Wealth of Households and Nonprofit Organizations Recovering In Second Quarter 2020 by Growing 7.0 Percent Inflation Adjusted Above Levels Relative to First Quarter 2020 and Equal in Inflation Adjusted Levels Relative to Fourth Quarter 2019, Financial Assets and Real Estate Lead Wealth Recovery, World Inflation Waves, Destruction of Household Nonfinancial Wealth with Cyclically Stagnating Total Real Wealth in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, World Cyclical Slow Growth, and Government Intervention in Globalization: Part VI
Carlos M. Pelaez
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
I World
Inflation Waves
IA Appendix: Transmission of
Unconventional Monetary Policy
IB1 Theory
IB2 Policy
IB3 Evidence
IB4 Unwinding Strategy
IC United
States Inflation
IC Long-term US Inflation
ID Current US Inflation
IE Theory and Reality
of Economic History, Cyclical Slow Growth Not Secular Stagnation and Monetary
Policy Based on Fear of Deflation
IIB Destruction of Household Nonfinancial Wealth
with Stagnating Total Real Wealth in the Lost Economic Cycle of the Global
Recession with Economic Growth Underperforming Below Trend Worldwide
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
VII Economic Indicators.
Crude oil input in refineries decreased 2.5 percent to 13,376 thousand
barrels per day on average in the four weeks ending on Sep 18,
2020 from 13,712 thousand barrels per day in the four weeks ending on Sep 11,
2020, as shown in Table VII-1. The rate of capacity utilization in refineries
continues at low level of 74.8 percent on Sep 18, 2020, which is lower than
92.7 percent on Sep 20, 2019 and close to 76.6 percent on Sep 11, 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 4.4 percent from 2,336 thousand
barrels per day on average in the four weeks ending on Sep 11, 2020 to 2,234
thousand barrels per day in the week of Sep 18, 2020. The Energy Information
Administration (EIA) informs that: “US crude oil imports averaged 5.2 million
barrels per day last week, up by 160,000 barrels per day from the previous
week. Over the past four weeks, crude oil imports averaged about 5.1 million
barrels per day, 24.2 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 1.6
million barrels from 496.0 million barrels on Sep 11 to 494.4 million barrels
on Sep 18. 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 0.6 percent to 9,150 thousand barrels per day in
the week of Sep 18 from 9,201 thousand barrels per day on average in the week
of Sep 11. Gasoline stocks decreased 1.6 million barrels and stocks of fuel oil
decreased 4.0 million barrels. Supply of gasoline changed from 9,391 thousand
barrels per day on Sep 20, 2019, to 8,542 thousand barrels per day on Sep 18,
2020, or by minus 9.0 percent, while fuel oil supply decreased 12.4 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 $41.09/barrel on Sep 18, 2020, decreasing 29.1 percent relative
to $57.92/barrel on Sep 20, 2019. Gasoline prices decreased 18.3 percent from
Sep 23, 2019 to Sep 21, 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 |
09/18/20 |
09/11/20 |
09/20/19 |
|
Crude Oil Refineries Input |
13,376 Week
∆%: -2.5% |
13,712 |
17,024 |
|
Refinery Capacity
Utilization % |
74.8 |
76.6 |
92.7 |
|
Motor Gasoline Production |
9,150 Week ∆%: -0.6% |
9,201 |
10,081 |
|
Distillate Fuel Oil
Production |
4,512 Week
∆%: -3.5% |
4,675 |
5,151 |
|
Crude Oil Imports |
2,234 Week
∆%: -4.4% |
2,336 |
3,636 |
|
Motor Gasoline Supplied |
8,542 ∆% 2020/2019 = -9.0% |
8,704 |
9,391 |
|
Distillate Fuel Oil
Supplied |
4,512 ∆% 2020/2019 = -12.4% |
4,675 |
5,151 |
|
|
09/18/20 |
09/11/20 |
09/20/19 |
|
Crude Oil Stocks |
494.4 ∆= -1.6 MB |
496.0 |
419.5 |
|
Motor Gasoline Million B |
227.5 ∆= -4.0 MB |
231.5 |
230.2 |
|
Distillate Fuel Oil Million
B |
175.9 |
179.3 |
133.7 |
|
WTI Crude Oil Price $/B |
41.09 ∆% 2020/2019 = -29.1 |
37.33 |
57.92 |
|
|
09/21/20 |
09/14/20 |
09/23/19 |
|
Regular Motor Gasoline $/G |
2.168 ∆% 2020/2019 |
2.183 |
2.654 |
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 494,406
thousand barrels in the week of Sep 18, 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 $2.168/gallon on Sep 21, 2020, decreasing
$0.486 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 $39.60/barrel on Sep 22, 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 increased 4,000 from 866,000 on Sep
12, 2020 to 870,000 on Sep 19, 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 increased 28,527 from 796,015 on Sep 12, 2020 to
824,542 on Sep 19, 2020.
Table VII-2, US, Initial Claims for
Unemployment Insurance
|
|
SA |
NSA |
4-week MA SA |
|
870,000 |
824,542 |
878,250 |
|
|
Sep 12, 2020 |
866,000 |
796,015 |
913,500 |
|
Change |
_+4,000 |
+28,527 |
-35,250 |
|
Sep 5, 2020 |
893,000 |
865,995 |
973,000 |
|
Prior Year |
215,000 |
175,394 |
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 176,510 NSA from 12,440,861 on Sep
5, 2020 to 12,264,351 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).
Table VII-2A, US, Insured
Unemployment
|
|
SA |
NSA |
4-week MA SA |
|
Sep 12, 2020 |
12,580,000 |
12,264,351 |
13,040,750 |
|
Sep 05, 2020 |
12,747,000 |
12,440,861 |
13,518,750 |
|
Change |
-167,000 |
-176,510 |
-478,000 |
|
Aug 29, 2020 |
13,544,000 |
13,355,586 |
14,021,750 |
|
Prior Year |
1,672,000 |
1,399,601 |
1,678,250 |
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-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 441,311 on Sep
19, 2009 to 172,930 on Sep 22, 2018 and 175,394 on Sep 21, 2019, increasing to
824,542 on Sep 19, 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 22, 2001 |
353,611 |
453,000 |
|
Sep 21, 2002 |
317,264 |
401,000 |
|
Sep 20, 2003 |
301,217 |
379,000 |
|
Sep 18, 2004 |
275,846 |
341,000 |
|
Sep 17, 2005 |
346,204 |
424,000 |
|
Sep 23, 2006 |
261,396 |
319,000 |
|
Sep 22, 2007 |
247,643 |
302,000 |
|
Sep 20, 2008 |
397,610 |
483,000 |
|
Sep 19, 2009 |
441,311 |
536,000 |
|
Sep 25, 2010 |
372,551 |
459,000 |
|
Sep 17, 2011 |
353,820 |
422,000 |
|
Sep 22, 2012 |
303,685 |
377,000 |
|
Sep 21, 2013 |
255,087 |
314,000 |
|
Sep 20, 2014 |
239,780 |
295,000 |
|
Sep 19, 2015 |
219,342 |
269,000 |
|
Sep 24, 2016 |
198,455 |
247,000 |
|
Sep 23, 2017 |
212,987 |
262,000 |
|
Sep 22, 2018 |
172,930 |
212,000 |
|
Sep 21, 2019 |
175,394 |
215,000 |
|
Sep 19,
2020 |
824,542 |
870,000 |
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 0.084 percent for one month, 0.101 percent for three months, 0.119
percent for six months, 0.119 percent for one year, 0.137 percent for two
years, 0.159 percent for three years, 0.269 percent for five years, 0.452
percent for seven years, 0.658 percent for ten years and 1.404 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 |
∆% 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 25, 2020,
Dec 31, 2013, May 1, 2013, Sep 25, 2019, and Sep 25, 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 0.66 percent on Sep 25, 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 0.66 percent would jump instantaneously from yield of 0.66 percent on Sep
25, 2020 to 4.56 percent as occurred on Sep 25, 2006 when the economy was
closer to full employment. The price of the hypothetical bond issued with
coupon of 0.66 percent would drop from 100 to 68.9597 after an instantaneous
increase of the yield to 4.56 percent. The price loss would be 31.0 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
|
|
09/25/20 |
12/31/13 |
05/01/13 |
09/25/19 |
09/25/06 |
|
1 M |
0.08 |
0.01 |
0.03 |
1.80 |
4.72 |
|
2M |
0.09 |
NA |
NA |
1.86 |
NA |
|
3 M |
0.10 |
0.07 |
0.06 |
1.89 |
4.88 |
|
6 M |
0.11 |
0.10 |
0.08 |
1.90 |
5.01 |
|
1 Y |
0.12 |
0.13 |
0.11 |
1.82 |
4.88 |
|
2 Y |
0.12 |
0.38 |
0.20 |
1.68 |
4.63 |
|
3 Y |
0.15 |
0.78 |
0.30 |
1.61 |
4.54 |
|
5 Y |
0.26 |
1.75 |
0.65 |
1.60 |
4.51 |
|
7 Y |
0.45 |
2.45 |
1.07 |
1.66 |
4.51 |
|
10 Y |
0.66 |
3.04 |
1.66 |
1.73 |
4.56 |
|
20 Y |
1.19 |
3.72 |
2.44 |
1.99 |
4.77 |
|
30 Y |
1.40 |
3.96 |
2.83 |
2.18 |
4.70 |
M: Months; Y: Years; Data only available for 09/05/2006
Source: United States Treasury
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 re the
expected rate of interest. The rates are expressed as proportions. The price of
the consol is the inverse of the interest rate, (1+re). Thus,
g = [(r/re) – 1]. The critical analysis of
Tobin is that at extremely low interest rates there is only expectation of
interest rate increases, that is, dre>0, such that there
is expectation of capital losses on the consol, dg<0. Investors move
into positions combining only cash and no consols. Valuations of risk
financial assets would collapse in reversal of long positions in carry trades
with short exposures in a flight to cash. There is no exit from a central bank
created liquidity trap without risks of financial crash and another global
recession. The net worth of the economy depends on interest rates. In theory,
“income is generally defined as the amount a consumer unit could consume (or
believe that it could) while maintaining its wealth intact” (Friedman 1957,
10). Income, Y, is a flow that is obtained by applying a rate of return,
r, to a stock of wealth, W, or Y = rW (Friedman
1957). According to a subsequent statement: “The basic idea is simply that
individuals live for many years and that therefore the appropriate constraint
for consumption is the long-run expected yield from wealth r*W.
This yield was named permanent income: Y* = r*W” (Darby
1974, 229), where * denotes permanent. The simplified relation of income and
wealth can be restated as:
W = Y/r
(1)
Equation (1)
shows that as r goes to zero, r→0, W grows without bound, W→∞.
Unconventional monetary policy lowers interest rates to increase the present
value of cash flows derived from projects of firms, creating the impression of
long-term increase in net worth. An attempt to reverse unconventional monetary
policy necessarily causes increases in interest rates, creating the opposite
perception of declining net worth. As r→∞, W = Y/r
→0. There is no exit from unconventional monetary policy without increasing
interest rates with resulting pain of financial crisis and adverse effects on
production, investment and employment.
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 36.7 percent relative
to the dollar from the high on Jul 15, 2008 to Sep 25, 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 36.7
percent relative to the dollar from the high on Jul 15, 2008 to Sep 25, 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/monetary20200916a.htm): “The Committee
decided to keep the target range for the federal funds rate at 0 to ¼ percent
and expects it will be appropriate to maintain this target range until labor
market conditions have reached levels consistent with the Committee's
assessments of maximum employment and inflation has risen to 2 percent and is
on track to moderately exceed 2 percent for some time. In addition, over coming
months the Federal Reserve will increase its holdings of Treasury securities
and agency mortgage-backed securities at least at the current pace to sustain
smooth market functioning and help foster accommodative financial conditions,
thereby supporting the flow of credit to households and businesses. In
assessing the appropriate stance of monetary policy, the Committee will
continue to monitor the implications of incoming information for the economic
outlook. The Committee would be prepared to adjust the stance of monetary
policy as appropriate if risks emerge that could impede the attainment of the
Committee's goals. The Committee's assessments will take into account a wide
range of information, including readings on public health, labor market
conditions, inflation pressures and inflation expectations, and financial and
international developments.” (emphasis added).” There are multiple new policy measures, including purchases of Treasury securities
and mortgage-backed securities for the balance sheet of the Fed (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “To support the flow of credit to households and businesses, over
coming months the Federal Reserve will increase its holdings of Treasury
securities and agency residential and commercial mortgage-backed securities at
least at the current pace to sustain smooth market functioning, thereby
fostering effective transmission of monetary policy to broader financial
conditions. In addition, the Open Market Desk will continue to offer
large-scale overnight and term repurchase agreement operations. The Committee
will closely monitor developments and is prepared to adjust its plans as
appropriate.”In the Opening Remarks to the Press
Conference on Oct 30, 2019, the Chairman of the Federal Reserve Board, Jerome
H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20191030.pdf): “We see the current stance of
monetary policy as likely to remain appropriate as long as incoming information
about the economy remains broadly consistent with our outlook of moderate
economic growth, a strong labor market, and inflation near our symmetric 2
percent objective. We believe monetary policy is in a good place to achieve
these outcomes. Looking ahead, we will be monitoring the effects of our policy
actions, along with other information bearing on the outlook, as we assess the
appropriate path of the target range for the fed funds rate. Of course, if
developments emerge that cause a material reassessment of our outlook, we would
respond accordingly. Policy is not on a preset course.” In the Opening Remarks to the Press Conference on Jan 30, 2019, the
Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that
the cumulative effects of those developments over the last several months
warrant a patient, wait-and-see approach regarding future policy changes. In
particular, our statement today says, “In light of global economic and
financial developments and muted inflation pressures, the Committee will be
patient as it determines what future adjustments to the target range for the
federal funds rate may be appropriate.” This change was not driven by a major
shift in the baseline outlook for the economy. Like many forecasters, we
still see “sustained expansion of economic activity, strong labor market
conditions, and inflation near … 2 percent” as the likeliest case. But the
cross-currents I mentioned suggest the risk of a less-favorable outlook. In
addition, the case for raising rates has
weakened somewhat. The traditional case for rate increases is to protect
the economy from risks that arise when rates are too low for too long,
particularly the risk of too-high inflation. Over the past few months, that
risk appears to have diminished. Inflation readings have been muted, and the
recent drop in oil prices is likely to Page 3 of 5 push headline inflation
lower still in coming months. Further, as we noted in our post-meeting
statement, while survey-based measures of inflation expectations have been
stable, financial market measures of inflation compensation have moved lower.
Similarly, the risk of financial imbalances appears to have receded, as a
number of indicators that showed elevated levels of financial risk appetite
last fall have moved closer to historical norms. In this environment, we
believe we can best support the economy by being patient in evaluating the
outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or
reduction of the balance sheet of securities held outright for monetary policy
(https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm) with
significant changes (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf). In the opening remarks to the Mar 20, 2019, the Chairman of the Federal
Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s
projections, it is useful to note what those projections are, as well as what
they are not. The SEP includes participants’ individual projections of the most
likely economic scenario along with their views of the appropriate path of the
federal funds rate in that scenario. Views about the most likely scenario form
one input into our policy discussions. We also discuss other plausible
scenarios, including the risk of more worrisome outcomes. These and other
scenarios and many other considerations go into policy, but are not reflected
in projections of the most likely case. Thus, we always emphasize that the
interest rate projections in the SEP are not a Committee decision. They are not
a Committee plan. As Chair Yellen noted some years ago, the FOMC statement,
rather than the dot plot, is the device that the Committee uses to express its
opinions about the likely path of rates.”
In the Introductory Statement on Jul 25,
2019, in Frankfurt am Main, the President of the European Central Bank, Mario
Draghi, stated (https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html): “Based on our regular economic and monetary analyses, we decided
to keep the key ECB interest rates unchanged.
We expect them to remain at their present or lower levels at least through the
first half of 2020, and in any case for as long as necessary to ensure the
continued sustained convergence of inflation to our aim over the medium term.
We intend to continue reinvesting, in full, the principal
payments from maturing securities purchased under the asset purchase programme
for an extended period of time past the date when we start raising the key ECB
interest rates, and in any case for as long as necessary to maintain favourable
liquidity conditions and an ample degree of monetary accommodation.” At its meeting on September 12, 2019, the Governing
Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html):
(1) decrease the deposit facility by 10 basis points to minus 0.50 percent
while maintaining at 0.00 the main refinancing operations rate and at 0.25
percent the marginal lending facility rate; (2) restart net purchases of
securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3)
reinvest principal payments from maturing securities; (4) adapt long-term
refinancing operations to maintain “favorable bank lending conditions;” and (5)
exempt part of the “negative deposit facility rate” on bank excess liquidity.
The Federal
Open Market Committee (FOMC) decided to lower the target range of the federal
funds rate by 0.50 percent to 1.0 to 1¼ percent on Mar 3, 2020 in a decision
outside the calendar meetings (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm):
March 03, 2020
Federal Reserve issues FOMC statement
For release at
10:00 a.m. EST
The
fundamentals of the U.S. economy remain strong. However, the coronavirus poses
evolving risks to economic activity. In light of these risks and in support of
achieving its maximum employment and price stability goals, the Federal Open
Market Committee decided today to lower the target range for the federal funds
rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely
monitoring developments and their implications for the economic outlook and
will use its tools and act as appropriate to support the economy.
Voting for the
monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice
Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker;
Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
For media
inquiries, call 202-452-2955.
Implementation
Note issued March 3, 2020
In his classic
restatement of the Keynesian demand function in terms of “liquidity preference
as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies
the risks of low interest rates in terms of portfolio allocation (Tobin 1958,
86):
“The assumption
that investors expect on balance no change in the rate of interest has been
adopted for the theoretical reasons explained in section 2.6 rather than for
reasons of realism. Clearly investors do form expectations of changes in
interest rates and differ from each other in their expectations. For the
purposes of dynamic theory and of analysis of specific market situations, the
theories of sections 2 and 3 are complementary rather than competitive. The
formal apparatus of section 3 will serve just as well for a non-zero expected
capital gain or loss as for a zero expected value of g. Stickiness of interest
rate expectations would mean that the expected value of g is a function of the
rate of interest r, going down when r goes down and rising when r goes up. In
addition to the rotation of the opportunity locus due to a change in r itself,
there would be a further rotation in the same direction due to the accompanying
change in the expected capital gain or loss. At low interest rates
expectation of capital loss may push the opportunity locus into the negative
quadrant, so that the optimal position is clearly no consols, all cash. At
the other extreme, expectation of capital gain at high interest rates would
increase sharply the slope of the opportunity locus and the frequency of no
cash, all consols positions, like that of Figure 3.3. The stickier the
investor's expectations, the more sensitive his demand for cash will be to
changes in the rate of interest (emphasis added).”
Tobin (1969)
provides more elegant, complete analysis of portfolio allocation in a general
equilibrium model. The major point is equally clear in a portfolio consisting
of only cash balances and a perpetuity or consol. Let g be the capital
gain, r the rate of interest on the consol and re the
expected rate of interest. The rates are expressed as proportions. The price of
the consol is the inverse of the interest rate, (1+re). Thus,
g = [(r/re) – 1]. The critical analysis of
Tobin is that at extremely low interest rates there is only expectation of
interest rate increases, that is, dre>0, such that there
is expectation of capital losses on the consol, dg<0. Investors move
into positions combining only cash and no consols. Valuations of risk
financial assets would collapse in reversal of long positions in carry trades
with short exposures in a flight to cash. There is no exit from a central bank
created liquidity trap without risks of financial crash and another global
recession. The net worth of the economy depends on interest rates. In theory,
“income is generally defined as the amount a consumer unit could consume (or
believe that it could) while maintaining its wealth intact” (Friedman 1957,
10). Income, Y, is a flow that is obtained by applying a rate of return,
r, to a stock of wealth, W, or Y = rW (Friedman
1957). According to a subsequent statement: “The basic idea is simply that
individuals live for many years and that therefore the appropriate constraint
for consumption is the long-run expected yield from wealth r*W.
This yield was named permanent income: Y* = r*W” (Darby
1974, 229), where * denotes permanent. The simplified relation of income and
wealth can be restated as:
W = Y/r
(1)
Equation (1)
shows that as r goes to zero, r→0, W grows without bound, W→∞.
Unconventional monetary policy lowers interest rates to increase the present
value of cash flows derived from projects of firms, creating the impression of
long-term increase in net worth. An attempt to reverse unconventional monetary
policy necessarily causes increases in interest rates, creating the opposite
perception of declining net worth. As r→∞, W = Y/r
→0. There is no exit from unconventional monetary policy without increasing
interest rates with resulting pain of financial crisis and adverse effects on
production, investment and employment.
The
decision is based on “the coronavirus poses evolving risks to economic activity” (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm).
The FOMC states that it “will use its tools and act as appropriate to support
the economy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm).
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 24, 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* |
|
09/24/20 |
0.09 |
0.67 |
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 1.1061/EUR
on Sep 18, 2019 to USD 1.1857/EUR on Sep 19, 2020 or 7.2 percent. The euro has
devalued 36.7 percent relative to the dollar from the high on Jul 15, 2008 to
Sep 25, 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 18, 2019 to Sep 18, 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
0.64 percent on Jun 26, 2020 to 0.67 percent on Sep 24, 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 26, 2020 to Sep 24, 2020
Source: Board of Governors of the Federal Reserve System
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