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 V

 

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

 

Table VA-1 provides the value of total sales of US business (manufacturers, retailers and merchant wholesalers) and monthly and 12-month percentage changes. Sales of manufacturers increased 4.6 percent in Jul and increased 10.0 percent in Jun, decreasing 4.7 percent in the 12 months ending in Jul 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. Sales of retailers increased 0.5 percent in Jul and increased 6.9 percent in Jun, increasing 6.6 percent in 12 months. Sales of merchant wholesalers increased 4.6 percent in Jul, increasing 9.0 percent in Jun and decreasing 4.0 percent in 12 months. Total business sales increased 3.2 percent in Jul and increased 8.6 percent in Jun, decreasing 0.9 percent in the 12 months ending in Jul 2020.

Table VA-1, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Jul 20/Jun 20 ∆% SA	Jul 2020 Millions of Dollars NSA	Jun 20/ May 20 ∆% SA	Jul 20/ Jul 19 ∆% NSA
Total Business	3.2	1,448,932	8.6	-0.9
Manufacturers	4.6	466,322	10.0	-4.7
Retailers	0.5	496,876	6.9	6.6
Merchant Wholesalers	4.6	485,734	9.0	-4.0

Source: US Census Bureau https://www.census.gov/mtis/index.html

Chart VA-1 of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers seasonally adjusted (SA) in millions of dollars. The series with adjustment evens fluctuations following seasonal patterns. There is sharp recovery from the global recession in a robust trend, which is mixture of price and quantity effects because data are not adjusted for price changes. There is stability in the final segment with subdued prices with data not adjusted for price changes. There is recovery in the recent segment with occasional vacillation. The data point in Apr 2020 shows sharp contraction followed by increase in May-Jul 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event.

Chart VA-1, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 1992-Jul 2020

Source: US Census Bureau https://www.census.gov/mtis/index.html

Chart VA-1A shows of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers seasonally adjusted (SA) in millions of dollars from Jan 2019 to Jul 2020, showing the deep contraction in Mar-Apr 2020 followed by increase in May-Jul 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.

Chart VA-1A, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 2019-Jul 2020

Source: US Census Bureau https://www.census.gov/mtis/index.html

Chart VA-2 of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers not seasonally adjusted (NSA) in millions of dollars from Jan 1992 to Jul 2020. The series without seasonal adjustment shows sharp jagged behavior because of monthly fluctuations following seasonal patterns. There is sharp recovery from the global recession in a robust trend, which is mixture of price and quantity effects because data are not adjusted for price changes. There is stability in the final segment with monthly marginal weakness in data without adjustment for price changes with following recovery. There is sharp contraction in Mar-Apr 2020 followed by increase in May-Jul 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event.

Chart VA-2, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 1992-Jul 2020

Source: US Census Bureau

https://www.census.gov/mtis/index.html

Chart VA-2A of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers not seasonally adjusted (NSA) in millions of dollars from Jan 2019 to Jul 2020. There is sharp contraction in the data point in Apr 2020 followed by increase in May-Jul 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.

Chart VA-2A, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 2019-Jul 2020

Source: US Census Bureau

https://www.census.gov/mtis/index.html

Businesses added cautiously to inventories to replenish stocks. Retailers’ inventories increased 1.2 percent in Jul 2020 and decreased 2.7 percent in

Jun with decrease of 11.1 percent in 12 months, as shown in Table VA-2. Total business increased inventories 0.1 percent in Jul after decreasing 1.1 percent in Jun and decreasing 5.9 percent in 12 months. Inventories sales/ratios of total business stabilized at a level close to 1.30 under careful management to avoid costs and risks, moving to 1.33 in Jul 2020. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier with increase at the margin.

Table VA-2, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Jul 20 Millions of Dollars NSA	Jul 20/Jun 20 ∆% SA	Jun 20/ May 2020 SA	Jul 20/Jul 19 ∆% NSA
Total Business	1,897,799	0.1	-1.1	-5.9
Manufacturers	690,711	-0.5	0.5	-1.2
Retailers	580,650	1.2	-2.7	-11.1
Merchant Wholesalers	626,438	-0.3	-1.3	-5.6
Inventory/ Sales Ratio	Jul 20 Millions of Dollars NSA	Jul 2020 SA	Jun 2020 SA	Jul 2019 SA
Total Business	1,892,654	1.33	1.37	1.39
Manufacturers	687,406	1.43	1.51	1.38
Retailers	579,948	1.23	1.22	1.46
Merchant Wholesalers	625,300	1.32	1.38	1.34

US Census Bureau

https://www.census.gov/mtis/index.html

Chart VA-3 of the US Census Bureau provides total business inventories of manufacturers, retailers and merchant wholesalers seasonally adjusted (SA) in millions of dollars from Jan 1992 to Jul 2020. The impact of the two recessions of 2001 and IVQ2007 to IIQ2009 is evident in the form of sharp reductions in inventories. Inventories have surpassed the peak before the global recession. Data are not adjusted for price changes. Inventories decline 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.

Chart VA-3, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 1992-Jul 2020

Source: US Census Bureau https://www.census.gov/mtis/index.html

Chart VA-3A of the US Census Bureau provides total business inventories of manufacturers, retailers and merchant wholesalers seasonally adjusted (SA) in millions of dollars from Jan 2019 to Jul 2020. Inventories sink 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.

Chart VA-3A, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 2019-Jul 2020

Source: US Census Bureau https://www.census.gov/mtis/index.html

Chart VA-4 provides total business inventories of manufacturers, retailers and merchant wholesalers not seasonally adjusted (NSA) from Jan 1992 to Jul 2020 in millions of dollars. The recessions of 2001 and IVQ2007 to IIQ2009 are evident in the form of sharp reductions of inventories. There is sharp upward trend of inventory accumulation after both recessions. Total business inventories are higher than in the peak before the global recession. Inventories decrease 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.

Chart VA-4, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 1992-Jul 2020

Source: US Census Bureau https://www.census.gov/mtis/index.html

Chart VA-4A provides total business inventories of manufacturers, retailers and merchant wholesalers not seasonally adjusted (SA) from Jan 1992 to Jul 2020 in millions of dollars. There is sharp contraction in Mar-Jun 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event.

Chart VA-4A, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 2019-Jul 2020

Source: US Census Bureau https://www.census.gov/mtis/index.html

Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:

“The dynamic sequences (i) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:

(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.

This is the pure inventory cycle.

(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.

(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.

(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.

(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”

Chart VA-5 shows the increase in the inventory/sales ratios during the recession of 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels in 2012, 2013 and 2015 with increase into 2015-2016 and then decreasing at the margin from 2016 into 2017-2019. Inventory/sales ratios increase sharply 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.

Chart VA-5, Total Business Inventories/Sales Ratios 2011 to 2020

https://www.census.gov/mtis/img/mtisbrf.gif

 

Sales of retail and food services increased 0.6 percent in Aug 2020, after increasing 0.9 percent in Jul 2020 seasonally adjusted (SA), in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event,  decreasing 1.8 percent in Jan-Aug 2020 relative to Jan-Aug 2019 not seasonally adjusted (NSA), as shown in Table VA-3. Excluding motor vehicles and parts, retail sales increased 0.7 percent in Aug 2020, increasing 1.3 percent in Jul 2020 SA and decreasing 1.4 percent NSA in Jan-Aug 2020 relative to a year earlier. Sales of motor vehicles and parts increased 0.2 percent in Aug 2020 after decreasing 1.0 percent in Jul 2020 SA and decreasing 3.4 percent NSA in Jan-Aug 2020 relative to a year earlier. Gasoline station sales increased 0.4 percent SA in Aug 2020 after increasing 4.4 percent in Jul 2020 in oscillating prices of gasoline that are moderating, decreasing 16.9 percent in Jan-Aug 2020 relative to a year earlier.

Table VA-3, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%

	Aug ∆% SA	Jul ∆% SA	Jan-Aug 2020 Million Dollars NSA	Jan-Aug 2020 from Jan-Aug 2019 ∆% NSA
Retail and Food Services	0.6	0.9	3,995,662	-1.8
Excluding Motor Vehicles and Parts	0.7	1.3	3,194,645	-1.4
Motor Vehicles & Parts Dealers	0.2	-1.0	801,017	-3.4
Retail	0.1	0.5	3,591,768	0.9
Building Materials	2.0	-2.4	289,219	11.4
Food and Beverage	-1.2	0.6	566,563	12.2
Grocery	-1.6	0.7	507,503	12.2
Health & Personal Care Stores	0.8	4.5	236,769	0.1
Clothing & Clothing Accessories Stores	2.9	2.2	108,616	-34.9
Gasoline Stations	0.4	4.4	277,960	-16.9
General Merchandise Stores	-0.4	-1.1	467,022	2.2
Food Services & Drinking Places	4.7	4.1	403,894	-20.9

Source: US Census Bureau https://www.census.gov/retail/index.html

Chart VA-6 provides monthly percentage changes of sales of retail and food services. There is significant monthly volatility that prevents identification of clear trends. Sales collapsed in Mar-Apr 2020,  in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, with sharp recovery in May-Aug 2020.

Chart VA-6, US, Monthly Percentage Change of Retail and Food Services Sales, Jan 1992-Aug 2020

Source: US Census Bureau https://www.census.gov/retail/index.html

 

Chart VA-6A provides monthly percentage changes of sales of retail and food services from Jan 2019 to Jun 2020.There is vertical increase in May-Aug 2020 after collapse in Feb-Apr 2020.

Chart VA-6A, US, Monthly Percentage Change of Retail and Food Services Sales, Jan 2019-Aug 2020

Source: US Census Bureau https://www.census.gov/retail/index.html

Chart VA-7 of the US Census Bureau provides total sales of retail trade and food services seasonally adjusted (SA) from Jan 1992 to Aug 2020 in millions of dollars. The impact on sales of the shallow recession of 2001 was much milder than the sharp contraction in the global recession from IVQ2007 to IIQ2009. There is flattening in the final segment of the series followed by another increase/decrease. Sales collapsed in the lockdown of economic activity in the COVID-19 event. Data are not adjusted for price changes. There is sharp decline in Feb-Mar 2020 with sharp recovery in May-Aug 2020.

Chart VA-7, US, Total Sales of Retail Trade and Food Services, SA, Jan 1992-Aug 2020, Millions of Dollars

Source: US Census Bureau https://www.census.gov/retail/index.html

Chart VA-7A of the US Census Bureau provides total sales of retail trade and food services seasonally adjusted (SA) from Jan 2019 to Aug 2020 in millions of dollars. Sales jumped in May-Aug 2020 in recovery from the contraction in Feb-Mar 2020.

Chart VA-7A, US, Total Sales of Retail Trade and Food Services, SA, Jan 2019-Aug 2020, Millions of Dollars

Source: US Census Bureau https://www.census.gov/retail/index.html

Chart VA-8 of the US Census Bureau provides total sales of retail trade and food services seasonally adjusted (NSA) from Jan 1992 to Aug 2020 in millions of dollars. Data are not adjusted for price changes. There is sharp contraction in Feb-Apr 2020, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, with sharp recovery in May-Aug 2020.

Chart VA-8, US, Total Sales of Retail Trade and Food Services, NSA, Jan 1992-Aug 2020, Millions of Dollars

Source: US Census Bureau https://www.census.gov/retail/index.html

Chart VA-8A of the US Census Bureau provides total sales of retail trade and food services seasonally adjusted (NSA) from Jan 2019 to Aug 2020 in millions of dollars. Data are not adjusted for price changes. There is sharp recovery in May-Aug 2020.

Chart VA-8A, US, Total Sales of Retail Trade and Food Services, NSA, Jan 2019-Aug 2020, Millions of Dollars

Source: US Census Bureau https://www.census.gov/retail/index.html

Table VI-7B provides the maturity distribution and average length in months of marketable interest-bearing debt held by private investors from 2007 to 2020. Total debt held by investors increased from $3635 billion in 2007 to $15,688 billion in Jun 2020 (Fiscal Year 2020) or increase by 331.6 percent. There are two concerns with the maturity distribution of US debt. (1) Growth of debt is moving total debt to the point of saturation in investors’ portfolio. In a new environment of risk appetite and nonzero fed funds rates with economic growth at historical trend of around 3 percent, yields on risk financial assets are likely to increase. Placement of new debt may require increasing interest rates in an environment of continuing placement of debt by the US Treasury without strong fiscal constraints. (2) Refinancing of maturing debt is likely to occur in an environment of higher interest rates, exerting pressure on future fiscal budgets. In Jun (fiscal year 2020), $6416 billion or 40.9 percent of outstanding debt held by investors matures in less than a year and $5442 billion or 34.7 percent of total debt matures in one to five years. Debt maturing in five years or less adds to $11,858 billion or 75.6 percent of total outstanding debt held by investors of $15,688 billion. This historical episode may be remembered as one in which the US managed its government debt with short-dated instruments during record low long-dated yields and on the verge of fiscal pressures on all interest rates. This strategy maximizes over time interest payments on government debt by taxpayers that is precisely the opposite of the objective of sound debt management and taxpayer welfare.

Table VI-7B, Maturity Distribution and Average Length in Months of Marketable Interest-Bearing Public Debt Held by Private Investors, Billions of Dollars

End of Fiscal Year or Month	2007	2008	2009	2010	2011	2012
Total*	3635	4745	6229	7676	7951	9040
<1 Year	1176	2042	2605	2480	2504	2897
1-5 Years	1310	1468	2075	2956	3085	3852
5-10 Years	678	719	995	1529	1544	1488
10-20 Years	292	352	351	341	309	271
>20 Years	178	163	204	371	510	533
Average Months	58	49	49	57	60	55

 

End of Fiscal Year or Month		2013	2014	2015	2016	2017
Total*		9518	9829	10379	11184	11643
<1 Year		2940	2932	2923	3321	3263
1-5 Years		4135	4217	4356	4478	4746
5-10 Years		1648	1814	2084	2219	2321
10-20 Years		231	223	184	168	152
>20 Years		565	644	832	998	1161
Average Months		55	56	61	63	66
End of Fiscal Year or Month	2018	2019	2020 Jun
Total*	12881	14225	15,688
<1 Year	3794	4147	6416
1-5 Years	5181	5822	5442
5-10 Years	2445	2625	2287
10-20 Years	121	105	166
>20 Years	1339	1526	1376
Average Months	65	65	55

*Amount Outstanding Privately Held

Source: United States Treasury. 2020 Sep. Treasury Bulletin. Washington, Dec

https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/

Table VI-7C provides additional information required for understanding the deficit/debt situation of the United States. The table is divided into four parts: Treasury budget in the 2020 fiscal year beginning on Oct 1, 2019 and ending on Sep 30, 2020; federal fiscal data for the years from 2009 to 2019; federal fiscal data for the years from 2005 to 2008; and Treasury debt held by the public from 2005 to 2019. Receipts decreased 1.3 percent in the cumulative fiscal year 2020 ending in Aug 2020 relative to the cumulative in fiscal year 2019. Individual income taxes decreased 5.7 percent relative to the same fiscal period a year earlier. Outlays increased 45.7 percent relative to a year earlier. There are also receipts, outlays, deficit and debt for fiscal years 2013, 2014, 2015, 2016, 2017, 2018 and 2019. In fiscal year 2019, the deficit reached $984.4 billion or 4.6 percent of GDP. Outlays of 4,446.6 billion were 21.0 percent of GDP and receipts of $3,462.2 billion were 16.3 percent of GDP. It is quite difficult for the US to raise receipts above 18 percent of GDP. Total revenues of the US from 2009 to 2012 accumulate to $9021.2 billion, or $9.0 trillion, while expenditures or outlays accumulate to $14,104.5 billion, or $14.1 trillion, with the deficit accumulating to $5083.3 billion, or $5.1 trillion. Revenues decreased 6.5 percent from $9652.5 billion in the four years from 2005 to 2008 to $9021.2 billion in the years from 2009 to 2012. Decreasing revenues were caused by the global recession from IVQ2007 (Dec) to IIQ2009 (Jun) and by growth of only 1.2 percent on average in the cyclical expansion from IIIQ2009 to IIQ2020. In contrast, the expansion from IQ1983 to IVQ1993 was at the average annual growth rate of 3.7 percent and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2020/08/d-ollar-devaluation-and-yuan.html and earlier https://cmpassocregulationblog.blogspot.com/2020/08/contraction-of-united-states-gdp-at-32_57.html). Because of mediocre GDP growth, there are 34.8 million unemployed or underemployed in the United States for an effective unemployment/underemployment rate of 20.2 percent (https://cmpassocregulationblog.blogspot.com/2020/09/exchange-rate-fluctuations-1.html and earlier https://cmpassocregulationblog.blogspot.com/2020/08/thirty-eight-million-unemployed-or.html). Weakness of growth and employment creation is analyzed in II Collapse of United States Dynamism of Income Growth and Employment Creation (https://cmpassocregulationblog.blogspot.com/2020/07/contraction-of-household-wealth-by-14.html). In contrast with the decline of revenue, outlays or expenditures increased 30.1 percent from $10,838.2 billion, or $10.8 trillion, in the four years from 2005 to 2008, to $14,104.5 billion, or $14.1 trillion, in the four years from 2009 to 2012. Increase in expenditures by 30.1 percent while revenue declined by 6.5 percent caused the increase in the federal deficit from $1185.8 billion in 2005-2008 to $5083.3 billion in 2009-2012. Federal revenue was 14.8 percent of GDP on average in the years from 2009 to 2012, which is well below 17.3 percent of GDP on average from 1962 to 2019. Federal outlays were 23.3 percent of GDP on average from 2009 to 2012, which is well above 20.1 percent of GDP on average from 1962 to 2019. The lower part of Table VI-7C shows that debt held by the public swelled from $5803 billion in 2008 to $13,117 billion in 2015, by $7314 billion or 126.0 percent. Debt held by the public as percent of GDP or economic activity jumped from 39.4 percent in 2008 to 79.2 percent in 2019, which is well above the average of 41.7 percent from 1962 to 2019. The United States faces tough adjustment because growth is unlikely to recover, creating limits on what can be obtained by increasing revenues, while continuing stress of social programs restricts what can be obtained by reducing expenditures. The Congressional Budget Office (CBO) provides a preliminary estimate of the impact of Public Law 116-136 of Mar 27, 2020, CARES Act or Coronavirus Aid, Relief and Economic Security Act (https://www.cbo.gov/system/files/2020-04/hr748.pdf). This preliminary estimate finds that the CARES Act “will increase federal deficits by about $1.8 trillion over the 2020-2030 period (https://www.cbo.gov/system/files/2020-04/hr748.pdf).

 Table VI-7C, US, Treasury Budget in Fiscal Year to Date Million Dollars

Aug 2020	Fiscal Year 2020	Fiscal Year 2019	∆%
Receipts	3,046,786	3,088,167	-1.3
Outlays	6,054,175	4,155,323	45.7
Deficit	-3,007,390	-1,067,156
Individual Income Tax	1,447,184	1,534,886	-5.7
Corporation Income Tax	162,185	169,927	-4.6
Social Insurance	879,522	836,607	5.1
	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
Fiscal Year 2019	3,462.2	4,446.6	-984.4
% GDP	16.3	21.0	-4.6
Fiscal Year 2018	3,329.9	4,109.0	-779.1
% GDP	16.4	20.2	-3.8
Fiscal Year 2017	3,316.2	3,981.6	-665.4
% GDP	17.2	20.6	-3.5
Fiscal Year 2016	3,268.0	3,852.6	-584.7
% GDP	17.6	20.8	-3.2
Fiscal Year 2015	3,249.9	3,691.8	-442.0
% GDP	18.0	20.4	-2.4
Fiscal Year 2014	3,021.5	3,506.3	-484.8
% GDP	17.4	20.2	-2.8
Fiscal Year 2013	2,775.1	3,454.9	-679.8
% GDP	16.7	20.8	-4.1
Fiscal Year 2012	2,450.0	3,526.6	-1,076.6
% GDP	15.3	22.0	-6.7
Fiscal Year 2011	2,303.5	3,603.1	-1,299.6
% GDP	15.0	23.4	-8.4
Fiscal Year 2010	2,162.7	3,457.1	-1,294.4
% GDP	14.6	23.3	-8.7
Fiscal Year 2009	2,105.0	3,517.7	-1,412.7
% GDP	14.6	24.4	-9.8
Total 2009-2012	9,021.2	14,104.5	-5,083.3
Average % GDP 2009-2012	14.8	23.3	-8.4
Fiscal Year 2008	2,524.0	2,982.5	-458.6
% GDP	17.1	20.2	-3.1
Fiscal Year 2007	2,568.0	2,728.7	-160.7
% GDP	18.0	19.1	-1.1
Fiscal Year 2006	2,406.9	2,655.1	-248.2
% GDP	17.6	19.5	-1.8
Fiscal Year 2005	2,153.6	2,472.0	-318.3
% GDP	16.8	19.3	-2.5
Total 2005-2008	9,652.5	10,838.2	-1,185.8
Average % GDP 2005-2008	17.4	19.5	-2.1
Debt Held by the Public	Billions of Dollars	Percent of GDP
2005	4,592	35.8
2006	4,829	35.4
2007	5,035	35.2
2008	5,803	39.4
2009	7,545	52.3
2010	9,019	60.8
2011	10,128	65.8
2012	11,281	70.3
2013	11,983	72.2
2014	12,780	73.7
2015	13,117	72.5
2016	14,168	76.4
2017	14,666	76.0
2018	15,750	77.4
2019	16,803	79.2

Source: https://www.fiscal.treasury.gov/reports-statements/mts/

https://www.treasury.gov/press-center/press-releases/Pages/sm0184.aspx https://home.treasury.gov/news/press-releases/sm806 CBO, The budget and economic outlook: 2018 to 2028. Washington, DC, Apr 9 https://www.cbo.gov/publication/53651

CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370 CBO, An update to the budget and economic outlook: 2016 to 2026. Washington, DC, Aug 23, 2016.

https://www.cbo.gov/about/products/budget-economic-data#6

CBO (2012NovMBR). CBO (2011AugBEO); Office of Management and Budget 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan. CBO. 2012AugBEO. Budget and Economic Outlook. Washington, DC, Aug 22. CBO. 2012Jan31. Historical budget data. Washington, DC, Jan 31. CBO. 2012NovCDR. Choices for deficit reduction. Washington, DC. Nov. CBO. 2013HBDFeb5. Historical budget data—February 2013 baseline projections. Washington, DC, Congressional Budget Office, Feb 5. CBO. 2013HBDFeb5. Historical budget data—February 2013 baseline projections. Washington, DC, Congressional Budget Office, Feb 5. CBO (2013Aug12). 2013AugHBD. Historical budget data—August 2013. Washington, DC, Congressional Budget Office, Aug. CBO, Historical Budget Data—February 2014, Washington, DC, Congressional Budget Office, Feb. CBO, Historical budget data—April 2014 release. Washington, DC, Congressional Budget Office, Apr. Congressional Budget Office, August 2014 baseline: an update to the budget and economic outlook: 2014 to 2024. Washington, DC, CBO, Aug 27, 2014. CBO, Monthly budget review: summary of fiscal year 2014. Washington, DC, Congressional Budget Office, Nov 10, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

https://www.cbo.gov/about/products/budget-economic-data#6

https://www.cbo.gov/about/products/budget_economic_data#3 https://www.cbo.gov/about/products/budget_economic_data#2

 

 

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting from risk flight to US dollar denominated assets. There are now temporary interruptions because of fear of rising interest rates that erode prices of US government securities because of mixed signals on monetary policy and exit from the Fed balance sheet of seven trillion dollars of securities held outright. Net foreign purchases of US long-term securities (row C in Table VA-4) weakened from $70.6 billion in Jun 2020 to minus $29.0 billion in Jul

 2020. Foreign residents’ purchases minus sales of US long-term securities (row A in Table VA-4) in Jun 2020 of $78.8 billion weakened to $26.7 billion in Jul 2020. Net US (residents) purchases of long-term foreign securities (row B in Table VA-4) strengthened from $34.2 billion in Jun 2020 to $37.5 billion in Jul 2020. Other transactions (row C2 in Table VA-4) changed from minus $42.4 billion in Jun 2020 to $39.7 billion in Jul 2020. In Jul 2020,

C = A + B + C2 = -$26.7 billion + $37.5 billion - $39.7 billion = $29.0 billion.

There are minor rounding errors. There is weakening demand in Table VA-4 in Jul 2020 in A1 private purchases by residents overseas of US long-term securities of minus $20.8 billion of which weakening in A11 Treasury securities of minus $2.1 billion, weakening in A12 of $22.2 billion in agency securities, weakening of minus 55.8 billion of corporate bonds and weakening of $14.8 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 decreased $5.9 billion with decrease of Treasury securities of $20.7 billion in Jul 2020. Official purchases of agency securities increased $12.2 billion in Jul 2020. Row D shows decrease in Jul 2020 of $3.9 billion in purchases of short-term dollar denominated obligations. Foreign holdings of US Treasury bills decreased $1.4 billion (row D1) with foreign official holdings increasing $11.1 billion while the category “other” decreased $2.5 billion. Foreign private holdings of US Treasury bills decreased $12.5 billion in what could be arbitrage of duration exposures and international risks. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses with significant oscillations

in risk perceptions.

Table VA-4, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Jul 2019  12 Months	Jul 2020 12 Months	Jun 2020	Jul 2020
A Foreign Purchases less Sales of US LT Securities	131.8	-185.1	78.8	-26.7
A1 Private	309.9	-20.2	91.9	-20.8
A11 Treasury	189.3	-255.7	49.5	-2.1
A12 Agency	169.0	213.2	28.5	22.2
A13 Corporate Bonds	53.8	-129.2	-17.4	-55.8
A14 Equities	-102.2	151.5	31.2	14.8
A2 Official	-178.1	-164.9	-13.0	-5.9
A21 Treasury	-263.9	-335.3	-20.6	-20.7
A22 Agency	90.5	148.6	9.5	12.2
A23 Corporate Bonds	-9.3	16.2	0.7	1.4
A24 Equities	4.5	5.5	-2.6	1.2
B Net US Purchases of LT Foreign Securities	286.0	385.0	34.2	37.5
B1 Foreign Bonds	247.5	276.8	14.8	12.4
B2 Foreign Equities	38.5	108.1	19.4	25.1
C1 Net Transactions	417.9	199.9	113.0	10.8
C2 Other	-170.0	-353.7	-42.4	-39.7
C Net Foreign Purchases of US LT Securities	247.9	-153.8	70.6	-29.0
D Increase in Foreign Holdings of Dollar Denominated Short-term
US Securities & Other Liab	74.0	417.8	56.1	-3.9
D1 US Treasury Bills	-39.1	319.2	79.1	-1.4
D11 Private	14.7	211.5	52.3	-12.5
D12 Official	-53.8	107.7	26.8	11.1
D2 Other	113.0	98.6	-23.0	-2.5

C1 = A + B; C = C1+C2

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

Sources: United States Treasury

https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/press-center/press-releases/Pages/jl2609.aspx

Table VA-5 provides major foreign holders of US Treasury securities. China is the second largest holder 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.”

Table VA-5, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Jul 2020	Jun 2020	Jul 2019
Total	7087.2	7039.0	6800.2
Japan	1293.0	1261.5	1131.2
China	1073.4	1074.4	1110.3
United Kingdom	424.6	445.6	406.8
Ireland	330.8	330.4	257.3
Hong Kong	267.1	266.4	235.8
Brazil	265.7	264.1	309.9
Luxemboug	264.7	267.6	229.2
Switzerland	250.7	247.4	228.3
Cayman Islands	212.9	222.0	233.2
Belgium	211.9	218.7	203.3
Taiwan	209.7	204.6	178.7
India	194.6	182.7	159.9
Singapore	158.6	150.5	137.9
Canada	133.9	127.5	148.4
Foreign Official Holdings	4191.9	4142.3	4139.3
A. Treasury Bills	393.6	382.5	285.8
B. Treasury Bonds and Notes	3798.4	3759.8	3853.5

Source: United States Treasury

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

https://ticdata.treasury.gov/Publish/mfh.txt

VII Economic Indicators. Crude oil input in refineries decreased 1.8 percent to 13,712 thousand

barrels per day on average in the four weeks ending on Sep 11, 2020 from 13,961 thousand barrels per day in the four weeks ending on Sep 4, 2020, as shown in Table VII-1. The rate of capacity utilization in refineries continues at low level of 76.6 percent on Sep 11, 2020, which is lower than 94.1 percent on Sep 13, 2019 and close to 77.9 percent on Sep 4, 2020. Hurricane Harvey reduced capacity utilization with recent recovery followed by decline 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 and marginal recovery. Imports of crude oil decreased 11.2 percent from 2,631 thousand barrels per day on average in the four weeks ending on Sep 4, 2020 to 2,336 thousand barrels per day in the week of Sep 11, 2020. The Energy Information Administration (EIA) informs that: “US crude oil imports averaged 5.0 million barrels per day last week, down by 416,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 5.3 million barrels per day, 20.1 percent less than the same four-week period last year” (https://www.eia.gov/petroleum/supply/weekly/). Marginally decreased utilization in refineries with decreasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 4.4 million barrels from 500.4 million barrels on Sep 4 to 496.0 million barrels on Sep 11. The US Energy Information Administration (EIA) states: “US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.9 million in the previous week. At 490.9 million barrels [on Apr 24, 2015], US crude oil inventories are at the highest level for this time of year in at least 80 years” (https://www.eia.gov/petroleum/supply/weekly/). Motor gasoline production decreased 1.6 percent to 9,201 thousand barrels per day in the week of Sep 11 from 9,346 thousand barrels per day on average in the week of Sep 4. Gasoline stocks decreased 0.4 million barrels and stocks of fuel oil decreased 3.5 million barrels. Supply of gasoline changed from 9,529 thousand barrels per day on Sep 13, 2019, to 8,704 thousand barrels per day on Sep 11, 2020, or by minus 8.7 percent, while fuel oil supply decreased 9.1 percent. Part of the prior fall in consumption of gasoline had been due to high prices and part to the growth recession while current decline originates in the lockdown of economic activity in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. WTI crude oil price traded at $37.33/barrel on Sep 11, 2020, decreasing 31.8 percent relative to $54.76/barrel on Sep 13, 2019. Gasoline prices decreased 14.5 percent from Sep 16, 2019 to Sep 14, 2020. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been weakening.

Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	09/11/20	09/04/20	09/13/19
Crude Oil Refineries Input	13,712 Week       ∆%: -1.8%	13,961	17,247
Refinery Capacity Utilization %	76.6	77.9	94.1
Motor Gasoline Production	9,201 Week    ∆%: -1.6%	9,346	10,186
Distillate Fuel Oil Production	4,675 Week     ∆%: -1.8%	4,760	5,199
Crude Oil Imports	2,336 Week      ∆%: -11.2%	2,631	3,514
Motor Gasoline Supplied	8,704 ∆% 2020/2019 = -8.7%	8,742	9,529
Distillate Fuel Oil Supplied	3,600 ∆% 2020/2019 = -9.1%	3,711	3,961
	09/04/20	08/28/20	09/06/19
Crude Oil Stocks Million B	496.0 ∆= -4.4 MB	500.4	417.1
Motor Gasoline Million B	231.5 ∆= -0.4 MB	231.9	229.7
Distillate Fuel Oil Million B	179.3 ∆= 3.5 MB	175.8	136.7
WTI Crude Oil Price $/B	37.33 ∆% 2020/2019 = -31.8	39.69	54.76
	09/14/20	09/07/20	09/16/19
Regular Motor Gasoline $/G	2.183 ∆% 2020/2019 = -14.5	2.211	2.552

B: barrels; G: gallon

Source: US Energy Information Administration

https://www.eia.gov/petroleum/supply/weekly/

Chart VII-1 of the US Energy Information Administration (EIA) shows commercial stocks of crude oil in the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but with fluctuations followed by sharp increases alternating with declines. Stocks reached 496,045 thousand barrels in the week of Sep 11, 2020.

Chart VII-1, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W

Chart VII-2 of the US Energy Information Administration provides US average retail prices of regular gasoline. The US average was $2.183/gallon on Sep 14, 2020, decreasing $0.369 relative to the price a year earlier on a comparable day.

Chart VII-2, US, Regular Gasoline Prices

Source: US Energy Information Administration

https://www.eia.gov/petroleum/weekly/

There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. The peak in Chart VII-3 is $145.18/barrel on Jul 14, 2008 in the midst of deep global recession, falling to $33.87/barrel on Dec 19, 2008 (data for US Energy Information Administration http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D). Prices collapsed in the flight to government obligations caused by proposals of withdrawing “toxic assets” in the Troubled Asset Relief Program (TARP), as analyzed by Cochrane and Zingales (2009). Risk appetite with zero interest rates after stress tests of US banks resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. The price of the crude oil contract was $37.26/barrel on Sep 14, 2020.

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

 

There is typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 33,000 from 893,000 on Sep 5, 2020 to 860,000 on Sep 12, 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf). Claims not adjusted for seasonality decreased 75,974 from 865,995 on Sep 5, 2020 to 790,021 on Sep 12, 2020.

Table VII-2, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Sep 12, 2020	860,000	790,021	912,000
Sep 05, 2020	893,000	865,995	973,000
Change	_-33,000	-75,974	-61,000
Aug 29, 2020	884,000	837,008	992,500
Prior Year	211,000	173,134	213,250

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Note: The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Source: https://www.dol.gov/ui/data.pdf

Table VII-2A provides the SA and NSA number of uninsured that decreased 1,034,052 NSA from 13,355,447 on Aug 29, 2020 to 12,321,395 on Sep 5, 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Table VII-2A, US, Insured Unemployment

	SA	NSA	4-week MA SA
Sep 05, 2020	12,628,000	12,321,395	13,489,000
Aug 29, 2020	13,544,000	13,355,447	14,021,750
Change	-916,000	-1,034,052	-532,750
Aug 22, 2020	13,292,000	13,142,717	14,505,750
Prior Year	1,675,000	1,465,554	1,685,000

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Note: The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Source: https://www.dol.gov/ui/data.pdf

Table VII-3 provides seasonally adjusted and not seasonally adjusted claims in the comparable week for the years from 2001 to 2020. Data for earlier years are less comparable because of population and labor force growth. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted decreased from 414,557 on Sep 12, 2009 to 173,624 on Sep 15, 2018 and 173,134 on Sep 14, 2019, increasing to 790,021 on Sep 12, 2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event. There is strong indication of significant decline in the level of layoffs in the US before the COVID-19 event. Hiring has not recovered (https://cmpassocregulationblog.blogspot.com/2020/09/new-nonfarm-hires-of-6.html and earlier https://cmpassocregulationblog.blogspot.com/2020/08/nonfarm-hires-jump-64.html). There is continuing unemployment and underemployment of 34.8 million or 20.2 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2020/09/exchange-rate-fluctuations-1.html and earlier https://cmpassocregulationblog.blogspot.com/2020/08/thirty-eight-million-unemployed-or.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Sep 15, 2001	317,245	395,000
Sep 14, 2002	337,577	412,000
Sep 13, 2003	328,414	394,000
Sep 11, 2004	250,568	331,000
Sep 10, 2005	322,387	422,000
Sep 16, 2006	267,036	324,000
Sep 15, 2007	261,971	313,000
Sep 13, 2008	381,720	449,000
Sep 12, 2009	414,557	542,000
Sep 18, 2010	382,341	459,000
Sep 10, 2011	328,868	429,000
Sep 15, 2012	330,454	392,000
Sep 14, 2013	272,946	323,000
Sep 13, 2014	242,318	288,000
Sep 12, 2015	198,903	264,000
Sep 17, 2016	205,649	252,000
Sep 16, 2017	212,313	260,000
Sep 15, 2018	173,624	213,000
Sep 14, 2019	173,134	211,000
Sep 12, 2020	790,021	860,000

Note: The BLS changed the methodology of unemployment insurance seasonal adjustment from multiplicative to additive beginning Sep 3, 2020, which affects the comparability of time periods (https://www.dol.gov/ui/data.pdf).

Source: https://oui.doleta.gov/unemploy/claims.asp

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the three months from Jun to Aug 2020, CPI inflation for all items seasonally adjusted was 6.6 percent in annual equivalent, obtained by calculating accumulated inflation from Jun 2020 to Aug 2020 and compounding for a full year. In the 12 months ending in Aug 2020, CPI inflation of all items not seasonally adjusted was 1.3 percent. Inflation in Aug 2020 seasonally adjusted was 0.4 percent relative to Jul 2020, or 4.9 percent annual equivalent (https://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 1.7 percent in 12 months, 4.9 percent in annual equivalent Jun 2020-Aug 2020 and 0.4 percent in Aug 2020 or 4.9 percent in annual equivalent. The Wall Street Journal provides the yields of US Treasury securities at the close of market on Jul 24, 2020 (http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000). The shortest term is 0.086 percent for one month, 0.096 percent for three months, 0.109 percent for six months, 0.124 percent for one year, 0.141 percent for two years, 0.167 percent for three years, 0.282 percent for five years, 0.482 percent for seven years, 0.701 percent for ten years and 1.455 percent for 30 years. The Irving Fisher (1930) definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by the Wall Street Journal, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Inflation in Jun 2017 is low in 12 months because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (https://www.federalreserve.gov/aboutthefed.htm):

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

Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.

Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	% RI	∆% 12 Months Aug 2020/Aug 2019 NSA	∆% Annual Equivalent Jun 2020 to Aug 2020 SA	∆% Aug 2020/Jul 2020 SA
CPI All Items	100.000	1.3	6.6	0.4
CPI ex Food and Energy	79.695	1.7	4.9	0.4

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

Professionals use a variety of techniques in measuring interest rate risk (Fabozzi, Buestow and Johnson, 2006, Chapter Nine, 183-226):

• Full valuation approach in which securities and portfolios are shocked by 50, 100, 200 and 300 basis points to measure their impact on asset values
• Stress tests requiring more complex analysis and translation of possible events with high impact even if with low probability of occurrence into effects on actual positions and capital
• Value at Risk (VaR) analysis of maximum losses that are likely in a time horizon
• Duration and convexity that are short-hand convenient measurement of changes in prices resulting from changes in yield captured by duration and convexity
• Yield volatility

Analysis of these methods is in Pelaez and Pelaez (International Financial Architecture (2005), 101-162) and Pelaez and Pelaez, Globalization and the State, Vol. (I) (2008a), 78-100). Frederick R. Macaulay (1938) introduced the concept of duration in contrast with maturity for analyzing bonds. Duration is the sensitivity of bond prices to changes in yields. In economic jargon, duration is the yield elasticity of bond price to changes in yield, or the percentage change in price after a percentage change in yield, typically expressed as the change in price resulting from change of 100 basis points in yield. The mathematical formula is the negative of the yield elasticity of the bond price or –[dB/d(1+y)]((1+y)/B), where d is the derivative operator of calculus, B the bond price, y the yield and the elasticity does not have dimension (Hallerbach 2001). The duration trap of unconventional monetary policy is that duration is higher the lower the coupon and higher the lower the yield, other things being constant. Coupons and yields are historically low because of unconventional monetary policy. Duration dumping during a rate increase may trigger the same crossfire selling of high duration positions that magnified the credit crisis. Traders reduced positions because capital losses in one segment, such as mortgage-backed securities, triggered haircuts and margin increases that reduced capital available for positioning in all segments, causing fire sales in multiple segments (Brunnermeier and Pedersen 2009; see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 217-24). Financial markets are currently experiencing fear of duration and riskier asset classes resulting from the debate within and outside the Fed on increasing interest rates. Table VIII-2 provides the rate of the yield curve of Treasury securities on Sep 18, 2020, Dec 31, 2013, May 1, 2013, Sep 18, 2019, and Sep 18, 2006. There is oscillating steepening of the yield curve for longer maturities, which are also the ones with highest duration. The 10-year yield increased from 1.45 percent on Jul 26, 2012 to 3.04 percent on Dec 31, 2013 and 0.70 percent on Sep 18, 2020, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Dec 31, 2013, at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 86.3778 with instantaneous increase of the yield to 3.04 percent for loss of 13.6 percent and far more with leverage. Assume that the yield of a bond with exactly ten years to maturity and coupon of 0.70 percent would jump instantaneously from yield of 0.70 percent on Sep 18, 2020 to 4.81 percent as occurred on Sep 18, 2006 when the economy was closer to full employment. The price of the hypothetical bond issued with coupon of 0.70 percent would drop from 100 to 67.6749 after an instantaneous increase of the yield to 4.81 percent. The price loss would be 32.3 percent. Losses absorb capital available for positioning triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). What is the path of adjustment of zero interest rates on fed funds and artificially low bond yields? There is no painless exit from unconventional monetary policy. Chris Dieterich, writing on “Bond investors turn to cash,” on Jul 25, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323971204578625900935618178.html), uses data of the Investment Company Institute (https://www.ici.org/) in showing withdrawals of $43 billion in taxable mutual funds in Jun, which is the largest in history, with flows into cash investments such as $8.5 billion in the week of Jul 17 into money-market funds.

Table VIII-2, United States, Treasury Yields

	09/18/20	12/31/13	05/01/13	09/18/19	09/18/06
1 M	0.09	0.01	0.03	1.94	4.76
2M	0.10	NA	NA	1.93	NA
3 M	0.10	0.07	0.06	1.95	4.94
6 M	0.12	0.10	0.08	1.91	5.12
1 Y	0.13	0.13	0.11	1.87	5.04
2 Y	0.14	0.38	0.20	1.77	4.88
3 Y	0.16	0.78	0.30	1.72	4.80
5 Y	0.29	1.75	0.65	1.68	4.77
7 Y	0.48	2.45	1.07	1.76	4.78
10 Y	0.70	3.04	1.66	1.80	4.81
20 Y	1.24	3.72	2.44	2.06	5.01
30 Y	1.45	3.96	2.83	2.25	4.93

M: Months; Y: Years; Data only available for 09/05/2006

Source: United States Treasury

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

There are collateral effects of unconventional monetary policy. Chart VIII-1 of the Board of Governors of the Federal Reserve System provides the rate on the overnight fed funds rate and the yields of the 10-year constant maturity Treasury and the Baa seasoned corporate bond. Table VIII-3 provides the data for selected points in Chart VIII-1. There are two important economic and financial events, illustrating the ease of inducing carry trade with extremely low interest rates and the resulting financial crash and recession of abandoning extremely low interest rates.

• 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). Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment. The exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV). The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity by the penalty in the form of low interest rates and unsound credit decisions. The put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). 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 VIII-1. 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.
• On Dec 16, 2008, the policy determining committee of the Fed decided (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm): “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.” Policymakers emphasize frequently that there are tools to exit unconventional monetary policy at the right time. At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states that: “The Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.” Perception of withdrawal of $2671 billion, or $2.7 trillion, of bank reserves (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1), would cause Himalayan increase in interest rates that would provoke another recession. There is no painless gradual or sudden exit from zero interest rates because reversal of exposures created on the commitment of zero interest rates forever.

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

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

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

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

Fri May 1	Mon 4	Tue 5	Wed 6	Thu 7	Fri 8
DJIA 18024.06 -0.3% 1.0%	18070.40 0.3% 0.3%	17928.20 -0.5% -0.8%	17841.98 -1.0% -0.5%	17924.06 -0.6% 0.5%	18191.11 0.9% 1.5%

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

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

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

What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200729a.htm): “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” There are multiple new policy measures, including purchases of Treasury securities and mortgage-backed securities for the balance sheet of the Fed (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.”

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

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

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

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

 

March 03, 2020

Federal Reserve issues FOMC statement

For release at 10:00 a.m. EST

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

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

For media inquiries, call 202-452-2955.

Implementation Note issued March 3, 2020

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%

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 VIII-1, Fed Funds Rate and Yields of  Ten-year Treasury Constant Maturity and Baa Seasoned Corporate Bond, Jan 2, 2001 to Oct 6, 2016 

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/

 

Chart VIII-1A, Fed Funds Rate and Yield of Ten-year Treasury Constant Maturity, Jan 2, 2001 to Sep 17, 2020

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/

Table VIII-3, Selected Data Points in Chart VIII-1, % per Year

	Fed Funds Overnight Rate	10-Year Treasury Constant Maturity	Seasoned Baa Corporate Bond
1/2/2001	6.67	4.92	7.91
10/1/2002	1.85	3.72	7.46
7/3/2003	0.96	3.67	6.39
6/22/2004	1.00	4.72	6.77
6/28/2006	5.06	5.25	6.94
9/17/2008	2.80	3.41	7.25
10/26/2008	0.09	2.16	8.00
10/31/2008	0.22	4.01	9.54
4/6/2009	0.14	2.95	8.63
4/5/2010	0.20	4.01	6.44
2/4/2011	0.17	3.68	6.25
7/25/2012	0.15	1.43	4.73
5/1/2013	0.14	1.66	4.48
9/5/2013	0.089	2.98	5.53
11/21/2013	0.09	2.79	5.44
11/26/13	0.09	2.74	5.34 (11/26/13)
12/5/13	0.09	2.88	5.47
12/11/13	0.09	2.89	5.42
12/18/13	0.09	2.94	5.36
12/26/13	0.08	3.00	5.37
1/1/2014	0.08	3.00	5.34
1/8/2014	0.07	2.97	5.28
1/15/2014	0.07	2.86	5.18
1/22/2014	0.07	2.79	5.11
1/30/2014	0.07	2.72	5.08
2/6/2014	0.07	2.73	5.13
2/13/2014	0.06	2.73	5.12
2/20/14	0.07	2.76	5.15
2/27/14	0.07	2.65	5.01
3/6/14	0.08	2.74	5.11
3/13/14	0.08	2.66	5.05
3/20/14	0.08	2.79	5.13
3/27/14	0.08	2.69	4.95
4/3/14	0.08	2.80	5.04
4/10/14	0.08	2.65	4.89
4/17/14	0.09	2.73	4.89
4/24/14	0.10	2.70	4.84
5/1/14	0.09	2.63	4.77
5/8/14	0.08	2.61	4.79
5/15/14	0.09	2.50	4.72
5/22/14	0.09	2.56	4.81
5/29/14	0.09	2.45	4.69
6/05/14	0.09	2.59	4.83
6/12/14	0.09	2.58	4.79
6/19/14	0.10	2.64	4.83
6/26/14	0.10	2.53	4.71
7/2/14	0.10	2.64	4.84
7/10/14	0.09	2.55	4.75
7/17/14	0.09	2.47	4.69
7/24/14	0.09	2.52	4.72
7/31/14	0.08	2.58	4.75
8/7/14	0.09	2.43	4.71
8/14/14	0.09	2.40	4.69
8/21/14	0.09	2.41	4.69
8/28/14	0.09	2.34	4.57
9/04/14	0.09	2.45	4.70
9/11/14	0.09	2.54	4.79
9/18/14	0.09	2.63	4.91
9/25/14	0.09	2.52	4.79
10/02/14	0.09	2.44	4.76
10/09/14	0.08	2.34	4.68
10/16/14	0.09	2.17	4.64
10/23/14	0.09	2.29	4.71
11/13/14	0.09	2.35	4.82
11/20/14	0.10	2.34	4.86
11/26/14	0.10	2.24	4.73
12/04/14	0.12	2.25	4.78
12/11/14	0.12	2.19	4.72
12/18/14	0.13	2.22	4.78
12/23/14	0.13	2.26	4.79
12/30/14	0.06	2.20	4.69
1/8/15	0.12	2.03	4.57
1/15/15	0.12	1.77	4.42
1/22/15	0.12	1.90	4.49
1/29/15	0.11	1.77	4.35
2/05/15	0.12	1.83	4.43
2/12/15	0.12	1.99	4.53
2/19/15	0.12	2.11	4.64
2/26/15	0.11	2.03	4.47
3/5/215	0.11	2.11	4.58
3/12/15	0.11	2.10	4.56
3/19/15	0.12	1.98	4.48
3/26/15	0.11	2.01	4.56
4/03/15	0.12	1.92	4.47
4/9/15	0.12	1.97	4.50
4/16/15	0.13	1.90	4.45
4/23/15	0.13	1.96	4.50
5/1/15	0.08	2.05	4.65
5/7/15	0.13	2.18	4.82
5/14/15	0.13	2.23	4.97
5/21/15	0.12	2.19	4.94
5/28/15	0.12	2.13	4.88
6/04/15	0.13	2.31	5.03
6/11/15	0.13	2.39	5.10
6/18/15	0.14	2.35	5.17
6/25/15	0.13	2.40	5.20
7/1/15	0.13	2.43	5.26
7/9/15	0.13	2.32	5.20
7/16/15	0.14	2.36	5.24
7/23/15	0.13	2.28	5.13
7/30/15	0.14	2.28	5.16
8/06/15	0.14	2.23	5.15
8/20/15	0.15	2.09	5.13
8/27/15	0.14	2.18	5.33
9/03/15	0.14	2.18	5.35
9/10/15	0.14	2.23	5.35
9/17/15	0.14	2.21	5.39
9/25/15	0.14	2.13	5.29
10/01/15	0.13	2.05	5.36
10/08/15	0.13	2.12	5.40
10/15/15	0.13	2.04	5.33
10/22/15	0.12	2.04	5.30
10/29/15	0.12	2.19	5.40
11/05/15	0.12	2.26	5.44
11/12/15	0.12	2.32	5.51
11/19/15	0.12	2.24	5.44
11/25/15	0.12	2.23	5.44
12/03/15	0.13	2.33	5.51
12/10/15	0.14	2.24	5.43
12/17/15	0.37	2.24	5.45
12/23/15	0.36	2.27	5.53
12/30/15	0.35	2.31	5.54
1/07/2016	0.36	2.16	5.44
01/14/16	0.36	2.10	5.46
01/20/16	0.37	2.01	5.41
01/29/16	0.38	2.00	5.48
02/04/16	0.38	1.87	5.40
02/11/16	0.38	1.63	5.26
02/18/16	0.38	1.75	5.37
02/25/16	0.37	1.71	5.27
03/03/16	0.37	1.83	5.30
03/10/16	0.36	1.93	5.23
03/17/16	0.37	1.91	5.11
03/24/16	0.37	1.91	4.97
03/31/16	0.25	1.78	4.90
04/07/16	0.37	1.70	4.76
04/14/16	0.37	1.80	4.79
04/21/16	0.37	1.88	4.79
04/28/16	0.37	1.84	4.73
05/05/16	0.37	1.76	4.62
05/12/16	0.37	1.75	4.66
05/19/16	0.37	1.85	4.70
05/26/16	0.37	1.83	4.69
06/02/16	0.37	1.81	4.64
06/09/16	0.37	1.68	4.53
06/16/16	0.38	1.57	4.47
06/23/16	0.39	1.74	4.60
06/30/16	0.36	1.49	4.41
07/07/16	0.40	1.40	4.19
07/14/16	0.40	1.53	4.23
07/21/16	0.40	1.57	4.25
07/28/16	0.40	1.52	4.20
08/04/16	0.40	1.51	4.27
08/11/16	0.40	1.57	4.27
08/18/16	0.40	1.53	4.23
08/25/16	0.40	1.58	4.21
09/01/16	0.40	1.57	4.19
09/08/16	0.40	1.61	4.28
09/15/16	0.40	1.71	4.43
09/22/16	0.40	1.63	4.32
09/29/16	0.40	1.56	4.23
10/06/16	0.40	1.75	4.36
10/13/16	0.40	1.75	NA*
10/20/16	0.41	1.76	NA*
10/27/16	0.41	1.85	NA*
11/03/16	0.41	1.82	NA*
11/09/16	0.41	2.07	NA*
11/17/16	0.41	2.29	NA*
11/23/16	0.40	2.36	NA*
12/01/16	0.40	2.45	NA*
12/08/16	0.41	2.40	NA*
12/15/16	0.66	2.60	NA*
12/22/16	0.66	2.55	NA*
12/29/16	0.66	2.49	NA*
01/05/17	0.66	2.37	NA*
01/12/17	0.66	2.36	NA*
01/19/17	0.66	2.42	NA*
01/26/17	0.66	2.51	NA*
02/02/17	0.66	2.48	NA*
02/09/17	0.66	2.40	NA*
02/16/17	0.66	2.45	NA*
02/23/17	0.66	2.38	NA*
03/02/17	0.66	2.49	NA*
03/09/17	0.66	2.60	NA*
03/16/17	0.91	2.53	NA*
03/23/17	0.91	2.41	NA*
03/30/17	0.91	2.42	NA*
04/06/17	0.91	2.34	NA*
04/13/17	0.91	2.24	NA*
04/21/17	0.91	2.24	NA*
04/27/17	0.91	2.30	NA*
05/04/17	0.91	2.36	NA*
05/11/17	0.91	2.39	NA*
05/18/17	0.91	2.23	NA*
05/25/17	0.91	2.25	NA*
06/01/17	0.90	2.21	NA*
06/08/17	0.91	2.19	NA*
06/15/17	1.16	2.16	NA*
06/22/17	1.16	2.15	NA*
06/29/17	1.16	2.27	NA*
07/06/17	1.16	2.37	NA*
07/13/17	1.16	2.35	NA*
07/20/17	1.16	2.27	NA*
07/27/17	1.16	2.32	NA*
08/03/17	1.16	2.24	NA*
08/10/17	1.16	2.20	NA*
08/17/17	1.16	2.19	NA*
08/24/17	1.16	2.19	NA*
08/31/17	1.07	2.12	NA*
09/07/17	1.16	2.05	NA*
09/14/17	1.16	2.20	NA*
09/21/17	1.16	2.27	NA*
09/28/17	1.16	2.31	NA*
10/05/17	1.16	2.35	NA*
10/12/17	1.16	2.33	NA*
10/19/17	1.16	2.33	NA*
10/26/17	1.16	2.46	NA*
11/02/17	1.16	2.35	NA*
11/09/17	1.16	2.32	NA*
11/16/17	1.16	2.37	NA*
11/22/17	1.16	2.32	NA*
11/30/17	1.16	2.42	NA*
12/07/17	1.16	2.37	NA*
12/14/17	1.41	2.35	NA*
12/21/17	1.42	2.48	NA*
12/28/17	1.42	2.43	NA*
01/04/18	1.42	2.46	NA*
01/11/18	1.42	2.54	NA*
01/18/18	1.42	2.62	NA*
01/25/18	1.42	2.63	NA*
02/01/18	1.42	2.78	NA*
02/08/18	1.42	2.85	NA*
02/15/18	1.42	2.90	NA*
02/22/18	1.42	2.92	NA*
03/01/18	1.42	2.81	NA*
03/08/18	1.42	2.86	NA*
03/15/18	1.43	2.82	NA*
03/22/18	1.68	2.83	NA*
03/29/18	1.68	2.74	NA*
04/05/18	1.69	2.83	NA*
04/12/18	1.69	2.83	NA*
04/19/18	1.69	2.92	NA*
04/26/18	1.70	3.00	NA*
05/03/18	1.70	2.94	NA*
05/10/18	1.70	2.97	NA*
05/17/18	1.70	3.11	NA*
05/24/18	1.70	2.98	NA*
05/31/18	1.70	2.83	NA*
06/07/18	1.70	2.93	NA*
06/14/18	1.90	2.94	NA*
06/21/18	1.92	2.90	NA*
06/28/18	1.91	2.84	NA*
07/05/18	1.91	2.84	NA*
07/12/18	1.91	2.85	NA*
07/19/18	1.91	2.84	NA*
07/26/18	1.91	2.98	NA*
08/02/18	1.91	2.98	NA*
08/09/18	1.91	2.93	NA*
08/16/18	1.92	2.87	NA*
08/23/18	1.92	2.82	NA*
08/30/18	1.92	2.86	NA*
09/06/18	1.92	2.88	NA*
09/13/18	1.92	2.97	NA*
09/20/18	1.92	3.07	NA*
09/27/18	2.18	3.06	NA*
10/04/18	2.18	3.19	NA*
10/11/18	2.18	3.14	NA*
10/18/18	2.19	3.17	NA*
10/25/18	2.20	3.14	NA*
11/01/18	2.20	3.14	NA*
11/08/18	2.20	3.24	NA*
11/15/18	2.20	3.11	NA*
11/21/18	2.20	3.06	NA*
11/29/18	2.20	3.03	NA*
12/06/18	2.20	2.87	NA*
12/13/18	2.19	2.91	NA*
12/20/18	2.40	2.79	NA*
12/27/18	2.40	2.77	NA*
01/03/19	2.40	2.56	NA*
01/10/19	2.40	2.74	NA*
01/17/19	2.40	2.75	NA*
01/24/19	2.40	2.72	NA*
01/31/19	2.40	2.63	NA*
02/07/19	2.40	2.63	NA*
02/14/19	2.40	2.66	NA*
02/21/19	2.40	2.69	NA*
02/28/19	2.40	2.73	NA*
03/07/19	2.40	2.64	NA*
03/14/19	2.40	2.63	NA*
03/21/19	2.41	2.54	NA*
03/28/19	2.41	2.39	NA*
04/04/19	2.41	2.51	NA*
04/11/19	2.41	2.51	NA*
04/18/19	2.43	2.57	NA*
04/25/19	2.44	2.54	NA*
05/02/19	2.41	2.55	NA*
05/09/19	2.38	2.45	NA*
05/16/19	2.39	2.40	NA*
05/23/19	2.38	2.31	NA*
05/30/19	2.39	2.22	NA*
06/06/19	2.37	2.12	NA*
06/13/19	2.37	2.10	NA*
06/20/19	2.37	2.01	NA*
06/27/19	2.38	2.01	NA*
07/03/19	2.41	1.96	NA
07/11/19	2.40	1.85	NA*
07/18/19	2.41	2.04	NA*
07/25/19	2.40	2.08	NA*
08/01/19	2.14	1.90	NA*
08/08/19	2.12	1.72	NA*
08/15/19	2.13	1.52	NA*
08/22/19	2.12	1.62	NA*
08/29/19	2.12	1.50	NA*
09/05/19	2.13	1.57	NA*
09/12/19	2.13	1.79	NA*
09/19/19	1.90	1.79	NA*
09/26/19	1.85	1.70	NA*
10/03/19	1.83	1.54	NA*
10/10/19	1.83	1.67	NA*
10/17/19	1.85	1.76	NA*
10/24/19	1.85	1.77	NA*
10/31/19	1.58	1.69	NA*
11/07/19	1.55	1.92	NA*
11/14/19	1.55	1.82	NA*
11/21/19	1.55	1.77	NA*
11/27/19	1.55	1.77	NA*
12/05/19	1.55	1.80	NA*
12/12/19	1.55	1.90	NA*
12/19/19	1.55	1.92	NA*
12/26/19	1.55	1.90	NA*
01/02/20	1.55	1.88	NA*
01/09/20	1.55	1.85	NA*
01/16/20	1.54	1.81	NA*
01/23/20	1.55	1.74	NA*
01/30/20	1.60	1.57	NA*
02/06/20	1.59	1.65	NA*
02/13/20	1.59	1.61	NA*
02/20/20	1.59	1.59	NA*
02/27/20	1.58	1.30	NA*
03/05/20	1.09	0.92	NA*
03/12/20	1.10	0.88	NA*
03/19/20	0.20	1.12	NA*
03/26/20	0.10	0.83	NA*
04/02/20	0.05	0.63	NA*
04/09/20	0.05	0.73	NA*
04/16/20	0.05	0.61	NA*
04/23/20	0.04	0.61	NA*
04/30/20	0.05	0.64	NA*
05/07/20	0.05	0.63	NA*
05/14/20	0.05	0.63	NA*
05/21/20	0.05	0.68	NA*
05/28/20	0.05	0.70	NA*
06/04/20	0.09	0.82	NA*
06/11/20	0.12	0.66	NA*
06/18/20	0.09	0.71	NA*
06/25/20	0.08	0.68	NA*
07/01/20	0.08	0.69	NA
07/09/20	0.09	0.62	NA*
07/16/20	0.10	0.62	NA*
07/23/20	0.09	0.59	NA*
07/31/20	0.10	0.55	NA*
08/06/20	0.10	0.55	NA*
08/13/20	0.10	0.71	NA*
08/20/20	0.09	0.65	NA*
08/27/20	0.08	0.74	NA*
09/03/20	0.09	0.63	NA*
09/10/20	0.09	0.68	NA*
09/17/20	0.09	0.69	NA*

*Note: The Board of Governors of the Federal Reserve System discontinued the publication of the BAA bond yield.

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/h15/

Chart VIII-2 of the Board of Governors of the Federal Reserve System provides the rate of US dollars (USD) per euro (EUR), USD/EUR. The rate depreciated from USD 1.1074/EUR on Sep 11, 2019 to USD 1.1831/EUR on Sep 11, 2020 or 6.8 percent. The euro has devalued 34.3 percent relative to the dollar from the high on Jul 15, 2008 to Sep 18, 2020. US corporations with foreign transactions and net worth experience losses in their balance sheets in converting revenues from depreciated currencies to the dollar. Corporate profits with IVA and CCA decreased at 0.2 percent in IIIQ2019 and increased at 0.6 percent after taxes.  Corporate profits with IVA and CCA increased at 2.6 percent in IVQ2019 and increased at 2.1 percent after taxes. Corporate profits with IVA and CCA decreased at 12.3 percent in IVQ2019 and decreased at 12.4 percent after taxes.  Corporate profits with IVA and CCA decreased at 6.9 percent in IQ2020 relative to IQ2019 and profits after tax with IVA and CCA decreased 6.6 percent in IQ2020 relative to IQ2019. Net dividends increased at 1.7 percent in IIQ2019. Net dividends decreased at 0.5 percent in IIIQ2019. Net dividends increased at 1.0 percent in IVQ2019. Net dividends increased at 1.7 percent in IQ2020. Net dividends increased 3.9 percent in IQ2020 relative to a year earlier. Undistributed profits increased at 9.4 percent in IIQ2019. Undistributed profits increased at 3.6 percent in IIIQ2019.  Undistributed profits increased at 5.1 percent in IVQ2019. Undistributed profits decreased at 46.6 percent in IQ2020. Undistributed profits decreased at 36.5 percent in IQ2020 relative to IQ2019. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. There is increase in corporate profits from devaluing the dollar with unconventional monetary policy of zero interest rates and decrease of corporate profits in revaluing the dollar with attempts at “normalization” or increases in interest rates. Conflicts arise while other central banks differ in their adjustment process. The current account deficit seasonally adjusted at 2.1 percent in IIQ2018 increases to 2.4 percent in IIIQ2018. The current account deficit increases to 2.8 percent in IVQ2018. The current account deficit decreases to 2.6 percent in IQ2019. The current account deficit decreases to 2.4 percent in IIQ2019. The absolute value of the net international investment position increases from minus $8.9 trillion in IIQ2018 to minus $9.7 trillion in IIIQ2018. The absolute value of the net international investment position stabilizes to $9.6 trillion in IIIQ2018. The absolute value of the net international investment position increases at $10.1 trillion in IQ2019. The absolute value of the net international investment position stabilizes to $10.1 trillion in IIQ2019. The BEA explains as follows (https://www.bea.gov/system/files/2019-09/intinv219.pdf):

“The U.S. net international investment position, the difference between U.S. residents’ foreign financial assets and liabilities, was –$10.56 trillion at the end of the second quarter of 2019, according to statistics released by the U.S. Bureau of Economic Analysis (BEA). Assets totaled $28.01 trillion and liabilities were $38.56 trillion.

At the end of the first quarter, the net investment position was –$10.16 trillion (Table1.”

The BEA explains further (https://www.bea.gov/system/files/2019-09/intinv219.pdf):

“U.S. assets increased by $952.7 billion, to a total of $28.01 trillion, at the end of the second quarter, reflecting increases in all major categories of assets, particularly in portfolio investment and direct investment assets. Portfolio investment assets increased by $366.4 billion, to $12.68 trillion, and direct investment assets increased by $232.8 billion, to $8.39 trillion. These increases were driven mainly by foreign stock price increases that raised the value of these assets.

U.S. liabilities increased by $1.35 trillion, to a total of $38.56 trillion, at the end of the second quarter, reflecting increases in all major categories of liabilities, particularly in portfolio investment liabilities. Portfolio investment liabilities increased by $665.3 billion, to $20.62 trillion, driven mainly by U.S. stock and bond price increases that raised the value of these liabilities.”

Chart VIII-2, Exchange Rate of US Dollars (USD) per Euro (EUR), Sep 11, 2019 to Sep 11, 2020

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/H10/default.htm

Chart VIII-3 of the Board of Governors of the Federal Reserve System provides the yield of the 10-year Treasury constant maturity note from 0.70 percent on Jun 19, 2020 to 0.69 percent on Sep 17, 2020. There is turbulence in financial markets originating in a combination of intentions of decreasing the US policy fed funds rate, quantitative easing in the United States, Europe and Japan and increasing perception of financial/economic risks.

Chart VIII-3, Yield of Ten-year Constant Maturity Treasury, Jun 19, 2020 to Sep 17, 2020

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/releases/h15

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