

-3.5

-2.4

1.8

1.8

0.0

-18.7

Mar

0.2

0.2

-0.2

0.2

0.2

0.2

0.5

Feb

0.2

0.3

-0.1

0.2

0.2

-0.1

1.9

Jan

0.4

0.4

0.1

0.3

0.3

0.4

0.9

∆% AE Jan- Mar

3.2

3.7

-0.8

2.8

2.8

2.0

14.0

2011

Dec

0.1

-0.2

-0.1

0.2

0.2

0.2

-1.7

Nov

0.2

0.2

-0.1

0.2

0.2

-0.1

0.5

Oct

0.0

0.0

0.0

0.0

0.1

0.1

-0.8

∆% AE Oct- Dec

1.2

0.0

-0.8

1.6

2.0

0.8

-7.8

Sep

0.1

0.2

-0.4

0.1

0.1

0.6

0.7

Aug

0.2

0.2

-0.1

0.2

0.2

0.6

0.3

Jul

0.2

0.1

0.0

0.2

0.2

0.4

0.2

∆% AE Jul-Sep

2.0

2.0

-2.0

2.0

2.0

6.6

4.9

Jun

0.0

-0.2

0.1

0.1

0.1

0.2

-2.2

May

0.3

0.4

0.1

0.3

0.2

0.5

1.1

∆% AE May-Jun

1.8

1.2

1.2

2.4

1.8

4.3

-6.6

Apr

0.4

0.8

0.2

0.2

0.2

0.4

3.4

Mar

0.4

0.8

-0.2

0.2

0.2

0.9

3.6

Feb

0.3

0.5

0.1

0.2

0.2

0.6

1.4

Jan

0.3

0.5

0.2

0.2

0.2

0.7

1.1

∆% AE Jan-Apr

4.3

8.1

0.9

2.4

2.4

8.1

32.4

2010

Dec

0.2

0.5

-0.3

0.1

0.0

0.1

3.5

Nov

0.2

0.3

0.0

0.1

0.1

0.2

1.3

Oct

0.3

0.5

-0.2

0.2

0.1

0.0

3.4

Sep

0.1

0.2

-0.1

0.0

0.0

0.3

0.6

Aug

0.1

0.2

0.1

0.1

0.1

0.1

0.9

Jul

0.1

0.1

-0.4

0.1

0.0

0.0

1.5

Jun

-0.1

-0.3

-0.3

0.1

0.0

-0.1

-1.4

May

0.0

-0.3

-0.3

0.2

0.1

0.0

-1.3

Apr

0.0

-0.2

-0.4

0.1

0.0

0.1

0.0

Mar

0.1

0.0

-0.1

0.2

0.1

0.3

-0.2

Feb

0.0

-0.3

-0.4

0.1

0.1

0.1

-1.5

Jan

0.2

0.2

-0.1

0.2

0.1

0.1

1.5

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services. AE: annual equivalent.

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

Chart VI-1 provides monthly percentage changes of the headline PCE price index from 1999 to 2020. There is significant volatility in the monthly changes but excluding outliers, fluctuations have been in a tight range between 1999 and 2019 around 0.2 percent per month. The energy shock is causing decline of PCEE prices in the final segment similar to that after reversal of carry trades in 2008-2009 with oscillations in portfolio reallocations. There are declines in Mar-Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event followed by increase in May 2020.

clip_image007

Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

There is much less volatility in the PCE index excluding food and energy shown in Chart IV-2 with monthly percentage changes from 1999 to 2020. Except for minus 0.6 percent in Oct 2001, there are no major negative changes and again changes around 0.2 percent when excluding outliers. PCE excluding food and energy decreased 0.4 percent in Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. PCE excluding food and energy increased 0.1 percent in May 2020.

clip_image009

Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Fluctuations in the PCE index of food are much wider as shown in Chart IV-3 by monthly percentage changes from 1999 to 2020. There are also multiple negative changes and positive changes even exceeding 1.0 percent in three months. PCE food increased 2.4 percent in Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. PCE excluding food and energy increased 0.1 percent in May 2020. PCE food increased 0.8 percent in May 2020.

clip_image011

Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes and large percentages. The final segment shows the sharp decline of energy prices during reversal of carry trades from zero interest rates to commodity futures similar to 2008-2009. Energy prices had been decreasing in late 2019 and the decrease accentuated in 2020 with decreases of 9.2 percent in Apr 2020 and 6.0 percent in Mar 2020. Energy prices decreased 1.7 percent in May 2020.

clip_image013

Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Table IV-6 provides twelve-month inflation rates, annual rates from 2000 to 2019 and average yearly rates of PCE inflation for various periods since 1929. Headline 12-month PCE inflation decreased from 2.6 percent in in the 12 months ending in Jan 2012 to 0.5 percent in the 12 months ending in May 2020. PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, decreased from 2.1 percent in the 12 months ending in Jan 2012 to 1.0 percent in the 12 months ending in May 2020, which is still below or at the tolerable maximum of 2.0-2.5 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy. Annual PCE inflation in the second part of Table IV-6 shows significant fluctuations. Headline PCE inflation rose during the period of 1 percent interest rates from Jun 2003 to Jun 2005, reaching 2.8 percent in 2005. PCEE rose at very high two-digit rates after 2003. Headline PCE inflation increased 3.0 percent in 2008 while PCEE energy increased 14.3 percent in carry trades from zero interest rates to commodity derivatives during deep global recession. Flight away from risk financial assets to US government obligations fueled by proposals of TARP in Congress (Cochrane and Zingales 2009) caused decline of PCEE of 18.9 percent in 2009 and minus 0.1 percent in headline PCE. There is no deflation in the US economy. Carry trades from zero interest rates to commodity exposures mixed with portfolio reallocations among risk financial assets caused wide recent oscillations. Headline PCE inflation increased at the average rate of 2.8 percent from 1929 to 2019, as shown in Table IV-6 using the revisions by the BEA. PCE inflation was 6.1 percent on average during the Great Inflation episode from 1965 to 1981 (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/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). PCE inflation was 3.1 percent on average from 1947 to 2019 and 3.1 percent on average for PCEX. The long-term charts of PCE and PCEX show almost identical behavior.

Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption

Expenditures ∆%

PCE

PCEG

PCEG
-D

PCES

PCEX

PCEF

PCEE

2020

May

0.5

-2.1

-2.7

1.8

1.0

4.5

-18.5

Apr

0.6

-2.0

-2.8

1.7

1.0

3.9

-17.6

Mar

1.3

-0.9

-1.9

2.4

1.7

1.1

-6.5

Feb

1.8

0.2

-1.8

2.5

1.8

0.8

3.0

Jan

1.8

0.3

-2.3

2.5

1.7

0.8

5.7

2019

Dec

1.6

0.2

-2.1

2.2

1.6

0.7

3.0

Nov

1.3

-0.4

-1.7

2.1

1.5

0.9

-1.6

Oct

1.3

-0.8

-1.2

2.3

1.6

1.0

-5.1

Sep

1.3

-0.7

-1.0

2.3

1.7

0.8

-4.8

Aug

1.4

-0.5

-1.1

2.3

1.8

0.8

-4.5

Jul

1.4

-0.5

-1.2

2.3

1.6

0.9

-2.1

Jun

1.4

-0.6

-0.5

2.3

1.6

1.1

-3.4

May

1.4

-0.4

-1.2

2.2

1.5

1.3

-0.4

Apr

1.5

-0.4

-1.5

2.4

1.6

0.8

1.7

Mar

1.4

-0.3

-1.3

2.2

1.5

1.4

-0.3

Feb

1.3

-0.8

-1.0

2.3

1.6

1.3

-5.1

Jan

1.4

-0.8

-1.1

2.5

1.8

0.8

-5.1

2018

Dec

1.8

-0.3

-1.1

2.7

2.0

0.7

-0.3

Nov

1.9

0.3

-1.2

2.7

2.0

0.6

3.0

Oct

2.0

0.7

-1.6

2.6

1.9

0.3

9.1

Sep

2.0

0.3

-1.6

2.8

2.0

0.5

5.0

Aug

2.3

1.0

-1.4

2.8

2.0

0.5

11.4

Jul

2.5

1.5

-1.3

2.9

2.1

0.5

14.1

Jun

2.4

1.5

-1.9

2.8

2.0

0.5

13.5

May

2.3

1.4

-1.8

2.8

2.1

0.3

12.4

Apr

2.1

0.8

-1.8

2.7

2.0

0.5

8.2

Mar

2.1

0.4

-2.0

2.9

2.0

0.4

7.6

Feb

1.9

0.4

-2.5

2.6

1.7

0.6

8.2

Jan

1.8

0.2

-2.2

2.5

1.7

0.8

5.8

2017

Dec

1.9

0.4

-1.8

2.5

1.7

0.8

7.4

Nov

1.9

0.6

-1.8

2.5

1.7

0.6

9.9

Oct

1.7

0.2

-2.0

2.5

1.6

0.5

6.6

Sep

1.8

0.6

-2.2

2.4

1.5

0.4

11.2

Aug

1.6

0.1

-2.3

2.2

1.4

0.3

7.0

Jul

1.5

-0.1

-2.3

2.2

1.5

0.2

3.8

Jun

1.5

-0.5

-2.3

2.4

1.6

-0.1

2.4

May

1.6

-0.3

-2.6

2.5

1.6

-0.2

5.5

Apr

1.8

0.1

-2.9

2.5

1.6

-0.6

9.9

Mar

1.9

0.7

-2.5

2.4

1.6

-0.7

12.6

Feb

2.1

1.0

-2.4

2.7

1.8

-1.5

17.1

Jan

2.0

0.6

-2.4

2.6

1.9

-1.5

12.0

2016

Dec

1.7

-0.3

-2.9

2.6

1.8

-1.6

5.8

Nov

1.4

-1.1

-3.1

2.6

1.7

-1.8

0.5

Oct

1.4

-1.0

-2.8

2.5

1.8

-1.9

-0.2

Sep

1.2

-1.3

-2.8

2.4

1.7

-1.7

-3.3

Aug

0.9

-2.1

-2.4

2.4

1.7

-1.6

-10.1

Jul

0.8

-2.5

-2.6

2.3

1.6

-1.3

-11.6

Jun

0.8

-2.1

-2.5

2.2

1.5

-1.0

-10.0

May

0.8

-2.1

-2.3

2.2

1.5

-0.5

-10.9

Apr

0.9

-1.6

-2.0

2.1

1.5

-0.1

-9.5

Mar

0.6

-2.2

-2.0

2.0

1.4

-0.4

-13.6

Feb

0.7

-2.0

-1.8

1.9

1.5

-0.2

-14.2

Jan

0.9

-1.1

-1.4

1.9

1.4

-0.3

-7.5

2015

Dec

0.4

-2.4

-1.8

1.7

1.2

-0.3

-14.0

Nov

0.3

-2.8

-2.0

1.7

1.2

0.3

-16.3

Oct

0.1

-3.3

-2.1

1.8

1.2

0.8

-18.6

Sep

0.1

-3.4

-2.0

1.8

1.3

0.7

-19.7

Aug

0.3

-2.9

-2.3

1.8

1.2

0.8

-16.1

Jul

0.3

-2.8

-2.2

1.7

1.2

1.0

-15.6

Jun

0.3

-2.8

-2.1

1.8

1.3

1.1

-15.9

May

0.2

-2.9

-2.0

1.7

1.2

0.8

-17.2

Apr

0.1

-3.4

-2.2

1.8

1.3

1.3

-20.2

Mar

0.2

-3.0

-2.4

1.8

1.3

1.8

-18.7

Feb

0.2

-3.4

-2.3

2.0

1.3

2.6

-20.6

Jan

0.1

-3.8

-2.8

2.0

1.3

2.8

-21.9

2014

Dec

0.8

-2.1

-2.8

2.2

1.4

3.0

-12.2

Nov

1.1

-1.1

-2.7

2.2

1.4

2.9

-6.4

Oct

1.4

-0.4

-2.4

2.3

1.5

2.5

-2.6

Sep

1.6

-0.2

-2.6

2.5

1.6

2.5

-0.9

Aug

1.6

-0.3

-2.4

2.5

1.6

2.3

0.0

Jul

1.8

0.1

-2.5

2.6

1.7

2.1

2.2

Jun

1.7

0.2

-2.7

2.5

1.7

1.9

2.8

May

1.8

0.3

-2.6

2.6

1.7

2.1

3.6

Apr

1.7

0.1

-2.4

2.5

1.6

1.3

3.8

Mar

1.5

-0.7

-2.6

2.6

1.6

1.1

0.9

Feb

1.1

-1.3

-2.8

2.4

1.5

0.8

-2.8

Jan

1.5

-0.6

-2.6

2.5

1.5

0.5

1.9

2013

Dec

1.5

-0.7

-2.5

2.5

1.6

0.5

0.2

Nov

1.3

-1.1

-2.2

2.4

1.6

0.6

-2.8

Oct

1.0

-1.7

-2.0

2.4

1.5

0.9

-5.9

Sep

1.2

-1.3

-2.0

2.4

1.6

1.1

-4.5

Aug

1.4

-0.4

-2.1

2.4

1.6

1.1

-0.1

Jul

1.6

0.1

-1.9

2.4

1.5

1.1

4.0

Jun

1.5

0.0

-1.9

2.3

1.5

1.0

2.8

May

1.3

-0.8

-2.1

2.3

1.4

1.0

-0.9

Apr

1.1

-1.1

-2.1

2.2

1.4

1.1

-4.0

Mar

1.3

-0.6

-2.0

2.2

1.5

1.1

-1.5

Feb

1.6

0.4

-1.8

2.2

1.6

1.2

2.7

Jan

1.5

0.1

-1.8

2.2

1.6

1.1

0.2

2012

Dec

1.6

0.4

-1.6

2.3

1.7

1.3

1.0

Nov

1.7

0.5

-1.6

2.3

1.8

1.3

0.9

Oct

2.0

1.3

-1.7

2.3

1.9

1.1

4.5

Sep

1.7

1.0

-1.6

2.1

1.7

0.9

2.4

Aug

1.5

0.5

-1.8

2.1

1.7

1.5

-0.4

Jul

1.4

0.1

-1.7

2.1

1.8

2.1

-4.8

Jun

1.6

0.3

-1.6

2.2

1.9

2.5

-3.7

May

1.6

0.6

-1.2

2.1

1.9

2.5

-3.2

Apr

2.1

1.6

-1.0

2.3

2.0

3.1

1.2

Mar

2.4

2.5

-0.6

2.3

2.1

3.4

4.7

Feb

2.6

3.0

-0.5

2.4

2.1

4.1

8.0

Jan

2.6

3.2

-0.3

2.4

2.1

4.8

7.4

Annual ∆%

2019

1.4

-0.5

-1.2

2.3

1.6

1.0

-2.3

2018

2.1

0.7

-1.7

2.7

1.9

0.5

8.0

2017

1.8

0.3

-2.3

2.4

1.6

-0.1

8.7

2016

1.0

-1.6

-2.4

2.3

1.6

-1.0

-7.3

2015

0.2

-3.1

-2.2

1.8

1.2

1.1

-18.0

2014

1.5

-0.5

-2.6

2.4

1.6

1.9

-0.8

2013

1.3

-0.6

-2.0

2.3

1.5

1.0

-0.9

2012

1.9

1.2

-1.3

2.2

1.9

2.4

1.4

2011

2.5

3.8

-0.8

1.9

1.6

4.0

15.8

2010

1.7

1.5

-1.8

1.8

1.4

0.3

10.0

2009

-0.1

-2.4

-1.9

1.1

1.2

1.2

-18.9

2008

3.0

3.0

-1.9

3.0

2.0

6.1

14.3

2007

2.5

1.1

-2.1

3.3

2.2

3.9

6.0

2006

2.7

1.3

-1.7

3.5

2.3

1.7

11.4

2005

2.8

2.0

-1.0

3.3

2.1

1.7

17.3

2004

2.5

1.4

-2.0

3.1

2.0

3.1

11.3

2003

1.9

-0.1

-3.7

3.1

1.4

1.9

12.6

2002

1.3

-1.0

-2.5

2.6

1.7

1.5

-5.8

2001

1.9

-0.1

-2.0

3.1

1.8

2.9

2.5

2000

2.5

2.0

-1.8

2.8

1.7

2.3

18.3

Average ∆%

2000-2019

1.8

0.3

-31.2*

2.5

1.7

1.8

2.9

1929-2019

2.8

2.1

1.1

3.2

2.8

2.7

2.9

1947-2019

3.1

2.1

0.8

3.8

3.1

2.8

3.6

1965-1981

6.1

5.6

4.3

6.5

5.7

6.3

9.3

*Percentage change from 2000 to 2018.

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

The headline PCE index is in Chart IV-5 from 1999 to 2020. There is an evident upward trend with the carry-trade bump in 2008-2009 during the global recession. Price fell in Mar-Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, increasing in May 2020.

clip_image015

Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

The consumer price index in Chart IV-6 mirrors the behavior of the PCE price index in Chart IV-6. There is the same upward trend with the carry-trade bump in 2008 during the global recession.

clip_image016

Chart IV-6, US, Consumer Price Index, NSA, 1999-2020

Source: US Bureau of Labor Statistics

https://www.bls.gov/cpi/data.htm

Chart IV-7 provides the PCE price index excluding food and energy. There is milder upward trend with fewer oscillations. Prices declined in Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, increasing in May 2020.

clip_image018

Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2020 Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

The core consumer price index, excluding food and energy, is in Chart IV-8. There is also an upward trend but with fluctuations.

clip_image019

Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2020

Source: US Bureau of Labor Statistics

https://www.bls.gov/cpi/data.htm

The PCE price index of food is in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations and recent stability followed by increase. Food prices increased 0.6 percent in Mar 2020 and increased 2.4 percent in Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, increasing 0.8 percent in May 2020.

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Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and in 2012-2020 with recent increase.

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Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2020

Source: US Bureau of Labor Statistics

https://www.bls.gov/cpi/data.htm

The most pronounced trend and oscillation of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. Cochrane and Zingales (2009) explain the flight by public allegations of toxic assets in banks during the request of funding from Congress for the Troubled Asset Relief Program (TARP). The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations. PCE energy good and services prices had been decreasing in the decline and dropped sharply by 6.0 percent in Mar 2020 and 9.2 percent in Apr 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, decreasing 1.7 percent in May 2020.

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Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2020

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-12 provides the consumer price index of energy. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in: (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012 followed by softness in another episode of risk aversion and increases during risk appetite.

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Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2020

Source: US Bureau of Labor Statistics https://www.bls.gov/cpi/data.htm

Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. The peak in Chart IV-13 is $145.18 on Jul 14, 2008, in the midst of deep global recession, falling to $33.87/barrel on Dec 19, 2008 (data from the US Energy Information Administration (https://www.eia.gov/dnav/pet/hist/RCLC1D.htm). Prices collapsed in the flight to government obligations caused by proposals for withdrawing “toxic assets” in the Troubled Asset Relief Program (TARP) as analyzed by Cochrane and Zingales (2009). Risk appetite with zero interest rates after stress tests of US banks resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. Unconventional monetary policy affects all price indexes. There is sharp contraction in the final segment during OPEC-Russia dispute.

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Chart IV-13, US, Crude Oil Futures Contract

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/RCLC1D.htm

Chart IV-14 provides the annual PCE price index from the revised and enhanced dataset of the Bureau of Economic Analysis (BEA). The annual PCE index increased at the average rate of 2.8 percent from 1929 to 2019. There is no support for fear of deflation.

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Chart IV-14, US, Price Index of Personal Consumption Expenditures, Annual, 1929-2019

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-15 of the Bureau of Labor Statistics (BLS) provides the consumer price index from 1913 to 2019. There is long-term inflation and no evidence in support of fear of deflation.

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Chart IV-15, US, Consumer Price Index, Annual, 1913-2019

Source: US Bureau of Labor Statistics https://www.bls.gov/cpi/data.htm

Chart IV-16 provides the BEA annual index of PCE prices excluding food and energy. The average rate of increase is 2.8 percent from 1929 to 2019.

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Chart IV-16, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy, Annual, 1929-2019

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-17 of the Bureau of Labor Statistics (BLS) provides the annual consumer price index excluding food and energy from 1957 to 2019. There is long-term, fluctuating inflation.

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Chart IV-17, US, Consumer Price Index Excluding Food and Energy, Annual, 1957-2019

Source: US Bureau of Labor Statistics https://www.bls.gov/cpi/data.htm

Chart IV-18 provides annual percentage changes of prices of personal consumption expenditures (PCE). Negative percentage changes concentrate in the Great Depression with decreases of 4.2 percent in 1930, 10.7 percent in 1931, 11.8 percent in 1932 and 3.6 percent in 1933. PCE prices fell 2.3 percent in 1938 and fell 1.0 percent in 1939. There is another decline of 0.8 percent in 1949 after high increases of 7.0 percent in 1946, 10.1 percent in 1947 and 5.7 percent in 1948 with earlier high increases during World War II. The only other decline is 0.1 percent in 2009 after reversal of carry trades that caused increase of 3.0 percent in 2008. There is no evidence of systematic decrease of prices of PCE or deflation during the entire availability of data.

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Chart IV-18, US, Price Index of Personal Consumption Expenditures, Annual Percentage Changes 1930-2019

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-19 provides annual percentage changes of United States consumer price inflation from 1914 to 2019. There have been only cases of annual declines of the CPI after wars:

  • World War I minus 10.5 percent in 1921 and minus 6.1 percent in 1922 following cumulative increases of 83.5 percent in four years from 1917 to 1920 at the average of 16.4 percent per year
  • World War II: minus 1.2 percent in 1949 following cumulative 33.9 percent in three years from 1946 to 1948 at average 10.2 percent per year
  • Minus 0.4 percent in 1955 two years after the end of the Korean War
  • Minus 0.4 percent in 2009.
  • The decline of 0.4 percent in 2009 followed increase of 3.8 percent in 2008 and is explained by the reversal of speculative carry trades into commodity futures that were created in 2008 as monetary policy rates were driven to zero. The reversal occurred after misleading statement on toxic assets in banks in the proposal for TARP (Cochrane and Zingales 2009).

There were declines of 1.7 percent in both 1927 and 1928 during the episode of revival of rules of the gold standard. The only persistent deflationary period since 1914 was during the Great Depression in the years from 1930 to 1933 and again in 1938-1939. Consumer prices increased only 0.1 percent in 2015 because of the collapse of commodity prices from artificially high levels induced by zero interest rates. Consumer prices increased 1.3 percent in 2016, increasing at 2.1 percent in 2017. Consumer prices increased 2.4 percent in 2018, increasing at 1.8 percent in 2019. Fear of deflation based on that experience does not justify unconventional monetary policy of zero interest rates that has failed to stop deflation in Japan. Financial repression causes far more adverse effects on allocation of resources by distorting the calculus of risk/returns than alleged employment-creating effects or there would not be current recovery without jobs and hiring after zero interest rates since Dec 2008 and intended now forever in a self-imposed forecast growth and employment mandate of monetary policy. 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). 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), analyzed 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). Jon Hilsenrath demonstrates 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) that monetary impulses increase financial and economic instability because of lags in anticipating needs of policy, taking policy decisions and effects of decisions. This a fortiori true when untested unconventional monetary policy in gargantuan doses shocks the economy and financial markets.

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Chart IV-19, US, Consumer Price Index, Annual Percentage Changes, 1914-2019

Source: US bureau of Labor Statistics https://www.bls.gov/cpi/data.htm

Chart IV-20 provides annual percentage changes of the price index of personal consumption expenditures excluding food and energy since 1930. Besides the episode of the Great Depression, there are no negative changes with the lowest reading after fast inflation during World War II.

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Chart IV-20, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy, Annual Percentage Changes, 1930-2019

Source: US Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

CPI inflation of all goods and CPI inflation excluding food and energy for the past six decades does not show even one negative change, as shown in Chart IV-21.

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Chart IV-21, US, Consumer Price Index Excluding Food and Energy, Annual Percentage Changes, 1958-2019

Source: US bureau of Labor Statistics https://www.bls.gov/cpi/data.htm

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.

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