Federal Open Market Committee Leaves Fed Funds Rate at 0 to ¼ Percent Per Year Probably Until 2023, Stable US Dollar With Revaluing Yuan, Growth of US Manufacturing at 1.0 Percent in Aug 2020, US Manufacturing 7.0 Lower Than A Year Earlier 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, US Manufacturing Underperforming Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Continuing Recovery of US Economic Indicators, World Cyclical Slow Growth, and Government Intervention in Globalization: Part IV
Carlos M. Pelaez
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
I United States Industrial Production
IIB Squeeze of Economic Activity by Carry Trades Induced
by Zero Interest Rates
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
VI Valuation of Risk Financial Assets.
The financial crisis and global recession were caused by interest rate and
housing subsidies and affordability policies that encouraged high leverage and
risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial
Regulation after the Global Recession (2009a), 157-66, Regulation of
Banks and Finance (2009b), 217-27, International Financial Architecture
(2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization
and the State Vol. II (2008b), 197-213, Government Intervention in
Globalization (2008c), 182-4). Several past comments of this blog elaborate
on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Table VI-1 shows the phenomenal impulse to
valuations of risk financial assets originating in the initial shock of near
zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear
of deflation that never materialized, and quantitative easing in the form of
suspension of the auction of 30-year Treasury bonds to lower mortgage rates.
World financial markets were dominated by monetary and housing policies in the
US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely
because of unconventional monetary policy encouraging carry trades from low US
interest rates to long leveraged positions in commodities, exchange rates and
other risk financial assets. The charts of risk financial assets show sharp
increase in valuations leading to the financial crisis and then profound drops
that are captured in Table VI-1 by percentage changes of peaks and troughs. The
first round of quantitative easing and near zero interest rates depreciated the
dollar relative to the euro by 39.3 percent between 2003 and 2008, with
revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to
dollar-denominated assets in fear of world financial risks. The dollar revalued
0.7 percent by Sep 18, 2020. Dollar devaluation is a major vehicle of monetary
policy in reducing the output gap that is implemented in the probably erroneous
belief that devaluation will not accelerate inflation, misallocating resources
toward less productive economic activities and disrupting financial markets.
The last row of Table VI-1 shows CPI inflation in the US rising from 1.9
percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the
fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.
Table VI-1, Volatility of
Assets
|
DJIA |
10/08/02-10/01/07 |
10/01/07-3/4/09 |
3/4/09- 4/6/10 |
|
|
∆% |
87.8 |
-51.2 |
60.3 |
|
|
NYSE Financial |
1/15/04- 6/13/07 |
6/13/07- 3/4/09 |
3/4/09- 4/16/07 |
|
|
∆% |
42.3 |
-75.9 |
121.1 |
|
|
Shanghai Composite |
6/10/05- 10/15/07 |
10/15/07- 10/30/08 |
10/30/08- 7/30/09 |
|
|
∆% |
444.2 |
-70.8 |
85.3 |
|
|
STOXX EUROPE 50 |
3/10/03- 7/25/07 |
7/25/07- 3/9/09 |
3/9/09- 4/21/10 |
|
|
∆% |
93.5 |
-57.9 |
64.3 |
|
|
UBS Com. |
1/23/02- 7/1/08 |
7/1/08- 2/23/09 |
2/23/09- 1/6/10 |
|
|
∆% |
165.5 |
-56.4 |
41.4 |
|
|
10-Year Treasury |
6/10/03 |
6/12/07 |
12/31/08 |
4/5/10 |
|
% |
3.112 |
5.297 |
2.247 |
3.986 |
|
USD/EUR |
6/26/03 |
7/14/08 |
6/07/10 |
09/19/2020 |
|
Rate |
1.1423 |
1.5914 |
1.192 |
1.1842 |
|
CNY/USD |
01/03 |
07/21 |
7/15 |
09/18/ 2020 |
|
Rate |
8.2798 |
8.2765 |
6.8211 |
6.7690 |
|
New House |
1963 |
1977 |
2005 |
2009 |
|
Sales 1000s |
560 |
819 |
1283 |
375 |
|
New House |
2000 |
2007 |
2009 |
2010 |
|
Median Price $1000 |
169 |
247 |
217 |
222 |
|
|
2003 |
2005 |
2007 |
2010 |
|
CPI |
2.3 |
3.4 |
2.8 |
1.6 |
Sources: https://www.wsj.com/market-data
https://www.census.gov/construction/nrs/index.html
https://www.federalreserve.gov/data.htm
Table VI-2
provides the Euro/Dollar (EUR/USD) exchange rate and Chinese Yuan/Dollar
(CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting
from monetary policy in the US and capital control/exchange rate policy in
China. The ultimate intentions are the same: promoting internal economic
activity at the expense of the rest of the world. The easy money policy of the
US was deliberately or not but effectively to devalue the dollar from USD
1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3
percent. The flight into dollar assets after the global recession caused
revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the
temporary interruption of the sovereign risk issues in Europe from Apr to Jul
2010, shown in Table VI-4 below, the dollar has revalued to USD 1.1842/EUR on Sep
18, 2020 or by 0.7 percent {[(1.1842/1.192)-1]100 = -0.7%}. 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. On Aug 27, 2020, the Federal Open
Market Committee changed its Longer-Run Goals and Monetary Policy Strategy,
including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The
Committee judges that longer-term inflation expectations that are well anchored
at 2 percent foster price stability and moderate long-term interest rates and
enhance the Committee's ability to promote maximum employment in the face of
significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that
averages 2 percent over time, and therefore judges that, following periods when
inflation has been running persistently below 2 percent, appropriate monetary
policy will likely aim to achieve inflation moderately above 2 percent for some
time.” The new policy can affect relative exchange rates depending on relative
inflation rates and country risk issues. China fixed the CNY to the dollar for
an extended period at a highly undervalued level of around CNY 8.2765/USD
subsequently revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent.
After fixing again the CNY to the dollar, China revalued to CNY 6.6790/USD on
Fri Sep 18, 2020, or by 0.8 percent, for cumulative revaluation of 18.2
percent. The final row of Table VI-2 shows: revaluation of 0.8 percent in the
week of Aug 28, 2020; revaluation of 0.3 percent in the week of Sep 4, 2020;
revaluation of 0.2 percent in the week of Sep 11, 2020; and revaluation of 1.1
percent in the week of Sep 18, 2020. There could be reversal of revaluation to
devalue the Yuan, but the outcome depends on ongoing negotiations.
Table
VI-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD)
Exchange Rate
|
USD/EUR |
12/26/03 |
7/14/08 |
6/07/10 |
09/18/20 |
|
Rate |
1.1423 |
1.5914 |
1.192 |
1.1842 |
|
CNY/USD |
01/03
|
07/21
|
7/15
|
09/18/20 |
|
Rate |
8.2765 |
6.8211 |
6.8211 |
6.7690 |
|
Weekly
Rates |
08/28/2020 |
09/04/2019 |
09/11/2020 |
09/18/20 |
|
CNY/USD |
6.8654 |
6.8425 |
6.8425 |
6.7690 |
|
∆%
from Earlier Week* |
0.8% |
0.3% |
0.2% |
1.1% |
*Negative
sign is depreciation; positive sign is appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
Bob Davis and Lingling
Wei, writing on “China shifts course, lets Yuan drop,” on Jul 25, 2012,
published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444840104577548610131107868.html?mod=WSJPRO_hpp_LEFTTopStories), find that China is depreciating the CNY relative to the USD
in an effort to diminish the impact of appreciation of the CNY relative to the
EUR. Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to Sep 18, 2020 in
selected intervals on Fridays. The CNY/USD revalued by 0.9 percent from Oct 28,
2012 to Apr 27, 2012. The CNY was virtually unchanged relative to the USD by
Aug 24, 2012 to CNY 6.3558/USD from the rate of CNY 6.3588/USD on Oct 28, 2011
and then revalued slightly by 1.1 percent to CNY 6.2858/USD on Sep 28, 2012.
Devaluation of 0.6 percent from CNY 6.2858/USD on Sep 28, 2012 to CNY
6.3240/USD on Oct 5, 2012, reduced to 0.5 percent the cumulative revaluation
from Oct 28, 2011 to Oct 5, 2012. Revaluation by 0.2 percent to CNY 6.2546/USD
on Oct 12, 2012 and revalued the CNY by 1.6 percent relative to the dollar from
CNY 6.3588/USD on Oct 29, 2011. By Sep 18, 2020, the CNY devalued 6.5 percent
to CNY 6.7690/USD relative to CNY 6.3588/USD on Oct 28, 2011. There could be
reversal of revaluation in favor of devaluation. Robin Harding and Josh Noble,
writing on “US warns China after renminbi depreciation,” on Apr 8, 2014,
published in the Financial Times (http://www.ft.com/intl/cms/s/0/3355dc74-bed7-11e3-a1bf-00144feabdc0.html?siteedition=intl#axzz2ynwr9l6s), quote concerns of a senior US Treasury official on possible
change in China’s policy of revaluation. Meanwhile, the Senate of the US
periodically considers a bill on China’s trade that could create a
confrontation but may not be approved by the entire Congress. An important
statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14,
2012, announced the widening of the daily maximum band of fluctuation of the
renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):
“Along with the
development of China’s foreign exchange market, the pricing and risk management
capabilities of market participants are gradually strengthening. In order to
meet market demands, promote price discovery, enhance the flexibility of RMB
exchange rate in both directions, further improve the managed floating RMB
exchange rate regime based on market supply and demand with reference to a
basket of currencies, the People’s Bank of China has decided to enlarge the
floating band of RMB’s trading prices against the US dollar and is hereby
making a public announcement as follows:
Effective from April 16, 2012 onwards, the floating band of
RMB’s trading prices against the US dollar in the inter-bank spot foreign
exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each
business day, the trading prices of the RMB against the US dollar in the
inter-bank spot foreign exchange market will fluctuate within a band of ±1
percent around the central parity released on the same day by the China Foreign
Exchange Trade System. The spread between the RMB/USD selling and buying prices
offered by the foreign exchange-designated banks to their customers shall not
exceed 2 percent of the central parity, instead of 1 percent, while other
provisions in the Circular of the PBC on Relevant Issues Managing the Trading
Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of
Exchange-Designated Banks (PBC Document No.[2010]325) remain valid.”
Table
VI-2A, Renminbi Yuan US Dollar Rate
|
|
CNY/USD |
∆%
from CNY 6.3588/USD 0n 10/28/2011 |
|
09/18/20 |
6.7690 |
-6.5 |
|
09/11/20 |
6.8344 |
-7.5 |
|
09/04/20 |
6.8425 |
-7.6 |
|
08/28/20 |
6.8654 |
-8.0 |
|
08/21/20 |
6.9195 |
-8.8 |
|
08/14/20 |
6.9503 |
-9.3 |
|
08/07/20 |
6.9678 |
-9.6 |
|
07/31/20 |
6.9752 |
-9.7 |
|
07/24/20 |
7.0173 |
-10.4 |
|
07/17/20 |
6.9922 |
-10.0 |
|
07/10/20 |
7.0018 |
-10.1 |
|
07/03/20 |
7.0664 |
-11.1 |
|
06/26/20 |
7.0784 |
-11.3 |
|
06/19/20 |
7.0723 |
-11.2 |
|
06/12/20 |
7.0834 |
-11.4 |
|
06/05/20 |
7.0820 |
-11.4 |
|
05/29/20 |
7.1373 |
-12.2 |
|
05/22/20 |
7.1304 |
-12.1 |
|
05/15/20 |
7.1021 |
-11.7 |
|
05/08/20 |
7.0741 |
-11.2 |
|
05/01/20 |
7.0623 |
-11.1 |
|
04/24/20 |
7.0819 |
-11.4 |
|
04/17/20 |
7.0732 |
-11.2 |
|
04/10/20 |
7.0361 |
-10.7 |
|
04/03/20 |
7.0923 |
-11.5 |
|
03/27/20 |
7.0964 |
-11.6 |
|
03/20/20 |
7.0958 |
-11.6 |
|
03/13/20 |
7.0082 |
-10.2 |
|
03/06/20 |
6.9320 |
-9.0 |
|
02/28/20 |
6.9919 |
-10.0 |
|
02/21/20 |
7.0272 |
-10.5 |
|
02/14/20 |
6.9871 |
-9.9 |
|
02/07/20 |
7.0016 |
-10.1 |
|
01/31/20 |
6.9367 |
-9.1 |
|
01/24/20 |
6.9367 |
-9.1 |
|
01/17/20 |
6.8597 |
-7.9 |
|
01/10/20 |
6.9197 |
-8.8 |
|
01/03/20 |
6.9655 |
-9.5 |
|
12/27/19 |
6.9958 |
-10.0 |
|
12/20/19 |
7.0067 |
-10.2 |
|
12/13/19 |
6.9729 |
-9.7 |
|
12/06/19 |
7.0353 |
-10.6 |
|
11/29/19 |
7.0326 |
-10.6 |
|
11/22/19 |
7.0392 |
-10.7 |
|
11/15/19 |
7.0084 |
-10.2 |
|
11/08/19 |
6.9960 |
-10.0 |
|
11/01/19 |
7.0374 |
-10.7 |
|
10/25/19 |
7.0657 |
-11.1 |
|
10/18/19 |
7.0817 |
-11.4 |
|
10/11/19 |
7.0882 |
-11.5 |
|
10/04/19 |
7.1485 |
-12.4 |
|
09/27/19 |
7.1228 |
-12.0 |
|
09/20/19 |
7.0916 |
-11.5 |
|
09/13/19 |
7.0795 |
-11.3 |
|
09/06/19 |
7.1157 |
-11.9 |
|
08/30/19 |
7.1567 |
-12.5 |
|
08/23/19 |
7.0960 |
-11.6 |
|
08/16/19 |
7.0429 |
-10.8 |
|
08/09/19 |
7.0624 |
-11.1 |
|
08/02/19 |
6.9402 |
-9.1 |
|
07/26/19 |
6.8792 |
-8.2 |
|
07/19/19 |
6.8819 |
-8.2 |
|
07/12/19 |
6.8808 |
-8.2 |
|
07/05/19 |
6.8936 |
-8.4 |
|
06/28/19 |
6.8668 |
-8.0 |
|
06/21/19 |
6.8699 |
-8.0 |
|
06/14/19 |
6.9254 |
-8.9 |
|
06/07/19 |
6.9098 |
-8.7 |
|
05/31/19 |
6.9051 |
-8.6 |
|
05/24/19 |
6.9002 |
-8.5 |
|
05/17/19 |
6.9186 |
-8.8 |
|
05/10/19 |
6.8241 |
-7.3 |
|
05/03/19 |
6.7346 |
-5.9 |
|
04/26/19 |
6.7297 |
-5.8 |
|
04/19/19 |
6.7044 |
-5.4 |
|
04/12/19 |
6.7042 |
-5.4 |
|
04/05/19 |
6.7179 |
-5.6 |
|
03/29/19 |
6.7121 |
-5.6 |
|
03/22/19 |
6.7181 |
-5.7 |
|
03/15/19 |
6.7135 |
-5.6 |
|
03/08/19 |
6.7216 |
-5.7 |
|
03/01/19 |
6.7064 |
-5.5 |
|
02/22/19 |
6.7142 |
-5.6 |
|
02/15/19 |
6.7731 |
-6.5 |
|
02/08/19 |
6.7448 |
-6.1 |
|
02/01/19 |
6.7449 |
-6.1 |
|
01/25/19 |
6.7487 |
-6.1 |
|
01/18/19 |
6.7788 |
-6.6 |
|
01/11/19 |
6.7627 |
-6.4 |
|
01/04/19 |
6.8694 |
-8.0 |
|
12/28/18 |
6.8782 |
-8.2 |
|
12/21/18 |
6.9064 |
-8.6 |
|
12/14/18 |
6.9076 |
-8.6 |
|
12/07/18 |
6.8744 |
-8.1 |
|
11/30/18 |
6.9590 |
-9.4 |
|
11/23/18 |
6.9485 |
-9.3 |
|
11/16/18 |
6.9380 |
-9.1 |
|
11/09/18 |
6.9569 |
-9.4 |
|
11/02/18 |
6.8909 |
-8.4 |
|
10/26/18 |
6.9435 |
-9.2 |
|
10/19/18 |
6.9296 |
-9.0 |
|
10/12/18 |
6.9222 |
-8.9 |
|
10/05/18 |
6.8689 |
-8.0 |
|
09/28/18 |
6.8690 |
-8.0 |
|
09/21/18 |
6.8568 |
-7.8 |
|
09/14/18 |
6.8705 |
-8.0 |
|
09/07/18 |
6.8448 |
-7.6 |
|
08/31/18 |
6.8316 |
-7.4 |
|
08/24/18 |
6.8077 |
-7.1 |
|
08/17/18 |
6.8776 |
-8.2 |
|
08/10/18 |
6.8469 |
-7.7 |
|
08/03/18 |
6.8306 |
-7.4 |
|
07/27/18 |
6.8137 |
-7.2 |
|
07/20/18 |
6.7709 |
-6.5 |
|
07/13/18 |
6.6908 |
-5.2 |
|
07/06/18 |
6.6434 |
-4.5 |
|
06/29/18 |
6.6225 |
-4.1 |
|
06/22/18 |
6.5059 |
-2.3 |
|
06/15/18 |
6.4389 |
-1.3 |
|
06/08/18 |
6.4065 |
-0.8 |
|
06/01/18 |
6.4204 |
-1.0 |
|
05/25/18 |
6.3919 |
-0.5 |
|
05/18/18 |
6.3780 |
-0.3 |
|
05/11/18 |
6.3341 |
0.4 |
|
05/04/18 |
6.3627 |
-0.1 |
|
04/27/18 |
6.3336 |
0.4 |
|
04/20/18 |
6.2965 |
1.0 |
|
04/13/18 |
6.2788 |
1.3 |
|
04/06/18 |
6.3044 |
0.9 |
|
03/30/18 |
6.2911 |
1.1 |
|
03/23/18 |
6.3157 |
0.7 |
|
03/16/18 |
6.3346 |
0.4 |
|
03/09/18 |
6.3346 |
0.4 |
|
03/02/18 |
6.3485 |
0.2 |
|
02/23/18 |
6.3358 |
0.4 |
|
02/16/18 |
6.3458 |
0.2 |
|
02/09/18 |
6.2890 |
1.1 |
|
02/02/18 |
6.3033 |
0.9 |
|
01/26/18 |
6.3154 |
0.7 |
|
01/19/18 |
6.4058 |
-0.7 |
|
01/12/18 |
6.4518 |
-1.5 |
|
01/05/18 |
6.4891 |
-2.0 |
|
12/29/17 |
6.5030 |
-2.3 |
|
12/22/17 |
6.5744 |
-3.4 |
|
12/15/17 |
6.5989 |
-3.8 |
|
12/08/17 |
6.6179 |
-4.1 |
|
12/01/17 |
6.6134 |
-4.0 |
|
11/24/17 |
6.5983 |
-3.8 |
|
11/17/17 |
6.6287 |
-4.2 |
|
11/10/17 |
6.6415 |
-4.4 |
|
11/03/17 |
6.6387 |
-4.4 |
|
10/27/17 |
6.6507 |
-4.6 |
|
10/20/17 |
6.6221 |
-4.1 |
|
10/13/17 |
6.5901 |
-3.6 |
|
10/06/17 |
6.6534 |
-4.6 |
|
09/29/17 |
6.6366 |
-4.4 |
|
09/22/17 |
6.5935 |
-3.7 |
|
09/15/17 |
6.5537 |
-3.1 |
|
09/08/17 |
6.4817 |
-1.9 |
|
09/01/17 |
6.5591 |
-3.1 |
|
08/25/17 |
6.6482 |
-4.6 |
|
08/18/17 |
6.6719 |
-4.9 |
|
08/11/17 |
6.6647 |
-4.8 |
|
08/04/17 |
6.7305 |
-5.8 |
|
07/28/17 |
6.7374 |
-6.0 |
|
07/21/17 |
6.7670 |
-6.4 |
|
07/14/17 |
6.7840 |
-6.7 |
|
07/07/17 |
6.8128 |
-7.1 |
|
06/30/17 |
6.7787 |
-6.6 |
|
06/23/17 |
6.8359 |
-7.5 |
|
06/16/17 |
6.8103 |
-7.1 |
|
06/09/17 |
6.7987 |
-6.9 |
|
06/02/17 |
6.8105 |
-7.1 |
|
05/26/17 |
6.8556 |
-7.8 |
|
05/19/17 |
6.8839 |
-8.3 |
|
05/12/17 |
6.8998 |
-8.5 |
|
05/05/17 |
6.9031 |
-8.6 |
|
04/28/17 |
6.8940 |
-8.4 |
|
04/21/17 |
6.8848 |
-8.3 |
|
04/14/17 |
6.8854 |
-8.3 |
|
04/07/17 |
6.9044 |
-8.6 |
|
03/31/17 |
6.8866 |
-8.3 |
|
03/24/17 |
6.8772 |
-8.2 |
|
03/17/17 |
6.9093 |
-8.7 |
|
03/10/17 |
6.9071 |
-8.6 |
|
03/03/17 |
6.8955 |
-8.4 |
|
02/24/17 |
6.8668 |
-8.0 |
|
02/17/17 |
6.8650 |
-8.0 |
|
02/10/17 |
6.8776 |
-8.2 |
|
02/03/17 |
6.8661 |
-8.0 |
|
01/27/17 |
6.8811 |
-8.2 |
|
01/20/17 |
6.8765 |
-8.1 |
|
01/13/17 |
6.8998 |
-8.5 |
|
01/06/17 |
6.9185 |
-8.8 |
|
12/30/16 |
6.9448 |
-9.2 |
|
12/23/16 |
6.9463 |
-9.2 |
|
12/16/16 |
6.9593 |
-9.4 |
|
12/09/16 |
6.9077 |
-8.6 |
|
12/02/16 |
6.8865 |
-8.3 |
|
11/25/16 |
6.9236 |
-8.9 |
|
11/18/16 |
6.8883 |
-8.3 |
|
11/11/16 |
6.8151 |
-7.2 |
|
11/04/16 |
6.7540 |
-6.2 |
|
10/28/16 |
6.7983 |
-6.9 |
|
10/21/16 |
6.7624 |
-6.3 |
|
10/14/16 |
6.7296 |
-5.8 |
|
10/07/16 |
6.6728 |
-4.9 |
|
09/30/16 |
6.6711 |
-4.9 |
|
09/23/16 |
6.6724 |
-4.9 |
|
09/16/16 |
6.6701 |
-4.9 |
|
09/09/16 |
6.6876 |
-5.2 |
|
09/02/16 |
6.6822 |
-5.1 |
|
08/26/16 |
6.6685 |
-4.9 |
|
08/19/16 |
6.6523 |
-4.6 |
|
08/12/16 |
6.6408 |
-4.4 |
|
08/05/16 |
6.6438 |
-4.5 |
|
07/29/16 |
6.6550 |
-4.7 |
|
07/22/16 |
6.6819 |
-5.1 |
|
07/15/16 |
6.6924 |
-5.2 |
|
07/08/16 |
6.6881 |
-5.2 |
|
07/01/16 |
6.6564 |
-4.7 |
|
06/24/16 |
6.6128 |
-4.0 |
|
06/17/16 |
6.5836 |
-3.5 |
|
06/10/16 |
6.5720 |
-3.4 |
|
06/03/16 |
6.5518 |
-3.0 |
|
05/27/16 |
6.5630 |
-3.2 |
|
05/20/16 |
6.5464 |
-3.0 |
|
05/13/16 |
6.5319 |
-2.7 |
|
05/06/16 |
6.4965 |
-2.2 |
|
04/29/16 |
6.4741 |
-1.8 |
|
04/22/16 |
6.5068 |
-2.3 |
|
04/15/16 |
6.4781 |
-1.9 |
|
04/08/16 |
6.4673 |
-1.7 |
|
04/01/16 |
6.4787 |
-1.9 |
|
03/25/16 |
6.5204 |
-2.5 |
|
03/18/16 |
6.4716 |
-1.8 |
|
03/11/16 |
6.4961 |
-2.2 |
|
03/04/16 |
6.5027 |
-2.3 |
|
02/26/16 |
6.5433 |
-2.9 |
|
02/19/16 |
6.5225 |
-2.6 |
|
02/12/16 |
6.5733 |
-3.4 |
|
02/05/16 |
6.5736 |
-3.4 |
|
01/29/16 |
6.5761 |
-3.4 |
|
01/22/16 |
6.5789 |
-3.5 |
|
01/15/16 |
6.5836 |
-3.5 |
|
01/08/16 |
6.5934 |
-3.7 |
|
01/01/16 |
6.4931 |
-2.1 |
|
12/25/15 |
6.4801 |
-1.9 |
|
12/18/15 |
6.4827 |
-1.9 |
|
12/11/15 |
6.4558 |
-1.5 |
|
12/04/15 |
6.4006 |
-0.7 |
|
11/27/15 |
6.3964 |
-0.6 |
|
11/20/15 |
6.3885 |
-0.5 |
|
11/13/15 |
6.3738 |
-0.2 |
|
11/06/15 |
6.3515 |
0.1 |
|
10/30/15 |
6.3161 |
0.7 |
|
10/23/15 |
6.3542 |
0.1 |
|
10/16/15 |
6.3529 |
0.1 |
|
10/09/15 |
6.3447 |
0.2 |
|
10/02/15 |
6.3552 |
0.1 |
|
09/25/15 |
6.3754 |
-0.3 |
|
09/18/15 |
6.3639 |
-0.1 |
|
09/11/15 |
6.3734 |
-0.2 |
|
09/04/15 |
6.3701 |
-0.2 |
|
08/28/15 |
6.3872 |
-0.4 |
|
08/21/15 |
6.3870 |
-0.4 |
|
08/14/15 |
6.3907 |
-0.5 |
|
08/07/15 |
6.2097 |
2.3 |
|
07/31/15 |
6.2077 |
2.4 |
|
07/24/15 |
6.2085 |
2.4 |
|
07/17/15 |
6.2110 |
2.3 |
|
07/10/15 |
6.2115 |
2.3 |
|
07/03/15 |
6.2048 |
2.4 |
|
06/26/15 |
6.2090 |
2.4 |
|
06/19/15 |
6.2098 |
2.3 |
|
06/12/15 |
6.2068 |
2.4 |
|
06/05/15 |
6.2016 |
2.5 |
|
05/29/15 |
6.2004 |
2.5 |
|
05/22/15 |
6.1974 |
2.5 |
|
05/15/15 |
6.2054 |
2.4 |
|
05/08/15 |
6.2143 |
2.3 |
|
05/01/15 |
6.2134 |
2.3 |
|
04/24/15 |
6.1935 |
2.6 |
|
04/17/15 |
6.1953 |
2.6 |
|
04/10/15 |
6.2063 |
2.4 |
|
04/03/15 |
6.1466 |
3.3 |
|
03/27/15 |
6.2150 |
2.3 |
|
03/20/15 |
6.2046 |
2.4 |
|
03/13/15 |
6.2599 |
1.6 |
|
03/06/15 |
6.2644 |
1.5 |
|
02/27/1 5 |
6.2671 |
1.4 |
|
02/20/15 |
6.2546 |
1.6 |
|
02/13/2015 |
6.2446 |
1.8 |
|
02/06/2015 |
6.2445 |
1.8 |
|
01/30/2015 |
6.2543 |
1.6 |
|
01/23/2015 |
6.2309 |
2.0 |
|
01/16/2015 |
6.2063 |
2.4 |
|
01/09/2015 |
6.2045 |
2.4 |
|
01/02/2015 |
6.2063 |
2.4 |
|
12/26/2014 |
6.2276 |
2.1 |
|
12/19/2014 |
6.2226 |
2.1 |
|
12/12/2014 |
6.1852 |
2.7 |
|
12/05/2014 |
6.1502 |
3.3 |
|
11/28/2014 |
6.1431 |
3.4 |
|
11/21/2014 |
6.1228 |
3.7 |
|
11/14/2014 |
6.1313 |
3.6 |
|
11/07/2014 |
6.1238 |
3.7 |
|
10/31/2014 |
6.1133 |
3.9 |
|
10/24/2014 |
6.1181 |
3.8 |
|
10/17/2014 |
6.1246 |
3.7 |
|
10/10/2014 |
6.1299 |
3.6 |
|
0/03/2014 |
6.1363 |
3.5 |
|
9/26/2014 |
6.1272 |
3.6 |
|
9/19/2014 |
6.1412 |
3.4 |
|
9/12/2014 |
6.1334 |
3.5 |
|
9/05/2014 |
6.1406 |
3.4 |
|
8/29/2014 |
6.1457 |
3.4 |
|
8/22/2014 |
6.1522 |
3.2 |
|
8/15/2014 |
6.1463 |
3.3 |
|
8/8/2014 |
6.1548 |
3.2 |
|
8/1/2014 |
6.1781 |
2.8 |
|
7/25/2014 |
6.1923 |
2.6 |
|
7/18/2014 |
6.2074 |
2.4 |
|
7/11/2014 |
6.2040 |
2.4 |
|
7/4/2014 |
6.2036 |
2.4 |
|
6/27/2014 |
6.2189 |
2.2 |
|
6/20/14 |
6.2238 |
2.1 |
|
6/13/2014 |
6.2097 |
2.3 |
|
6/6/2014 |
6.2507 |
1.7 |
|
5/30/2014 |
6.2486 |
1.7 |
|
5/23/2014 |
6.2354 |
1.9 |
|
5/16/2014 |
6.2340 |
2.0 |
|
5/9/2014 |
6.2281 |
2.1 |
|
5/3/2014 |
6.2595 |
1.6 |
|
4/28/2014 |
6.2539 |
1.6 |
|
4/18/2014 |
6.2377 |
1.9 |
|
4/11/2014 |
6.2111 |
2.3 |
|
4/4/2014 |
6.2102 |
2.3 |
|
3/28/2014 |
6.2130 |
2.3 |
|
3/21/2014 |
6.2247 |
2.1 |
|
3/14/2014 |
6.1496 |
3.3 |
|
3/7/2014 |
6.1260 |
3.7 |
|
2/28/2014 |
6.1481 |
3.3 |
|
2/21/2014 |
6.0913 |
4.2 |
|
2/14/2014 |
6.0670 |
4.6 |
|
2/7/2014 |
6.0634 |
4.6 |
|
1/31/2014 |
6.0589 |
4.7 |
|
1/24/2014 |
6.0472 |
4.9 |
|
1/17/2014 |
6.0503 |
4.9 |
|
1/10/2014 |
6.0503 |
4.9 |
|
1/3/2014 |
6.0516 |
4.8 |
|
12/27/2013 |
6.0678 |
4.6 |
|
12/20/2013 |
6.0725 |
4.5 |
|
12/13/2013 |
6.0691 |
4.6 |
|
12/6/2013 |
6.0801 |
4.4 |
|
11/29/2013 |
6.0914 |
4.2 |
|
11/22/2013 |
6.0911 |
4.2 |
|
11/15/2013 |
6.0928 |
4.2 |
|
11/8/2013 |
6.0912 |
4.2 |
|
11/1/2013 |
6.0996 |
4.1 |
|
10/25/2013 |
6.0830 |
4.3 |
|
10/18/2013 |
6.0973 |
4.1 |
|
10/11/2013 |
6.1210 |
3.7 |
|
10/4/2013 |
6.1226 |
3.7 |
|
9/27/2013 |
6.1196 |
3.8 |
|
9/20/2013 |
6.1206 |
3.7 |
|
9/13/2013 |
6.1190 |
3.8 |
|
9/6/2013 |
6.1209 |
3.7 |
|
8/30/2013 |
6.1178 |
3.8 |
|
8/23/2013 |
6.1211 |
3.7 |
|
8/16/2013 |
6.1137 |
3.9 |
|
8/9/2013 |
6.1225 |
3.7 |
|
8/2/2013 |
6.1295 |
3.6 |
|
7/26/2013 |
6.1305 |
3.6 |
|
7/19/2013 |
6.1380 |
3.5 |
|
7/12/2013 |
6.1382 |
3.5 |
|
7/5/2013 |
6.1316 |
3.6 |
|
6/28/2013 |
6.1910 |
2.6 |
|
6/21/2013 |
6.1345 |
3.5 |
|
6/14/2013 |
6.1323 |
3.6 |
|
6/7/2013 |
6.1334 |
3.5 |
|
5/31/2013 |
6.1347 |
3.5 |
|
5/24/2013 |
6.1314 |
3.6 |
|
5/17/2013 |
6.1395 |
3.4 |
|
5/10/2013 |
6.1395 |
3.4 |
|
5/3/2013 |
6.1553 |
3.2 |
|
4/26/2013 |
6.1636 |
3.1 |
|
4/19/13 |
6.1788 |
2.8 |
|
4/12/2013 |
6.1947 |
2.6 |
|
4/5/2013 |
6.2051 |
2.4 |
|
3/29/2013 |
6.2119 |
2.3 |
|
3/22/2013 |
6.2112 |
2.3 |
|
3/15/2013 |
6.2131 |
2.3 |
|
3/8/2013 |
6.2142 |
2.3 |
|
3/1/2013 |
6.2221 |
2.1 |
|
2/22/2013 |
6.2350 |
1.9 |
|
2/15/2013 |
6.2328 |
2.0 |
|
2/8/2013 |
6.2323 |
2.0 |
|
2/1/2013 |
6.2316 |
2.0 |
|
1/25/2013 |
6.2228 |
2.1 |
|
1/18/2013 |
6.2182 |
2.2 |
|
1/11/2013 |
6.2168 |
2.2 |
|
1/4/2013 |
6.2316 |
2.0 |
|
12/28/2012 |
6.2358 |
1.9 |
|
12/21/2012 |
6.2352 |
1.9 |
|
12/14/2012 |
6.2460 |
1.8 |
|
12/7/2012 |
6.2254 |
2.1 |
|
11/30/2012 |
6.2310 |
2.0 |
|
11/23/2012 |
6.2328 |
2.0 |
|
11/16/2012 |
6.2404 |
1.9 |
|
11/9/2012 |
6.2452 |
1.8 |
|
11/2/2012 |
6.2458 |
1.8 |
|
10/26/2012 |
6.2628 |
1.5 |
|
10/19/2012 |
6.2546 |
1.6 |
|
10/12/2012 |
6.2670 |
1.4 |
|
10/5/2012 |
6.3240 |
0.5 |
|
9/28/2012 |
6.2858 |
1.1 |
|
9/21/2012 |
6.3078 |
0.8 |
|
9/14/2012 |
6.3168 |
0.7 |
|
9/7/2012 |
6.3438 |
0.2 |
|
8/31/2012 |
6.3498 |
0.1 |
|
8/24/2012 |
6.3558 |
0.0 |
|
8/17/2012 |
6.3589 |
0.0 |
|
8/10/2012 |
6.3604 |
0.0 |
|
8/3/2012 |
6.3726 |
-0.2 |
|
7/27/2012 |
6.3818 |
-0.4 |
|
7/20/2012 |
6.3750 |
-0.3 |
|
7/13/2012 |
6.3868 |
-0.4 |
|
7/6/2012 |
6.3658 |
-0.1 |
|
6/29/2012 |
6.3552 |
0.1 |
|
6/22/2012 |
6.3650 |
-0.1 |
|
6/15/2012 |
6.3678 |
-0.1 |
|
6/8/2012 |
6.3752 |
-0.3 |
|
6/1/2012 |
6.3708 |
-0.2 |
|
4/27/2012 |
6.3016 |
0.9 |
|
3/23/2012 |
6.3008 |
0.9 |
|
2/3/2012 |
6.3030 |
0.9 |
|
12/30/2011 |
6.2940 |
1.0 |
|
11/25/2011 |
6.3816 |
-0.4 |
|
10/28/2011 |
6.3588 |
- |
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Professor Edward P Lazear
(2013Jan7), writing on “Chinese ‘currency manipulation’ is not the problem,” on
Jan 7, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323320404578213203581231448.html), provides clear thought on the role of the yuan in trade
between China and the United States and trade between China and Europe. There
is conventional wisdom that Chinese exchange rate policy causes the loss of
manufacturing jobs in the United States, which is shown by Lazear (2013Jan7) to
be erroneous. The fact is that manipulation of the CNY/USD rate by China has
only minor effects on US employment. Lazear (2013Jan7) shows that the movement
of monthly exports of China to its major trading partners, United States and
Europe, since 1995 cannot be explained by the fixing of the CNY/USD rate by
China. The period is quite useful because it includes rapid growth before 2007,
contraction until 2009 and weak subsequent expansion. Professor Charles W.
Calomiris, at Columbia University, writing in the Wall Street Journal on Apr 17, 2017, provides perceptive analysis
of China’s exchange rate. According to Calomiris (2017Apr), long-run exchange
rate appreciation in China originates in productivity growth in accordance with
Harrod (1939), Balassa (1964) and Samuelson (1964). In this view, reforms
allowing increasing participation of private economic activity caused an
increase in productivity measured by Calomiris (2017Apr) as only about 3
percent of US productivity around 1978 to current 13 percent of US
productivity. Calomiris (2017Apr) attributes recent depreciation of the Yuan to
rapidly increasing debt, slowing growth and inflation motivating capital
flight. Chart VI-1 of the Board of Governors of the Federal Reserve System
provides the CNY/USD exchange rate from Jan 3, 1995 to Sep 11, 2020 together
with US recession dates in shaded areas. China fixed the CNY/USD rate for an
extended period as shown in the horizontal segment from 1995 to 2005. There was
systematic revaluation of 17.6 percent from CNY 8.2765 on Jul 21, 2005 to CNY
6.8211 on Jul 15, 2008. China fixed the CNY/USD rate until Jun 7, 2010, to
avoid adverse effects on its economy from the global recession, which is shown
as a horizontal segment from 2009 until mid-2010. China then continued the
policy of appreciation of the CNY relative to the USD with oscillations until
the beginning of 2012 when the rate began to move sideways followed by a final
upward slope of devaluation that is measured in Table VI-2A but virtually
disappeared in the rate of CNY 6.3589/USD on Aug 17, 2012 and was nearly
unchanged at CNY 6.3558/USD on Aug 24, 2012. China then appreciated 0.2 percent
in the week of Dec 21, 2012, to CNY 6.2352/USD for cumulative 1.9 percent
revaluation from Oct 28, 2011 and left the rate virtually unchanged at CNY
6.2316/USD on Jan 11, 2013, moving to CNY 6.8330/USD on Sep 11, 2020, which is
the last data point in Chart VI-1. Revaluation of
the CNY relative to the USD of 18.2 percent by Sep 18, 2020 has not reduced the
trade surplus of China but reversal of the policy of revaluation could result
in international confrontation. The interruption with upward slope in the final
segment on the right of Chart VI-I is measured as virtually stability in Table
VI-2A followed with decrease or revaluation and subsequent increase or
devaluation. The final segment shows decline or revaluation with another upward
move or devaluation. Linglin Wei, writing on “China intervenes to lower yuan,”
on Feb 26, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304071004579406810684766716?KEYWORDS=china+yuan&mg=reno64-wsj), finds from informed sources that the central bank of China
conducted the ongoing devaluation of the yuan with the objective of driving out
arbitrageurs to widen the band of fluctuation. There is concern if the policy
of revaluation is changing to devaluation.
Chart VI-1, Chinese Yuan (CNY) per US Dollar (USD), Business
Days, Jan 3, 1995-Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-1A provides the daily CNY/USD rate from Jan 5,
1981 to Sep 11, 2020. The exchange rate was CNY 1.5418/USD on Jan 5, 1981.
There is sharp cumulative depreciation of 107.8 percent to CNY 3.2031 by Jul 2,
1986, continuing to CNY 5.8145/USD on Dec 29, 1993 for cumulative 277.1 percent
since Jan 5, 1981. China then devalued sharply to CNY 8.7117/USD on Jan 7, 1994
for 49.8 percent relative to Dec 29, 1993 and cumulative 465.0 percent relative
to Jan 5, 1981. China then fixed the rate at CNY 8.2765/USD until Jul 21, 2005
and revalued as analyzed in Chart VI-1. The final data point in Chart VI-1A is
CNY 6.8330/USD on Sep 11, 2020. To be sure, China fixed the
exchange rate after substantial prior devaluation. It is unlikely that the
devaluation could have been effective after many years of fixing the exchange
rate with high inflation and multiple changes in the world economy. The
argument of Lazear (2013Jan7) is still valid in view of the lack of association
between monthly exports of China to the US and Europe since 1995 and the
exchange rate of China.
Chart VI-1A, Chinese Yuan (CNY) per US Dollar (USD), Business
Days, Jan 5, 1981-Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-1B provides
finer details with the rate of Chinese Yuan (CNY) to the US Dollar (USD) from
Oct 28, 2011 to Sep 11, 2020. There have been alternations of revaluation and
devaluation. The initial data point is CNY 6.5370 on Nov 3, 2011. There is an
episode of devaluation from CNY 6.2790 on Apr 30, 2012 to CNY 6.3879 on Jul 25,
2012, or devaluation of 1.4 percent. Another devaluation is from CNY 6.0402/USD
on Jan 21, 2014 to CNY 6.8330/USD on Sep 11, 2020, or devaluation of 13.1
percent. Calomiris (2017Apr) attributes recent depreciation of the Yuan to
rapidly increasing debt, slowing growth and inflation motivating capital flight.
China
is the second largest holder of US Treasury securities with $1073.4 billion in Jul
2020, decreasing 0.1 percent from $1074.4 billion in Jun 2020 while decreasing
$36.9 billion from Jul 2019 or 3.3 percent. The United States Treasury
estimates US government debt held by private investors at $15,688 billion in Jun
2020 (Fiscal Year 2020). China’s holding of US Treasury securities represents 6.8
percent of US government marketable interest-bearing debt held by private
investors (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Min Zeng,
writing on “China plays a big role as US Treasury yields fall,” on Jul 16,
2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that
acceleration in purchases of US Treasury securities by China has been an
important factor in the decline of Treasury yields in 2014. Japan increased its
holdings from $1131.2 billion in Jul 2019 to $1293.0 billion in Jul 2020 or 14.3
percent. The combined holdings of China and Japan in Jul 2020 add to $2366.4
billion, which is equivalent to 15.1 percent of US government marketable
interest-bearing securities held by investors of $15,688 billion in Jun 2020
(Fiscal Year 2020) (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Total
foreign holdings of Treasury securities increased from $6625.9 billion in Jun
2019 to $7038.9 billion in Jun 2020, or 6.2 percent. The US continues to
finance its fiscal and balance of payments deficits with foreign savings (see
Pelaez and Pelaez, The Global Recession Risk (2007). Professor Martin Feldstein, at Harvard
University, writing on “The Debt Crisis Is Coming Soon,” published in the Wall Street Journal on Mar 20, 2019 (https://www.wsj.com/articles/the-debt-crisis-is-coming-soon-11553122139?mod=hp_opin_pos3), foresees a
US debt crisis with deficits moving above $1 trillion and debt above 100
percent of GDP. A point of saturation of
holdings of US Treasury debt may be reached as foreign holders evaluate the
threat of reduction of principal by dollar devaluation and reduction of prices
by increases in yield, including possibly risk premium. Shultz et al (2012)
find that the Fed financed three-quarters of the US deficit in fiscal year
2011, with foreign governments financing significant part of the remainder of
the US deficit while the Fed owns one in six dollars of US national debt.
Concentrations of debt in few holders are perilous because of sudden exodus in
fear of devaluation and yield increases and the limit of refinancing old debt
and placing new debt. In their classic work on “unpleasant monetarist
arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of
monetary policy by fiscal policy (emphasis added):
“Imagine that
fiscal policy dominates monetary policy. The fiscal authority independently
sets its budgets, announcing all current and future deficits and surpluses and
thus determining the amount of revenue that must be raised through bond sales
and seignorage. Under this second coordination scheme, the monetary authority
faces the constraints imposed by the demand for government bonds, for it must
try to finance with seignorage any discrepancy between the revenue demanded by
the fiscal authority and the amount of bonds that can be sold to the public.
Suppose that the demand for government bonds implies an interest rate on bonds
greater than the economy’s rate of growth. Then if the fiscal authority runs
deficits, the monetary authority is unable to control either the growth rate of
the monetary base or inflation forever. If the principal and interest due on
these additional bonds are raised by selling still more bonds, so as to
continue to hold down the growth of base money, then, because the interest rate
on bonds is greater than the economy’s growth rate, the real stock of bonds
will growth faster than the size of the economy. This cannot go on forever,
since the demand for bonds places an upper limit on the stock of bonds relative
to the size of the economy. Once that limit is reached, the principal and
interest due on the bonds already sold to fight inflation must be financed, at
least in part, by seignorage, requiring the creation of additional base money.”
Chart VI-1B, Chinese Yuan (CNY) per US Dollar (US), Business
Days, Oct 28, 2011-Sep 11, 2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-1C provides two exchange rates. Measured on the left
axis is the Yuan (CNY) per US Dollar (US) rate and measured on the right axis
is the US Dollar (US) per Euro rate from Jan 2, 2020 to Sep 11, 2020. In the
past few months since May 2020, the Yuan has revalued relative to the dollar
while the dollar has devalued relative to the euro. On Aug 27, 2020, the Federal Open Market Committee changed its
Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The
Committee judges that longer-term inflation expectations that are well anchored
at 2 percent foster price stability and moderate long-term interest rates and
enhance the Committee's ability to promote maximum employment in the face of
significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that
averages 2 percent over time, and therefore judges that, following periods when
inflation has been running persistently below 2 percent, appropriate monetary
policy will likely aim to achieve inflation moderately above 2 percent for some
time.” The new policy can affect relative exchange rates depending on relative
inflation rates and country risk issues.
Chart VI-1C, Chinese Yuan (CNY) per US Dollar (US) and US
Dollar (US) per Euro, Business Days, Jan 2, 2020-Sep 11, 2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Inflation and unemployment in
the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a
Phillips circuit joining points of inflation and unemployment. Chart VI-1B for
Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the
issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23)
argues that the Phillips circuit shows the weakness in Phillips curve
correlation. The explanation is by a shift in aggregate supply, rise in
inflation expectations or loss of anchoring. The case of Brazil in Chart VI-1B
cannot be explained without taking into account the increase in the fed funds
rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that
precipitated the stress on a foreign debt bloated by financing balance of
payments deficits with bank loans in the 1970s. The loans were used in
projects, many of state-owned enterprises with low present value in long
gestation. The combination of the insolvency of the country because of debt
higher than its ability of repayment and the huge government deficit with
declining revenue as the economy contracted caused adverse expectations on
inflation and the economy. This interpretation is consistent with the
case of the 24 emerging market economies analyzed by Reinhart and Rogoff
(2010GTD, 4), concluding that “higher debt levels are associated with
significantly higher levels of inflation in emerging markets. Median inflation
more than doubles (from less than seven percent to 16 percent) as debt rises
frm the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a
plausible interpretation of this pattern.”
The reading of the Phillips
circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output
gap and inflation expectations:
“So, inflation is caused by
‘tightness’ and deflation by ‘slack’ in the economy. This is not just a
cause and forecasting variable, it is the cause, because given ‘slack’
we apparently do not have to worry about inflation from other sources,
notwithstanding the weak correlation of [Phillips circuits]. These statements
[by the Fed] do mention ‘stable inflation expectations. How does the Fed know
expectations are ‘stable’ and would not come unglued once people look at
deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or
‘anchored’ expectations comes from the fact that we have experienced a long
period of low inflation (adaptive expectations). All these analyses ignore the
stagflation experience in the 1970s, in which inflation was high even with
‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore
the experience of hyperinflations and currency collapses, which happen in
economies well below potential.”
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.”
Chart VI-1B provides the
tortuous Phillips Circuit of Brazil from 1963 to 1987. There were no reliable
consumer price index and unemployment data in Brazil for that period. Chart
VI-1B used the more reliable indicator of inflation, the wholesale price index,
and idle capacity of manufacturing as a proxy of unemployment in large urban
centers.
Chart VI1-B, Brazil, Phillips Circuit, 1963-1987
Source:
©Carlos Manuel
Pelaez, O Cruzado e o Austral: AnΓ‘lise das Reformas MonetΓ‘rias do
Brasil e da Argentina. SΓ£o Paulo: Editora Atlas, 1986, pages 94-5.
Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January
1987, page 25.
Table VI-6,
updated with every blog comment, shows that exchange rate valuations affect a
large variety of countries, in fact, almost the entire world, in magnitudes
that cause major problems for domestic monetary policy and trade flows. Dollar
devaluation/fluctuation is expected to continue because of zero fed funds rate,
expectations of rising inflation, large budget deficit of the federal
government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now near
zero interest rates indefinitely but with interruptions caused by risk aversion
events. On Aug 27, 2020, the Federal Open Market Committee
changed its Longer-Run Goals and Monetary Policy Strategy, including the following
(https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The
Committee judges that longer-term inflation expectations that are well anchored
at 2 percent foster price stability and moderate long-term interest rates and
enhance the Committee's ability to promote maximum employment in the face of
significant economic disturbances. In order to anchor longer-term inflation
expectations at this level, the Committee seeks to achieve inflation that
averages 2 percent over time, and therefore judges that, following periods when
inflation has been running persistently below 2 percent, appropriate monetary
policy will likely aim to achieve inflation moderately above 2 percent for some
time.” The new policy can affect relative exchange rates depending on relative
inflation rates and country risk issues. The euro has devalued 34.3 percent relative
to the US dollar from the high on Jul 15, 2008 to Sep 18, 2020. There are
complex economic, financial and political effects of the withdrawal of the UK
from the European Union or BREXIT after the referendum on Jun 23, 2016 (https://next.ft.com/eu-referendum for extensive
coverage by the Financial Times). The
British pound (GBP) devalued 7.4 percent from the trough of USD/₤1.388 on Jan
2, 2009 to USD/₤1.2919 on Sep 18, 2020 and devalued 55.3 percent from the high
of USD/₤2.006 on Jul 15, 2008, exchange rate changes measuring ₤/USD. Such similar event occurred in the week of
Sep 23, 2011 reversing the devaluation of the dollar in the form of sharp
appreciation of the dollar relative to other currencies from all over the world
including the offshore Chinese yuan market. The Bank of England reduced the
Bank Rate to 0.25 percent on Aug 4, 2016, and announced new measures of
quantitative easing
(http://www.bankofengland.co.uk/publications/Pages/news/2016/008.aspx). The Bank of
England increased the policy interest rate by 0.25 percentage points to 0.75
percent at the meeting of its Monetary Policy Committee on Aug 1, 2018 (https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2018/august-2018). Column
“Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There
was a flight to safety in dollar-denominated government assets because of the
arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in
various exchange rates that depreciated sharply against the dollar such as the
South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct
22, 2008. Subsequently, the ZAR appreciated to the trough of ZAR 7.238/USD by
Aug 15, 2010 but now depreciating 125.6 percent to ZAR 16.3301/USD on Sep 18,
2020, which is depreciation of 41.0 percent relative to Oct 22, 2008. An
example from Asia is the Singapore Dollar (SGD) that depreciated at the peak of
SGD 1.553/USD on Mar 3, 2009. The SGD depreciated by 13.2 percent to the trough
of SGD 1.348/USD on Aug 9, 2010 but is now depreciating 0.9 percent at SGD 1.3598/USD
on Sep 18, 2020 relative to the trough of depreciation but still stronger by 12.4
percent relative to the peak of depreciation on Mar 3, 2009. Another example is
the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5,
2008. The BRL appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr
30, 2010, showing depreciation of 210.4 percent relative to the trough to BRL 5.3911/USD
on Sep 18, 2020 but depreciating by 121.9 percent relative to the peak on Dec
5, 2008. At one point in 2011, the Brazilian real traded at BRL 1.55/USD and in
the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation
of more than 20 percent. The Banco Central do Brasil (BCB), Brazil’s central
bank, decreased its policy rate SELIC for ten consecutive meetings (http://www.bcb.gov.br/?INTEREST) of its
monetary policy committee, COPOM. Brazil’s central bank did not change the
SELIC rate at its most recent meeting (https://www.bcb.gov.br/en/pressdetail/2355/nota):
“233rd Meeting of the Monetary Policy Committee
(COPOM) of the Central Bank of Brazil Press Release
09/15/2020
In its 233rd meeting, the COPOM unanimously decided
to maintain the Selic rate to 2.00 percent per year” (https://www.bcb.gov.br/en/pressdetail/2355/nota). The Banco
Central do Brasil is engaging in repurchase operations in foreign currency
beginning Mar 18, 2020 (https://www.bcb.gov.br/en/pressdetail/2319/nota). The monetary
authorities also provides multiple measures to face the COVID-19 event (https://www.bcb.gov.br/en/pressdetail/2322/nota). The Banco
Central do Brasil also engaged in FX auctions (http://www.bcb.gov.br/en/#!/c/news/1828):
“BC announces FX auctions program 22/08/2013 6:44:00 PM
With the aim of providing FX ‘hedge” (protection) to the
economic agents and liquidity to the FX market, the Banco Central do Brasil
informs that a program of FX swap auctions and US dollar sale auctions with
repurchase program will begin, as of Friday, August 23. This program will last,
at least, until December 31, 2013. The swap auctions will occur every Monday,
Tuesday, Wednesday and Thursday, when US$500 million will be offered per day.
On Fridays, a credit line of US$1 billion will be offered to the market,
through sale auctions with repurchase agreement. If it is considered
appropriate, the Banco Central do Brasil will carry out additional operations.”
Jeffrey T.
Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012,
published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new
measures by Brazil to prevent further appreciation of its currency, including
the extension of the tax on foreign capital for three years terms, subsequently
broadened to five years, and intervention in the foreign exchange market by the
central bank. Jeff Fick, writing on “Brazil shifts tack to woo wary investors,”
on Jun 5, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324299104578527000680111188.html), analyzes the
lifting in the week of Jun 7, 2013, of the tax on foreign transactions designed
in Oct 2010 to contain the flood of foreign capital into Brazil that overvalued
its currency. Jeffrey T. Lewis, writing on “Brazil’s real closes weaker,” on
Jun 14, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323734304578545680335302180.html), analyzes
measures to contain accelerated depreciation such as currency swaps and the
lifting of the 1 percent tax on exchange derivatives on Jun 12, 2013.
Unconventional monetary policy of zero interest rates and quantitative easing
creates trends such as the depreciation of the dollar followed by Table VI-6
but with abrupt reversals during risk aversion. The main effects of
unconventional monetary policy are on valuations of risk financial assets and
not necessarily on consumption and investment or aggregate demand.
Table VI-6,
Exchange Rates
|
|
Peak |
Trough |
∆% P/T |
Sep 18,
2020 |
∆% T Sep 18,
2020 |
∆% P Sep 18, 2020 |
|
EUR USD |
7/15 |
6/7 2010 |
|
09/18/2020 |
|
|
|
Rate |
1.59 |
1.192 |
|
1.1842 |
|
|
|
∆% |
|
|
-33.4 |
|
-0.7 |
-34.3 |
|
JPY USD |
8/18 |
9/15 |
|
09/18/2020
|
|
|
|
Rate |
110.19 |
83.07 |
|
104.57 |
|
|
|
∆% |
|
|
24.6 |
|
-25.9 |
5.1 |
|
CHF USD |
11/21 2008 |
12/8 2009 |
|
09/18/2020 |
|
|
|
Rate |
1.225 |
1.025 |
|
0.9116 |
|
|
|
∆% |
|
|
16.3 |
|
11.1 |
25.6 |
|
USD GBP |
7/15 |
1/2/ 2009 |
|
09/18/2020
|
|
|
|
Rate |
2.006 |
1.388 |
|
1.2919 |
|
|
|
∆% |
|
|
-44.5 |
|
-7.4 |
-55.3 |
|
USD AUD |
7/15 2008 |
10/27 2008 |
|
09/18/2020
|
|
|
|
Rate |
1.0215 |
1.6639 |
|
0.7291 |
|
|
|
∆% |
|
|
-62.9 |
|
17.6 |
-34.3 |
|
ZAR USD |
10/22 2008 |
8/15 |
|
09/18/2020
|
|
|
|
Rate |
11.578 |
7.238 |
|
16.3301 |
|
|
|
∆% |
|
|
37.5 |
-125.6 |
-41.0 |
|
|
SGD USD |
3/3 |
8/9 |
|
09/18/2020
|
|
|
|
Rate |
1.553 |
1.348 |
|
1.3598 |
|
|
|
∆% |
|
|
13.2 |
|
-0.9 |
12.4 |
|
HKD USD |
8/15 2008 |
12/14 2009 |
|
09/18/2020
|
|
|
|
Rate |
7.813 |
7.752 |
|
7.7503 |
|
|
|
∆% |
|
|
0.8 |
|
0.0 |
0.8 |
|
BRL USD |
12/5 2008 |
4/30 2010 |
|
09/18/2020
|
|
|
|
Rate |
2.43 |
1.737 |
|
5.3911 |
|
|
|
∆% |
|
|
28.5 |
|
-210.4 |
-121.9 |
|
CZK USD |
2/13 2009 |
8/6 2010 |
|
09/18/2020
|
|
|
|
Rate |
22.19 |
18.693 |
|
22.590 |
|
|
|
∆% |
|
|
15.7 |
|
-20.8 |
-1.8 |
|
SEK USD |
3/4 2009 |
8/9 2010 |
|
09/18/2020
|
||
|
Rate |
9.313 |
7.108 |
|
8.7650 |
|
|
|
∆% |
|
|
23.7 |
|
-23.3 |
5.9 |
|
CNY USD |
7/20 2005 |
7/15 |
|
09/18/2020
|
|
|
|
Rate |
8.2765 |
6.8211 |
|
6.7690 |
0.8 |
18.2 |
|
∆% |
|
|
17.6 |
|
Symbols:
USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound;
AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD:
Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY:
Chinese yuan; P: peak; T: trough
Note:
percentages calculated with currencies expressed in units of domestic currency
per dollar; negative sign means devaluation and no sign appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
https://markets.ft.com/data/currencies
There
are major ongoing and unresolved realignments of exchange rates in the
international financial system as countries and regions seek parities that can
optimize their productive structures. Seeking exchange rate parity or exchange
rate optimizing internal economic activities is complex in a world of
unconventional monetary policy of zero interest rates and even negative nominal
interest rates of government obligations such as negative yields for the
two-year government bond of Germany. Regulation, trade and devaluation
conflicts should have been expected from a global recession (Pelaez and Pelaez
(2007), The Global Recession Risk, Pelaez and Pelaez, Government
Intervention in Globalization: Regulation, Trade and Devaluation Wars
(2008a)): “There are significant grounds for concern on the basis of this
experience. International economic cooperation and the international financial
framework can collapse during extreme events. It is unlikely that there will be
a repetition of the disaster of the Great Depression. However, a milder
contraction can trigger regulatory, trade and exchange wars” (Pelaez and
Pelaez, Government Intervention in Globalization: Regulation, Trade and
Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the
Federal Reserve System provides the key exchange rate of US dollars (USD) per
euro (EUR) from Jan 4, 1999 to Sep 11, 2020. US recession dates are in shaded
areas. The rate on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR
on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate
depreciated 21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp
devaluation of the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004
largely because of the 1 percent interest rate between Jun 2003 and Jun 2004
together with a form of quantitative easing by suspension of auctions of the
30-year Treasury, which was equivalent to withdrawing supply from markets.
Another depreciation of 17.5 percent took the rate to USD 1.6010/EUR on Apr 22,
2008, already inside the shaded area of the global recession. The flight to the
USD and obligations of the US Treasury appreciated the dollar by 22.3 percent
to USD 1.2446/EUR on Oct 27, 2008. In the return of the carry trade after
stress tests showed sound US bank balance sheets, the rate depreciated 21.2
percent to USD 1.5085/EUR on Nov 25, 2009. The sovereign debt crisis of Europe
in the spring of 2010 caused sharp appreciation of 20.7 percent to USD
1.1959/EUR on Jun 6, 2010. Renewed risk appetite depreciated the rate 24.4
percent to USD 1.4875/EUR on May 3, 2011. The rate appreciated 1.1 percent to
USD 1.1831/EUR on Sep 11, 2020, which is the last point in Chart VI-2. The data
in Table VI-6 is obtained from closing dates in New York published by the Wall
Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-2, US Dollars (USD) per Euro (EUR), Jan 4, 1999 to
Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI 3 provides three currency indexes of the dollar from
Jan 4, 1995 to Sep 11, 2020. Chart VI-3A provides the overnight fed funds rate
and yields of the three-month constant maturity Treasury bill, the ten-year
constant maturity Treasury note and Moody’s Baa bond from Jan 4, 1995 to Jul 7,
2016. Chart VI-3B provides the overnight fed funds rate and yields of the
three-month constant maturity Treasury bill and the ten-year constant maturity
Treasury from Jan 4, 1995 to Sep 17, 2020. The first phase from 1995 to 2001
shows sharp trend of appreciation of the USD while interest rates remained at
relatively high levels. The dollar revalued partly because of the emerging
market crises that provoked inflows of financial investment into the US and
partly because of a deliberate strong dollar policy. DeLong and Eichengreen
(2001, 4-5) argue:
“That context was an economic and political
strategy that emphasized private investment as the engine for U.S. economic
growth. Both components of this term, "private" and
"investment," had implications for the administration’s international
economic strategy. From the point of view of investment, it was important that
international events not pressure on the Federal Reserve to raise interest
rates, since this would have curtailed capital formation and vitiated the
effects of the administration’s signature achievement: deficit reduction. A
strong dollar -- or rather a dollar that was not expected to weaken -- was a
key component of a policy which aimed at keeping the Fed comfortable with low
interest rates. In addition, it was important to create a demand for the goods
and services generated by this additional productive capacity. To the extent
that this demand resided abroad, administration officials saw it as important
that the process of increasing international integration, of both trade and
finance, move forward for the interest of economic development in emerging
markets and therefore in support of U.S. economic growth.”
The process of
integration consisted of restructuring “international financial architecture”
(Pelaez and Pelaez, International
Financial Architecture: G7, IMF, BIS, Debtors and Creditors (2005)). Policy
concerns subsequently shifted to the external imbalances, or current account
deficits, and internal imbalances, or government deficits (Pelaez and Pelaez, The Global Recession Risk: Dollar
Devaluation and the World Economy (2007)). Fed policy consisted of lowering
the policy rate or fed funds rate, which is close to the marginal cost of
funding of banks, toward zero during the past decade. Near zero interest rates
induce carry trades of selling dollar debt (borrowing), shorting the USD and
investing in risk financial assets. Without risk aversion, near zero interest
rates cause devaluation of the dollar. Chart VI-3 shows the weakening USD
between the recession of 2001 and the contraction after IVQ2007. There was a
flight to dollar assets and especially obligations of the US government after
Sep 2008. Cochrane and Zingales (2009) show that flight was coincident with
proposals of TARP (Troubled Asset Relief Program) to withdraw “toxic assets” in
US banks (see Pelaez and Pelaez, Financial
Regulation after the Global Recession (2009a) and Regulation of Banks and Finance (2009b)). There are shocks to
globalization in the form of regulation, trade and devaluation wars and
breakdown of international cooperation (Pelaez and Pelaez, Globalization and the State: Vol. I (2008a), Globalization and the State: Vol. II (2008b) and Government Intervention in Globalization:
Regulation, Trade and Devaluation Wars (2008c)). As evident in Chart VI-3A,
there is no exit from near zero interest rates without a financial crisis and
economic contraction, verified by the increase of interest rates from 1 percent
in Jun 2004 to 5.25 percent in Jun 2006. The Federal Open Market Committee
(FOMC) lowered the target of the fed funds rate from 7.03 percent on Jul 3,
2000, to 1.00 percent on Jun 22, 2004, in pursuit of non-existing deflation
(Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The
Global Recession Risk (2007), 83-85). The FOMC implemented increments of 25
basis points of the fed funds target from Jun 2004 to Jun 2006, raising the fed
funds rate to 5.25 percent on Jul 3, 2006, as shown in Chart VI-3A. The gradual
exit from the first round of unconventional monetary policy from 1.00 percent
in Jun 2004 (http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm) to 5.25
percent in Jun 2006 (http://www.federalreserve.gov/newsevents/press/monetary/20060629a.htm) caused the
financial crisis and global recession. There are conflicts on exchange rate
movements among central banks. There is concern of declining inflation in the
euro area and appreciation of the euro. On Jun 5, 2014, the European Central
Bank introduced cuts in interest rates and a negative rate paid on deposits of
banks (http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605.en.html):
“5 June 2014 - Monetary policy decisions
At today’s
meeting the Governing Council of the ECB took the following monetary policy
decisions:
- The
interest rate on the main refinancing operations of the Eurosystem will be
decreased by 10 basis points to 0.15%, starting from the operation to
be settled on 11 June 2014.
- The
interest rate on the marginal lending facility will be decreased by 35
basis points to 0.40%, with effect from 11 June 2014.
- The
interest rate on the deposit facility will be decreased by 10 basis
points to -0.10%, with effect from 11 June 2014. A separate press
release to be published at 3.30 p.m. CET today will provide details on the
implementation of the negative deposit facility rate.”
The ECB also
introduced new measures of monetary policy on Jun 5, 2014 (http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_2.en.html):
“5 June 2014 - ECB announces monetary policy measures to enhance
the functioning of the monetary policy transmission mechanism
In pursuing its
price stability mandate, the Governing Council of the ECB has today announced
measures to enhance the functioning of the monetary policy transmission
mechanism by supporting lending to the real economy. In particular, the
Governing Council has decided:
- To
conduct a series of targeted longer-term refinancing operations (TLTROs)
aimed at improving bank lending to the euro area non-financial private
sector [1], excluding loans to
households for house purchase, over a window of two years.
- To
intensify preparatory work related to outright purchases of asset-backed
securities (ABS).”
The President of the European Central Bank (ECB) Mario Draghi
analyzed the measures at a press conference (http://www.ecb.europa.eu/press/pressconf/2014/html/is140605.en.html). At the press
conference following the meeting of the ECB on Jul 3, 2014, Mario Draghi stated
(http://www.ecb.europa.eu/press/pressconf/2014/html/is140703.en.html): “In fact, as
I said, interest rates will stay low for an extended period of time, and the
Governing Council is unanimous in its commitment to use also nonstandard,
unconventional measures to cope with the risk of a too-prolonged period of time
of low inflation.”
The President
of the ECB Mario Draghi analyzed unemployment in the euro area and the policy
response policy in a speech at the Jackson Hole meeting of central bankers on
Aug 22, 2014 (http://www.ecb.europa.eu/press/key/date/2014/html/sp140822.en.html):
“We
have already seen exchange rate movements that should support both aggregate
demand and inflation, which we expect to be sustained by the diverging expected
paths of policy in the US and the euro area (Figure 7). We will launch our
first Targeted Long-Term Refinancing Operation in September, which has so far
garnered significant interest from banks. And our preparation for outright
purchases in asset-backed security (ABS) markets is fast moving forward and we
expect that it should contribute to further credit easing. Indeed, such
outright purchases would meaningfully contribute to diversifying the channels
for us to generate liquidity.”
On Sep 4, 2014,
the European Central Bank lowered policy rates (http://www.ecb.europa.eu/press/pr/date/2014/html/pr140904.en.html):
“4 September 2014 - Monetary policy decisions
At today’s
meeting the Governing Council of the ECB took the following monetary policy
decisions:
- The
interest rate on the main refinancing operations of the Eurosystem will be
decreased by 10 basis points to 0.05%, starting from the operation to
be settled on 10 September 2014.
- The
interest rate on the marginal lending facility will be decreased by 10
basis points to 0.30%, with effect from 10 September 2014.
- The
interest rate on the deposit facility will be decreased by 10 basis
points to -0.20%, with effect from 10 September 2014.”
The President
of the European Central Bank announced on Sep 4, 2014, the decision to expand
the balance sheet by purchases of asset-backed securities (ABS) in a new ABS
Purchase Program (ABSPP) and covered bonds (http://www.ecb.europa.eu/press/pressconf/2014/html/is140904.en.html):
“Based
on our regular economic and monetary analyses, the Governing Council decided
today to lower the interest rate on the main refinancing operations
of the Eurosystem by 10 basis points to 0.05% and the rate on the marginal
lending facility by 10 basis points to 0.30%. The rate on the deposit facility
was lowered by 10 basis points to -0.20%. In addition, the Governing Council
decided to start purchasing non-financial private sector assets. The Eurosystem
will purchase a broad portfolio of simple and transparent asset-backed
securities (ABSs) with underlying assets consisting of claims against the euro
area non-financial private sector under an ABS purchase programme (ABSPP).
This reflects the role of the ABS market in facilitating new credit flows to
the economy and follows the intensification of preparatory work on this matter,
as decided by the Governing Council in June. In parallel, the Eurosystem will
also purchase a broad portfolio of euro-denominated covered bonds issued by
MFIs domiciled in the euro area under a new covered bond purchase
programme (CBPP3). Interventions under these programmes will start in
October 2014. The detailed modalities of these programmes will be announced
after the Governing Council meeting of 2 October 2014. The newly decided
measures, together with the targeted longer-term refinancing operations which
will be conducted in two weeks, will have a sizeable impact on our balance
sheet.”
At the
Thirtieth Meeting of the International Monetary and Financial Committee of the
IMF (IMFC), the President of the European Central Bank (ECB), Mario Draghi
stated (http://www.ecb.europa.eu/press/key/date/2014/html/sp141010.en.html):
“Our monetary policy continues to aim at firmly
anchoring medium to long-term inflation expectations, in line with our
objective of maintaining inflation rates below, but close to, 2% over the
medium term. In this context, we have taken both conventional and
unconventional measures that will contribute to a return of inflation rates to
levels closer to our aim. Our unconventional measures, more specifically our
TLTROs (Targeted Longer-Term Refinancing Operations) and our new purchase
programmes for ABSs and covered bonds, will further enhance the functioning of
our monetary policy transmission mechanism and facilitate credit provision to
the real economy. Should it become necessary to further address risks of too
prolonged a period of low inflation, the ECB’s Governing Council is unanimous
in its commitment to using additional unconventional instruments within its
mandate.”
In a speech on
“Monetary Policy in the Euro Area,” on Nov 21, 2014, the President of the
European Central Bank, Mario Draghi, advised of the determination to bring
inflation back to normal levels by aggressive holding of securities in the
balance sheet (http://www.ecb.europa.eu/press/key/date/2014/html/sp141121.en.html):
“In short, there is a combination of policies that will work to
bring growth and inflation back on a sound path, and we all have to meet our
responsibilities in achieving that. For our part, we will continue to meet our
responsibility – we will do what we must to raise inflation and inflation
expectations as fast as possible, as our price stability mandate requires of
us.
If on its current trajectory our policy is not effective enough to
achieve this, or further risks to the inflation outlook materialise, we would
step up the pressure and broaden even more the channels through which we
intervene, by altering accordingly the size, pace and composition of our
purchases.”
In the
Introductory Statement to the press conference on Dec 4, 2014, the President of
the European Central Bank Mario Draghi advised that (http://www.ecb.europa.eu/press/pressconf/2014/html/is141204.en.html):
“In
this context, early next year the Governing Council will reassess the monetary
stimulus achieved, the expansion of the balance sheet and the outlook for price
developments. We will also evaluate the broader impact of recent oil price
developments on medium-term inflation trends in the euro area. Should it become
necessary to further address risks of too prolonged a period of low inflation,
the Governing Council remains unanimous in its commitment to using additional
unconventional instruments within its mandate. This would imply altering early
next year the size, pace and composition of our measures.”
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.”
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, former 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
34.3 percent relative to the dollar from the high on Jul 15, 2008 to Sep 18,
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 34.3 percent relative
to the dollar from the high on Jul 15, 2008 to Sep 18, 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
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/monetary20200916a.htm): “The Committee
decided to keep the target range for the federal funds rate at 0 to ¼ percent
and expects it will be appropriate to maintain this target range until labor
market conditions have reached levels consistent with the Committee's
assessments of maximum employment and inflation has risen to 2 percent and is
on track to moderately exceed 2 percent for some time. In addition, over coming
months the Federal Reserve will increase its holdings of Treasury securities
and agency mortgage-backed securities at least at the current pace to sustain
smooth market functioning and help foster accommodative financial conditions,
thereby supporting the flow of credit to households and businesses. In
assessing the appropriate stance of monetary policy, the Committee will
continue to monitor the implications of incoming information for the economic
outlook. The Committee would be prepared to adjust the stance of monetary
policy as appropriate if risks emerge that could impede the attainment of the
Committee's goals. The Committee's assessments will take into account a wide
range of information, including readings on public health, labor market
conditions, inflation pressures and inflation expectations, and financial and
international developments.” (emphasis added).” 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
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 (Friedman
1957). 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
(1)
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 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.”
The decisions of the FOMC (Federal Open Market Committee) depend
on incoming data. There are unexpected swings in valuations of risk financial
assets by “carry trades” from interest rates below inflation to exposures in
stocks, commodities and their derivatives. Another issue is the unexpected
“data surprises” such as the sharp decline in 12 months rates of increase of
real disposable income, or what is left after taxes and inflation, and the price
indicator of the FOMC, prices of personal consumption expenditures (PCE)
excluding food and energy. There is no science or art of monetary policy that
can deal with this uncertainty.
|
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% |
Chart VI-3, US Dollar Currency Indexes, Jan 4, 1995-Sep 11,
2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-3A,
US, Overnight Fed Funds Rate, Yield of Three-Month Treasury Constant Maturity,
Yield of Ten-Year Treasury Constant Maturity and Yield of Moody’s Baa Bond, Jan
4, 1995 to Jul 25, 2016
Source:
Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Chart VI-3B,
US, Overnight Fed Funds Rate, Yield of Three-Month Treasury Constant Maturity
and Yield of Ten-Year Treasury Constant Maturity, Jan 4, 1995 to Sep 17, 2020
Source:
Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Chart
VI-4 of the Board of Governors of the Federal Reserve System provides the
exchange rate of the US relative to the euro, or USD/EUR. During maintenance of
the policy of zero fed funds rates the dollar appreciates in periods of
significant risk aversion such as flight into US government obligations in late
2008 and early 2009 and in the various risks concerns generated by the European
sovereign debt crisis. There was depreciation of the dollar followed by recent
appreciation.
Chart VI-4, US Dollars per Euro, 2015-2020
Source: Board of Governors of the Federal Reserve System
Carry trades induced by zero interest rates increase
capital flows into emerging markets that appreciate exchange rates. Portfolio
reallocations away from emerging markets depreciate their exchange rates in
reversals of capital flows. Chart VI-4A provides the exchange rate of the
Mexican peso (MXN) per US dollar from Nov 8, 1993 to Sep 11, 2020. The first
data point in Chart VI-4A is MXN 3.1520 on Nov 8, 1993. The rate devalued to
11.9760 on Nov 14, 1995 during emerging market crises in the 1990s and the
increase of interest rates in the US in 1994 that stressed world financial
markets (Pelaez and Pelaez, International Financial Architecture 2005, The
Global Recession Risk 2007, 147-77). The MXN depreciated sharply to MXN
15.4060/USD on Mar 2, 2009, during the global recession. The rate moved to MXN
11.5050/USD on May 2, 2011, during the sovereign debt crisis in the euro area.
The rate depreciated to 11.9760 on May 9, 2013. The final data point is MXN 21.3270/USD
on Sep 11, 2020.
Chart VI-4A, Mexican Peso (MXN) per US Dollar (USD), Nov 8,
1993 to Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
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 former 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. 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 Willem Buiter (2014Feb4), a
distinguished economist currently Global Chief Economist at Citigroup (http://www.willembuiter.com/resume.pdf), writing on
“The Fed’s bad manners risk offending foreigners,” on Feb 4, 2014, published in
the Financial Times (http://www.ft.com/intl/cms/s/0/fbb09572-8d8d-11e3-9dbb-00144feab7de.html#axzz2suwrwkFs), concurs with
Raghuram Rajan. Buiter (2014Feb4) argues that international policy cooperation
in monetary policy is both in the interest of the world and the United States.
Portfolio reallocations induced by combination of zero interest rates and risk
events stimulate carry trades that generate wide swings in world capital flows.
In a speech at the Brookings Institution on Apr 10, 2014, Raghuram G. Rajan
(2014Apr10, 1, 10) argues:
“As the world seems to be struggling back to its feet after the
great financial crisis, I want to draw attention to an area we need to be
concerned about: the conduct of monetary policy in this integrated world. A
good way to describe the current environment is one of extreme monetary easing
through unconventional policies. In a world where debt overhangs and the need
for structural change constrain domestic demand, a sizeable portion of the
effects of such policies spillover across borders, sometimes through a weaker
exchange rate. More worryingly, it prompts a reaction. Such competitive easing
occurs both simultaneously and sequentially, as I will argue, and both advanced
economies and emerging economies engage in it. Aggregate world demand may be
weaker and more distorted than it should be, and financial risks higher. To
ensure stable and sustainable growth, the international rules of the game need
to be revisited. Both advanced economies and emerging economies need to adapt,
else I fear we are about to embark on the next leg of a wearisome cycle. A
first step to prescribing the right medicine is to recognize the cause of the
sickness. Extreme monetary easing, in my view, is more cause than medicine. The
sooner we recognize that, the more sustainable world growth we will have.”
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.
Chart VI-4B provides the rate of the Indian rupee (INR) per US
dollar (USD) from Jan 2, 1973 to Sep 11, 2020. The first data point is INR
8.0200 on Jan 2, 1973. The rate depreciated sharply to INR 51.9600 on Mar 3,
2009, during the global recession. The rate appreciated to INR 44.0300/USD on
Jul 28, 2011 in the midst of the sovereign debt event in the euro area. The
rate overshot to INR 68.8000 on Aug 28, 2013. The final data point is INR 73.4500/USD
on Sep 11, 2020.
Chart VI-4B, Indian Rupee (INR) per US Dollar (USD), Jan 2,
1973 to Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-5 provides the exchange rate of JPY (Japan yen)
per USD (US dollars). The first data point on the extreme left is JPY
357.7300/USD for Jan 14, 1971. The JPY has appreciated over the long term
relative to the USD with fluctuations along an evident long-term appreciation.
Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007.
The use of the JPY as safe haven is evident by sharp appreciation during the
global recession to JPY 110.4800/USD on Aug 15, 2008, and to JPY 87.8000/USD on
Jan 21, 2009. The final data point in Chart VI-5 is JPY 106.1700/USD on Sep 11,
2020 for appreciation of 14.4 percent relative to JPY 124.0900/USD on Jun 29,
2007 before the global recession and expansion characterized by recurring bouts
of risk aversion. Takashi Nakamichi and Eleanor Warnock, writing on “Japan
lashes out over dollar, euro,” on Dec 29, 2012, published in the Wall Street
Journal (http://professional.wsj.com/article/SB10001424127887323530404578207440474874604.html?mod=WSJ_markets_liveupdate&mg=reno64-wsj),
analyze the “war of words” launched by Japan’s new Prime Minister Shinzo Abe
and his finance minister Taro Aso, arguing of deliberate devaluations of the
USD and EUR relative to the JPY, which are hurting Japan’s economic activity.
Gerard Baker and Jacob M. Shlesinger, writing on “Bank of Japan’s Kuroda
signals impatience with Abe government,” on May 23, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303480304579579311491068756?KEYWORDS=bank+of+japan+kuroda&mg=reno64-wsj),
analyze concerns of the Governor of the Bank of Japan Haruhiko Kuroda that the
JPY has strengthened relative to the USD, partly eroding earlier
depreciation. The data in Table VI-6 is
obtained from closing dates in New York published by the Wall Street Journal
(http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, Jan
4, 1971-Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
The causes of the financial crisis and global recession were
interest rate and housing subsidies and affordability policies that encouraged
high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial
Regulation after the Global Recession (2009a), 157-66, Regulation of
Banks and Finance (2009b), 217-27, International Financial Architecture
(2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization
and the State Vol. II (2008b), 197-213, Government Intervention in
Globalization (2008c), 182-4). Several past comments of this blog elaborate
on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Zero interest rates in the United States forever tend to
depreciate the dollar against every other currency if there is no risk aversion
preventing portfolio rebalancing toward risk financial assets, which include
the capital markets and exchange rates of emerging-market economies. The
objective of unconventional monetary policy as argued by Yellen 2011AS) is to
devalue the dollar to increase net exports that increase US economic growth.
Increasing net exports and internal economic activity in the US is equivalent
to decreasing net exports and internal economic activity in other countries.
Continental territory, rich endowment of natural resources,
investment in human capital, teaching and research universities, motivated
labor force and entrepreneurial initiative provide Brazil with comparative
advantages in multiple economic opportunities. Exchange rate parity is critical
in achieving Brazil’s potential but is difficult in a world of zero interest
rates. Chart IV-6 of the Board of Governors of the Federal Reserve System
provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL
1.2074/USD on Jan 4, 1999 to BRL 5.3040/USD on Sep 11, 2020. The rate reached
BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on
Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008
during worldwide flight from risk. The rate appreciated again by 41.3 percent
to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 5.3040/USD
on Sep 11, 2020 for depreciation of 245.0 percent. The data in Table VI-6 is
obtained from closing dates in New York published by the Wall Street Journal
(http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-6, Brazilian Real (BRL) per US
Dollar (USD) Jan 4, 1999 to Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-7 of the Board of Governors of the Federal
Reserve System provides the history of the BRL beginning with the first data
point of BRL 0.8400/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on
Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD
on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880 on Sep 21, 2001
relative to Mar 3, 1999.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD) Jan 2,
1995 to Sep 11, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
Note:
US Recessions in Shaded Areas
Source: Board of
Governors of the Federal Reserve System
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
%5b4%5d.jpg){kind=link}
No comments:
Post a Comment