US Consumer Price Index Increased 8.5 Percent in 12 Months Ending in Mar 2022, which is the Highest Increase since 8.9 Percent in Dec 1981, Producer Prices of Finished Goods Increased 15.2 Percent in 12 Months Ending in Mar 2022 and Final Demand Producer Prices Increased 11.2 Percent, United States International Trade, United States Current Account and Net International Investment Position, United States Inflation, Stagflation Risks, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization
Carlos M. Pelaez
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.
IC United States Inflation
IC Long-term US Inflation
ID Current US Inflation
IIA United States International Trade
II United States Current Account of Balance of Payments and International Investment Position
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
Preamble. United States total public debt outstanding is $30.3 trillion and debt held by the public $23.8 trillion (https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny). The Net International Investment Position of the United States, or foreign debt, is $18.1 trillion (https://www.bea.gov/sites/default/files/2022-03/intinv421.pdf Section II and earlier https://cmpassocregulationblog.blogspot.com/2022/01/increase-in-dec-2021-of-nonfarm-payroll.html). The United States current account deficit is 3.6 percent of GDP in IVQ2021 (https://cmpassocregulationblog.blogspot.com/2022/03/accelerating-inflation-throughout-world.html https://www.bea.gov/sites/default/files/2022-03/trans421.pdf). The Treasury deficit of the United States reached $2.8 trillion in fiscal year 2021 (https://fiscal.treasury.gov/reports-statements/mts/). Total assets of Federal Reserve Banks reached $9.0 trillion on Apr 13, 2022 and securities held outright reached $8.5 trillion (https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). US GDP nominal NSA reached $24.0 trillion in IVQ2021 (https://apps.bea.gov/iTable/index_nipa.cfm). Total Treasury interest-bearing, marketable debt held by private investors increased from $3635 billion in 2007 to $16,439 billion in Sep 2021 (Fiscal Year 2021) or increase by 352.2 percent (https://fiscal.treasury.gov/reports-statements/treasury-bulletin/). John Hilsenrath, writing on “Economists Seek Recession Cues in the Yield Curve,” published in the Wall Street Journal on Apr 2, 2022, analyzes the inversion of the Treasury yield curve with the two-year yield at 2.430 on Apr 1, 2022, above the ten-year yield at 2.374. Hilsenrath argues that inversion appears to signal recession in market analysis but not in alternative Fed approach.
Chart CPI-H provides 12 months percentage changes of the US Consumer Price Index from 1981 to 2022. The increase of 8.5 percent of the US CPI in the 12 months ending in Mar 2022 is the highest since 8.9 percent in Dec 1981 in the beginning adjustment from the Great Inflation.
Chart CPI-H, US, Consumer Price Index, 12-Month Percentage Change, NSA, 1981-2022
Source: US Bureau of Labor Statistics https://www.bls.gov/cpi/data.htm
Chart VII-4 of the Energy Information Administration provides the price of the Natural Gas Futures Contract increasing from $2.581 on Jan 4, 2021 to $6.680 per million Btu on Apr 12, 2022 or 158.8 percent.
Chart VII-4, US, Natural Gas Futures Contract 1
Source: US Energy Information Administration
https://www.eia.gov/dnav/ng/hist/rngc1d.htm
Chart VII-5 of the US Energy Administration provides US field production of oil decreasing from a peak of 12,966 thousand barrels per day in Nov 2019 to the final point of 11.371 thousand barrels per day in Jan 2022.
Chart VII-5, US, US, Field Production of Crude Oil, Thousand Barrels Per Day
Source: US Energy Information Administration
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M
Chart VI-6 of the US Energy Information Administration provides imports of crude oil. Imports increased from 245,369 thousand barrels per day in Jan 2021 to 252,916 thousand in Jan 2022.
Chart VII-6, US, US, Imports of Crude Oil and Petroleum Products, Thousand Barrels
Source: US Energy Information Administration
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIMUS1&f=M
Chart VI-7 of the EIA provides US Petroleum Consumption, Production, Imports, Exports and Net Imports 1950-2020. There was sharp increase in production in the final segment that reached consumption in 2020.
Chart VI-7, US Petroleum Consumption, Production, Imports, Exports and Net Imports 1950-2020, Million Barrels Per Day
https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
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. A competing event is the high level of valuations of risk financial assets (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2017/01/unconventional-monetary-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2016/01/unconventional-monetary-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/peaking-valuations-of-risk-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2014/01/theory-and-reality-of-secular.html). Matt Jarzemsky, writing on “Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 34,451.23 on Apr 15, 2022, which is higher by 143.2 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 142.6 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial assets had been approaching or exceeding historical highs before effects on markets in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021).
The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. On Aug 27, 2020, the Federal Open Market Committee changed its Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The new policy can affect relative exchange rates depending on relative inflation rates and country risk issues. At its meeting on Mar 16, 2022, the FOMC decided (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220316a.htm): “With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.” The DJIA has increased 255.7 percent since the trough of the sovereign debt crisis in Europe on Jul 16, 2010 to Apr 15, 2022; S&P 500 has gained 329.6 percent and DAX 149.8 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 04/15/22” in Table VI-4 had double digit gains relative to the trough around Jul 2, 2010 followed by negative performance but now some valuations of equity indexes show varying behavior. China’s Shanghai Composite is 34.8 percent above the trough. Japan’s Nikkei Average is 207.0 percent above the trough. Dow Global is 136.7 percent above the trough. STOXX 50 of 50 blue-chip European equities (https://www.stoxx.com/index-details?symbol=sx5E) is 64.7 percent above the trough. NYSE Financial Index is 127.7 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 149.8 percent above the trough. Japan’s Nikkei Average is 207.0 percent above the trough on Aug 31, 2010 and 137.8 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 27,093.19 on Apr 15, 2022 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 164.2 percent higher than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar appreciated 9.3 percent relative to the euro. The dollar devalued before the new bout of sovereign risk issues in Europe. There was a shock to financial markets on Nov 26, 2021 with the discovery of a new Omicron variant of the COVID-19 virus. There are geopolitical issues. The column “∆% week to 04/15/22” in Table VI-4 shows decrease of 1.2 percent for China’s Shanghai Composite. The Nikkei increased 0.4 percent. NYSE Financial decreased 3.6 percent in the week. Dow Global decreased 0.6 percent in the week of Apr 15, 2022. The DJIA decreased 0.8 percent and S&P 500 decreased 2.1 percent. DAX of Germany decreased 0.8 percent. STOXX 50 decreased 0.2 percent. The USD appreciated 0.6 percent. There are still high uncertainties on European sovereign risks and banking soundness, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 04/15/21” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Apr 15, 2022. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 04/15/22” but also relative to the peak in column “∆% Peak to 04/15/22.” There are now several equity indexes above the peak in Table VI-4: DJIA 207.5 percent, S&P 500 260.8 percent, DAX 123.7 percent, Dow Global 93.1 percent, NYSE Financial Index (https://www.nyse.com/quote/index/NYK.ID) 81.3 percent and Nikkei Average 137.8 percent. STOXX 50 is 39.5 percent above the peak. Shanghai Composite is 1.5 percent above the peak. The Shanghai Composite increased 62.6 percent from March 12, 2014, to Apr 15, 2022. The US dollar strengthened 28.5 percent relative to the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010.
Sharp and continuing strengthening of the dollar, with recent oscillation of dollar devaluation, is affecting balance sheets of US corporations with foreign operations (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318). Recently, the dollar is depreciating. The Federal Open Market Committee (FOMC) is following “financial and international developments” as part of the process of framing interest rate policy (http://www.federalreserve.gov/newsevents/press/monetary/20150128a.htm). Kate Linebaugh, writing on “Corporate profits set to shrink for fourth consecutive quarter,” on Jul 17, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/corporate-profits-set-to-shrink-for-fourth-consecutive-quarter-1468799278), quotes forecasts of Thomson Reuters of 4.7 decline of adjusted earnings per share in the S&P 500 index in IIQ2016 relative to a year earlier. That would be the fourth consecutive quarterly decline. Theo Francis and Kate Linebaugh, writing on “US corporate profits on pace for third straight decline,” on Apr 28, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/u-s-corporate-profits-on-pace-for-third-straight-decline-1461872242), analyze three consecutive quarters of decline of corporate earnings and revenue in companies in S&P 500. They quote Thomson Reuters on expected decline of earnings of 6.1 percent in IQ2016 based on 55 percent of reporting companies. Weakness of economic activity shows in decline of revenues in IQ2016 of 1.4 percent, increasing 1.7 percent excluding energy, and contraction of profits of 0.5 percent. Justin Lahart, writing on “S&P 500 Earnings: far worse than advertised,” on Feb 24, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/s-p-500-earnings-far-worse-than-advertised-1456344483), analyzes S&P 500 earnings in 2015. Under data provided by companies, earnings increased 0.4 percent in 2015 relative to 2014 but under GAAP (Generally Accepted Accounting Principles), earnings fell 12.7 percent, which is the worst decrease since 2008. Theo Francis e Kate Linebaugh, writing on Oct 25, 2015, on “US Companies Warn of Slowing Economy, published in the Wall Street Journal (http://www.wsj.com/articles/u-s-companies-warn-of-slowing-economy-1445818298) analyze the first contraction of earnings and revenue of big US companies. Production, sales and employment are slowing in a large variety of companies with some contracting. Corporate profits also suffer from revaluation of the dollar that constrains translation of foreign profits into dollar balance sheets. Francis and Linebaugh quote Thomson Reuters that analysts expect decline of earnings per share of 2.8 percent in IIIQ2015 relative to IIIQ2014 based on reports by one third of companies in the S&P 500. Sales would decline 4.0% in a third quarter for the first joint decline of earnings per share and revenue in the same quarter since IIIQ2009. Dollar revaluation also constrains corporate results.
Inyoung Hwang, writing on “Fed optimism spurs record bets against stock volatility,” on Aug 21, 2014, published in Bloomberg.com (http://www.bloomberg.com/news/2014-08-21/fed-optimism-spurs-record-bets-against-stock-voalitlity.html), informs that the S&P 500 is trading at 16.6 times estimated earnings, which is higher than the five-year average of 14.3 Tom Lauricella, writing on Mar 31, 2014, on “Stock investors see hints of a stronger quarter,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304157204579473513864900656?mod=WSJ_smq0314_LeadStory&mg=reno64-wsj), finds views of stronger earnings among many money managers with positive factors for equity markets in continuing low interest rates and US economic growth. There is important information in the Quarterly Markets review of the Wall Street Journal (http://online.wsj.com/public/page/quarterly-markets-review-03312014.html) for IQ2014. Alexandra Scaggs, writing on “Tepid profits, roaring stocks,” on May 16, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323398204578487460105747412.html), analyzes stabilization of earnings growth: 70 percent of 458 reporting companies in the S&P 500 stock index reported earnings above forecasts but sales fell 0.2 percent relative to forecasts of increase of 0.5 percent. Paul Vigna, writing on “Earnings are a margin story but for how long,” on May 17, 2013, published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2013/05/17/earnings-are-a-margin-story-but-for-how-long/), analyzes that corporate profits increase with stagnating sales while companies manage costs tightly. More than 90 percent of S&P components reported moderate increase of earnings of 3.7 percent in IQ2013 relative to IQ2012 with decline of sales of 0.2 percent. Earnings and sales have been in declining trend. In IVQ2009, growth of earnings reached 104 percent and sales jumped 13 percent. Net margins reached 8.92 percent in IQ2013, which is almost the same at 8.95 percent in IIIQ2006. Operating margins are 9.58 percent. There is concern by market participants that reversion of margins to the mean could exert pressure on earnings unless there is more accelerated growth of sales. Vigna (op. cit.) finds sales growth limited by weak economic growth. Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. Future company cash flows derive from investment projects. In IQ1980, real gross private domestic investment in the US was $933.1 billion of chained 2012 dollars, growing to $1,514.4 billion in IIQ1995 or 62.3 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.4 percent from the pre-recession peak of $9404.5 billion of chained 2012 dollars in IIIQ1990 to the trough of $9275.3 billion in IQ1991 (https://apps.bea.gov/iTable/index_nipa.cfm). Real gross private domestic investment in the US increased 47.1 percent from $2,653.1 billion in IVQ2007 to $3,903.0 billion in IVQ2021. Real private fixed investment increased 37.2 percent from $2,630.0 billion of chained 2012 dollars in IVQ2007 to $3,609.1 billion in IVQ2021. Real gross private domestic investment fell at SAAR 48.8 percent in IIQ2020, increasing at 82.1 percent in IIIQ2020 and at 24.7 percent in IVQ2020, falling at 2.3 percent in IQ2021 and decreasing at 3.9 percent in IIQ2021. Real gross domestic investment increased at 12.4 percent in IIIQ2021. Real gross domestic investment increased at 36.7 percent in IVQ2021. Private fixed investment fell at SAAR 30.4 percent in IIQ2020, increasing at 27.5 percent in IIIQ2020, at 17.7 percent in IVQ2020, 13.0 percent in IQ2021, 3.3 percent in IIQ2021, decreasing at 0.9 percent in IIIQ2021 and increasing at 2.7 percent in IVQ2021, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). Private fixed investment fell relative to IVQ2007 in all quarters preceding IVQ2012 and increased 0.9 percent in IIIQ2016, increasing 0.5 percent in IIQ2016 and increasing 0.6 percent in IQ2016. Private fixed investment increased 0.8 percent in IVQ2016. Private fixed investment increased 1.6 percent in IQ2017 and increased 0.9 percent in IIQ2017. Private fixed investment increased 0.1 percent in IIIQ2017 and increased 2.0 percent in IVQ2017. Private fixed investment increased 1.6 percent in IQ2018, increasing 1.5 percent in IIQ2018. Private fixed investment increased 0.2 percent in IIIQ2018, increasing 0.4 percent in IVQ2018. Private fixed investment increased 0.9 percent in IQ2019, increasing 1.5 percent in IIQ2019. Private fixed investment increased 0.8 percent in IIIQ2019. Private fixed investment decreased 0.3 percent in IVQ2019. Private fixed investment decreased 0.6 percent in IQ2020. Private fixed investment decreased 8.7 percent in IIQ2020. Private fixed investment increased 6.3 percent in IIIQ2020. Private fixed investment increased 4.2 percent in IVQ2020. Private fixed investment increased at 3.1 percent in IQ2021. Private fixed investment increased at 0.8 percent in IIQ2021. Private fixed investment decreased 0.2 percent in IIIQ2021. Private fixed investment increased 0.7 percent in IVQ2021. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012. There is recent robust growth followed by sharp contraction and fast recovery in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). The investment decision of United States corporations is fractured in the current economic cycle in preference of cash.
Table IA1-9 provides change from prior quarter of the level of seasonally adjusted annual rates of US corporate profits. There are three aspects. First, there is fluctuation in corporate profits. Corporate profits decreased at $7.9 billion in IVQ2020 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). Corporate profits increased at $123.9 billion in IQ2021. Corporate profits increased at $267.8 billion in IIQ2021. Corporate profits increased at $96.9 billion in IIIQ2021. Corporate profits after tax with IVA and CCA decreased at $23.2 billion in IVQ2020. Corporate profits after tax increased at $95.8 billion in IQ2021. Corporate profits after tax increased at $232.9 billion in IIQ2021. Corporate profits after tax increased at $82.1 billion in IIIQ2021. Net dividends increased at $28.9 billion in IVQ2020. Net dividends decreased at $37.8 billion in IQ2021. Net dividends increased at $51.3 billion in IIQ2021. Net dividends increased at $27.7 billion in IIIQ2021. Undistributed profits decreased at $52.1 billion in IVQ2020. Undistributed profits increased at $133.6 billion in IQ2021. Undistributed profits increased at $181.6 billion in IIQ2021. Undistributed profits increased at $54.4 billion in IIIQ2021. Undistributed corporate profits swelled 569.1 percent from $138.3 billion in IQ2007 to $925.3 billion in IIIQ2021 and changed signs from minus $4.0 billion in current dollars in IVQ2007. Net dividends decreased from $1006.1 billion in IVQ2019 to $963.1 billion in IQ2020, increasing to $1,103.2 billion in IIQ2020, increasing to $1007.1 billion in IIIQ2020, $1171.1 billion in IVQ2020, $1007.6 billion in IQ2021, $1157.5 billion in IIQ2021 and $10861 billion in IIIQ2021, as corporations distributed dividends to halt decrease in stock valuations 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 investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Second, sharp and continuing strengthening of the dollar, with recent depreciation/fluctuations at the margin in global carry trades, is affecting balance sheets of US corporations with foreign operations (https://www.fasb.org/summary/stsum52.shtml) and the overall US economy. The bottom part of Table IA1-9 provides the breakdown of corporate profits with IVA and CCA in domestic industries and the rest of the world. Corporate profits with IVA and CCA decreased at $7.9 billion in IVQ2020. Profits from domestic industries decreased at $30.5 billion and profits from nonfinancial business decreased at $47.5 billion. Profits from the rest of the world increased at $22.6 billion. Corporate profits with IVA and CCA increased at $123.9 billion in IQ2021. Profits from domestic industries increased at $134.5 billion and profits from nonfinancial business increased at $133.2 billion. Profits from the rest of the world decreased at $10.6 billion. Corporate profits with IVA and CCA increased at $267.8 billion in IIQ2021. Profits from domestic industries increased at $274.0 billion and profits from nonfinancial business increased at $221.3 billion. Profits from the rest of the world decreased at $6.2 billion. Corporate profits with IVA and CCA increased at $96.9 billion in IIIQ2021. Profits from domestic industries increased at $45.8 billion and profits from nonfinancial business increased at $31.6 billion. Profits from the rest of the world increased at $51.1 billion. Total corporate profits with IVA and CCA were $2916.1 billion in IIIQ2021 of which $2404.8 billion from domestic industries, or 82.5 percent of the total, and $511.3 billion, or 17.5 percent, from the rest of the world. Nonfinancial corporate profits of $1852.9 billion account for 63.5 percent of the total. Third, there is reduction in the use of corporate cash for investment. Vipal Monga, David Benoit and Theo Francis, writing on “Companies send more cash back to shareholders,” published on May 26, 2015 in the Wall Street Journal (http://www.wsj.com/articles/companies-send-more-cash-back-to-shareholders-1432693805?tesla=y), use data of a study by Capital IQ conducted for the Wall Street Journal. This study shows that companies in the S&P 500 reduced investment in plant and equipment to median 29 percent of operating cash flow in 2013 from 33 percent in 2003 while increasing dividends and buybacks to median 36 percent in 2013 from 18 percent in 2003.
The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
declines. Equally, decline in expected revenue from the stock or project, Rτ, causes decline in valuation. Paul A. Samuelson (https://www.nobelprize.org/prizes/economic-sciences/1970/samuelson/biographical/) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the present of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.
Table VI-4, Stock Indexes, Commodities, Dollar and Ten-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 04/15 /22 | ∆% Week 04/15/22 | ∆% Trough to 04/15/ 22 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 207.5 | -0.8 | 255.7 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 260.8 | -2.1 | 329.6 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | 81.3 | -3.6 | 127.7 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | 93.1 | -0.6 | 136.7 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | NA | NA | NA |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | 137.8 | 0.4 | 207.0 |
| China Shang. | 4/15/ | 7/02 | -24.7 | 1.5 | -1.2 | 34.8 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | 39.5 | -0.2 | 64.7 |
| DAX | 4/26/ | 5/25/ | -10.5 | 123.7 | -0.8 | 149.8 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 28.5 | 0.6 | 9.3 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | NA | NA | NA |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 2.784 | 2.658 | 2.808 |
T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)
Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VI-5 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table VI-5 for Apr 15, 2022 shows that the S&P 500 is now 262.4 percent above the Apr 26, 2010 level and the DJIA is 207.5 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resources.
Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates
| ∆% DJIA from prior date | ∆% DJIA from | ∆% S&P 500 from prior date | ∆% S&P 500 from | |
| Apr 26, 2010 | ||||
| May 06/10 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26/10 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 08/10 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 02/10 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 09/10 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31/10 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5/10 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30/10 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17/10 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23/10 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31/10 | 0.03 | 3.3 | 0.0 | 3.8 |
| Jan 7, 2011 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14/11 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21/11 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28/11 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 04/11 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11/11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18/11 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25/11 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4/11 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11/11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18/11 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25/11 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 01/11 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 08/11 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15/11 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22/11 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29/11 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 06/11 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13/11 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20/11 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27/11 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 03/11 | -2.3 | 8.4 | -2.3 | 7.3 |
| Jun 10/11 | -1.6 | 6.7 | -2.2 | 4.9 |
| Jun 17/11 | 0.4 | 7.1 | 0.04 | 4.9 |
| Jun 24/11 | -0.6 | 6.5 | -0.2 | 4.6 |
| Jul 01/11 | 5.4 | 12.3 | 5.6 | 10.5 |
| Jul 08/11 | 0.6 | 12.9 | 0.3 | 10.9 |
| Jul 15/11 | -1.4 | 11.4 | -2.1 | 8.6 |
| Jul 22/11 | 1.6 | 13.2 | 2.2 | 10.9 |
| Jul 29/11 | -4.2 | 8.4 | -3.9 | 6.6 |
| Aug 05/11 | -5.8 | 2.1 | -7.2 | -1.0 |
| Aug 12/11 | -1.5 | 0.6 | -1.7 | -2.7 |
| Aug 19/11 | -4.0 | -3.5 | -4.7 | -7.3 |
| Aug 26/11 | 4.3 | 0.7 | 4.7 | -2.9 |
| Sep 02/11 | -0.4 | 0.3 | -0.2 | -3.1 |
| Sep 09/11 | -2.2 | -1.9 | -1.7 | -4.8 |
| Sep 16/11 | 4.7 | 2.7 | 5.4 | 0.3 |
| Sep 23/11 | -6.4 | -3.9 | -6.5 | -6.2 |
| Sep 30/11 | 1.3 | -2.6 | -0.4 | -6.7 |
| Oct 7/11 | 1.7 | -0.9 | 2.1 | -4.7 |
| Oct 14/11 | 4.9 | 3.9 | 5.9 | 1.0 |
| Oct 21/11 | 1.4 | 5.4 | 1.1 | 2.2 |
| Oct 28/11 | 3.6 | 9.2 | 3.8 | 6.0 |
| Nov 04/11 | -2.0 | 6.9 | -2.5 | 3.4 |
| Nov 11/11 | 1.4 | 8.5 | 0.8 | 4.3 |
| Nov 18/11 | -2.9 | 5.3 | -3.8 | 0.3 |
| Nov 25/11 | -4.8 | 0.2 | -4.7 | -4.4 |
| Dec 02/11 | 7.0 | 7.3 | 7.4 | 2.7 |
| Dec 09/11 | 1.4 | 8.7 | 0.9 | 3.6 |
| Dec 16/11 | -2.6 | 5.9 | -2.8 | 0.6 |
| Dec 23/11 | 3.6 | 9.7 | 3.7 | 4.4 |
| Dec 30/11 | -0.6 | 9.0 | -0.6 | 3.8 |
| Jan 06 2012 | 1.2 | 10.3 | 1.6 | 5.4 |
| Jan 13/12 | 0.5 | 10.9 | 0.9 | 6.4 |
| Jan 20/12 | 2.4 | 13.5 | 2.0 | 8.5 |
| Jan 27/12 | -0.5 | 13.0 | 0.1 | 8.6 |
| Feb 3/12 | 1.6 | 14.8 | 2.2 | 11.0 |
| Feb 10/12 | -0.5 | 14.2 | -0.2 | 10.8 |
| Feb 17/12 | 1.2 | 15.6 | 1.4 | 12.3 |
| Feb 24/12 | 0.3 | 15.9 | 0.3 | 12.7 |
| Mar 2/12 | 0.0 | 15.8 | 0.3 | 13.0 |
| Mar 9/12 | -0.4 | 15.3 | 0.1 | 13.1 |
| Mar 16/12 | 2.4 | 18.1 | 2.4 | 15.9 |
| Mar 23/12 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30/12 | 1.0 | 17.9 | 0.8 | 16.2 |
| Apr 6/12 | -1.1 | 16.6 | -0.7 | 15.3 |
| Apr 13/12 | -1.6 | 14.7 | -2.0 | 13.1 |
| Apr 20/12 | 1.4 | 16.3 | 0.6 | 13.7 |
| Apr 27/12 | 1.5 | 18.1 | 1.8 | 15.8 |
| May 4/12 | -1.4 | 16.4 | -2.3 | 12.9 |
| May 11/12 | -1.7 | 14.4 | -1.1 | 11.7 |
| May 18/12 | -3.5 | 10.4 | -4.3 | 6.4 |
| May 25/12 | 0.7 | 11.2 | 1.7 | 8.7 |
| Jun 01/12 | -2.7 | 8.2 | -3.0 | 5.4 |
| Jun 08/12 | 3.6 | 12.0 | 3.7 | 9.4 |
| Jun 15/12 | 1.7 | 13.9 | 1.3 | 10.8 |
| Jun 22/12 | -1.0 | 12.8 | -0.6 | 10.1 |
| Jun 29/12 | 1.9 | 14.9 | 2.0 | 12.4 |
| Jul 06/12 | -0.8 | 14.0 | -0.5 | 11.8 |
| Jul 13/12 | 0.0 | 14.0 | 0.2 | 11.9 |
| Jul 20/12 | 0.4 | 14.4 | 0.4 | 12.4 |
| Jul 27/12 | 2.0 | 16.7 | 1.7 | 14.3 |
| Aug 03/12 | 0.2 | 16.9 | 0.4 | 14.8 |
| Aug 10/12 | 0.9 | 17.9 | 1.1 | 16.0 |
| Aug 17/12 | 0.5 | 18.5 | 0.9 | 17.0 |
| Aug 24/12 | -0.9 | 17.4 | -0.5 | 16.4 |
| Aug 31/12 | -0.5 | 16.8 | -0.3 | 16.0 |
| Sep 07/12 | 1.6 | 18.8 | 2.2 | 18.6 |
| Sep 14/12 | 2.2 | 21.3 | 1.90 | 20.9 |
| Sep 21/12 | -0.1 | 21.2 | -0.4 | 20.5 |
| Sep 28/12 | -1.0 | 19.9 | -1.3 | 18.9 |
| Oct 05/12 | 1.3 | 21.5 | 1.4 | 20.5 |
| Oct 12/12 | -2.1 | 18.9 | -2.2 | 17.9 |
| Oct 19/12 | 0.1 | 19.1 | 0.3 | 18.3 |
| Oct 26/12 | -1.8 | 17.0 | -1.5 | 16.5 |
| Nov 02/12 | -0.1 | 16.9 | 0.2 | 16.7 |
| Nov 09/12 | -2.1 | 14.4 | -2.4 | 13.8 |
| Nov 16/12 | -1.8 | 12.3 | -1.4 | 12.2 |
| Nov 23/12 | 3.3 | 16.1 | 3.6 | 16.3 |
| Nov 30/12 | 0.1 | 16.2 | 0.5 | 16.8 |
| Dec 07/12 | 1.0 | 17.4 | 0.1 | 17.0 |
| Dec 14/12 | -0.2 | 17.2 | -0.3 | 16.6 |
| Dec 21/12 | 0.4 | 17.7 | 1.2 | 18.0 |
| Dec 28/12 | -1.9 | 15.5 | -1.9 | 15.7 |
| Jan 04, 2013 | 3.8 | 19.9 | 4.6 | 21.0 |
| Jan 11/13 | 0.4 | 20.4 | 0.4 | 21.5 |
| Jan 18/13 | 1.2 | 21.8 | 0.9 | 22.6 |
| Jan 25/13 | 1.8 | 24.0 | 1.1 | 24.0 |
| Feb 01/13 | 0.8 | 25.0 | 0.7 | 24.8 |
| Feb 08/13 | -0.1 | 24.9 | 0.3 | 25.2 |
| Feb 15/13 | -0.1 | 24.8 | 0.1 | 25.4 |
| Feb 22/13 | 0.1 | 24.9 | -0.3 | 25.0 |
| Mar 1/13 | 0.6 | 25.7 | 0.2 | 25.3 |
| Mar 8/13 | 2.2 | 28.5 | 2.2 | 28.0 |
| Mar 15/13 | 0.8 | 29.5 | 0.6 | 28.8 |
| Mar 22/13 | 0.0 | 29.5 | -0.2 | 28.5 |
| Mar 29/13 | 0.5 | 30.1 | 0.8 | 29.5 |
| Apr 05/13 | -0.1 | 30.0 | -1.0 | 28.2 |
| Apr 12/13 | 2.1 | 32.7 | 2.3 | 31.1 |
| Apr 19/13 | -2.1 | 29.8 | -2.1 | 28.3 |
| Aug 26/13 | 1.1 | 31.3 | 1.7 | 30.5 |
| May 03/13 | 1.8 | 33.6 | 2.0 | 33.2 |
| May 10/13 | 1.0 | 34.9 | 1.2 | 34.8 |
| May 17/13 | 1.6 | 37.0 | 2.1 | 37.6 |
| May 24/13 | -0.3 | 36.6 | -1.1 | 36.1 |
| May 31/13 | -1.2 | 34.9 | -1.1 | 34.5 |
| Jun 07/13 | 0.9 | 36.1 | 0.8 | 35.6 |
| Jun 14/13 | -1.2 | 34.5 | -0.9 | 34.4 |
| Jun 21/13 | -1.8 | 32.1 | -2.2 | 31.4 |
| Jun 28/13 | 0.7 | 33.1 | 0.9 | 32.5 |
| Jul 05/13 | 1.5 | 35.1 | 1.6 | 34.6 |
| Jul 12/13 | 2.2 | 38.0 | 3.0 | 38.6 |
| Jul 19/13 | 0.5 | 38.7 | 0.7 | 39.6 |
| Jul 26/13 | 0.1 | 38.9 | 0.0 | 39.6 |
| Aug 02/13 | 0.6 | 39.7 | 1.1 | 41.1 |
| Aug 09/13 | -1.5 | 37.7 | -1.1 | 39.6 |
| Aug 16/13 | -2.2 | 34.6 | -2.1 | 36.6 |
| Aug 23/13 | -0.5 | 34.0 | 0.5 | 37.2 |
| Aug 30/13 | -1.3 | 32.2 | -1.8 | 34.7 |
| Sep 06/13 | 0.8 | 33.2 | 1.4 | 36.6 |
| Sep 13/13 | 3.0 | 37.2 | 2.0 | 39.3 |
| Sep 20/13 | 0.5 | 37.9 | 1.3 | 41.1 |
| Sep 27/13 | -1.2 | 36.2 | -1.1 | 39.6 |
| Oct 04/13 | -1.2 | 34.5 | -0.1 | 39.5 |
| Oct 11/13 | 1.1 | 36.0 | 0.8 | 40.5 |
| Oct 18/13 | 1.1 | 37.4 | 2.4 | 43.9 |
| Oct 25/13 | 1.1 | 39.0 | 0.9 | 45.2 |
| Nov 01/13 | 0.3 | 39.4 | 0.1 | 45.3 |
| Nov 08/13 | 0.9 | 40.7 | 0.5 | 46.1 |
| Nov 15/13 | 1.3 | 42.5 | 1.6 | 48.4 |
| Nov 22/13 | 0.6 | 43.4 | 0.4 | 48.9 |
| Nov 29/13 | 0.1 | 43.6 | 0.1 | 49.0 |
| Dec 06/13 | -0.4 | 43.0 | 0.0 | 48.9 |
| Dec 13/13 | -1.7 | 40.6 | -1.6 | 46.5 |
| Dec 20/13 | 3.0 | 44.8 | 2.4 | 50.0 |
| Dec 27/13 | 1.6 | 47.1 | 1.3 | 51.9 |
| Jan 03, 2014 | -0.1 | 47.0 | -0.5 | 79.1 |
| Jan 10/14 | -0.2 | 46.7 | 0.6 | 52.0 |
| Jan 17/14 | 0.1 | 46.9 | -0.2 | 51.7 |
| Jan 24/14 | -3.5 | 41.7 | -2.6 | 47.7 |
| Jan 31/14 | -1.1 | 40.1 | -0.4 | 47.1 |
| Feb 7/14 | 0.6 | 41.0 | 0.8 | 48.3 |
| Feb 14/14 | 2.3 | 44.2 | 2.3 | 51.7 |
| Feb 21/14 | -0.3 | 43.7 | -0.1 | 51.5 |
| Feb 28/14 | 1.4 | 45.7 | 1.3 | 53.4 |
| Mar 7/14 | 0.8 | 46.8 | 1.0 | 54.9 |
| Mar 14/14 | -2.4 | 43.4 | -2.0 | 51.9 |
| Mar 21/14 | 1.5 | 45.5 | 1.4 | 54.0 |
| Mar 28/14 | 0.1 | 45.7 | -0.5 | 53.3 |
| Apr 04/14 | 0.5 | 46.5 | 0.4 | 53.9 |
| Apr 11/14 | -2.4 | 43.0 | -2.6 | 49.8 |
| Apr 17/14 | 2.4 | 46.4 | 2.7 | 53.9 |
| Apr 25/14 | -0.3 | 46.0 | -0.1 | 53.7 |
| May 02/14 | 0.9 | 47.4 | 1.0 | 55.2 |
| May 09/14 | 0.4 | 48.0 | -0.1 | 55.0 |
| May 16, 14 | -0.6 | 47.2 | 0.0 | 54.9 |
| May 23, 14 | 0.7 | 48.2 | 1.2 | 56.8 |
| May 30, 14 | 0.7 | 49.2 | 1.2 | 58.7 |
| Jun 06, 14 | 1.2 | 51.0 | 1.3 | 60.8 |
| Jun 13, 14 | -0.9 | 49.7 | -0.7 | 59.7 |
| Jun 20, 14 | 1.0 | 51.2 | 1.4 | 61.9 |
| Jun 27, 14 | -0.6 | 50.4 | -0.1 | 61.8 |
| Jul 04, 14 | 1.3 | 52.3 | 1.2 | 63.8 |
| Jul 11, 14 | -0.7 | 51.2 | -0.9 | 62.3 |
| Jul 18, 14 | 0.9 | 52.6 | 0.5 | 63.2 |
| Jul 25, 14 | -0.8 | 51.4 | 0.0 | 63.2 |
| Aug 1, 14 | -2.8 | 47.2 | -2.7 | 58.8 |
| Aug 8, 14 | 0.4 | 47.7 | 0.3 | 59.4 |
| Aug 15, 14 | 0.7 | 48.7 | 1.2 | 61.3 |
| Aug 22, 14 | 2.0 | 51.7 | 1.7 | 64.1 |
| Aug 29, 14 | 0.6 | 52.6 | 0.8 | 65.3 |
| Sep 5, 14 | 0.2 | 52.9 | 0.2 | 65.6 |
| Sep 12, 14 | -0.9 | 51.6 | -1.1 | 63.8 |
| Sep 19, 14 | 1.7 | 54.2 | 1.3 | 65.9 |
| Sep 26,14 | -1.0 | 52.7 | -1.4 | 63.6 |
| Oct 3, 14 | -0.6 | 51.8 | -0.8 | 62.4 |
| Oct 10, 14 | -2.7 | 47.6 | -3.1 | 57.3 |
| Oct 17, 14 | -1.0 | 46.2 | -1.0 | 55.7 |
| Oct 24, 14 | 2.6 | 50.0 | 4.1 | 62.1 |
| Oct 31, 14 | 3.5 | 55.2 | 2.7 | 66.5 |
| Nov 7, 14 | 1.1 | 56.8 | 0.7 | 67.6 |
| Nov 14, 14 | 0.3 | 57.4 | 0.4 | 68.3 |
| Nov 21,14 | 1.0 | 58.9 | 1.2 | 70.2 |
| Nov 28, 14 | 0.1 | 59.1 | 0.2 | 70.6 |
| Dec 5, 14 | 0.7 | 60.3 | 0.4 | 71.2 |
| Dec 12, 14 | -3.8 | 54.2 | -3.5 | 65.2 |
| Dec 19, 14 | 3.0 | 58.9 | 3.4 | 70.8 |
| Dec 26, 14 | 1.4 | 61.1 | 0.9 | 72.3 |
| Jan 02, 2015 | -1.2 | 59.2 | -1.5 | 69.8 |
| Jan 09, 15 | -0.5 | 58.3 | -0.7 | 68.7 |
| Jan 16, 15 | -1.3 | 56.3 | -1.2 | 66.6 |
| Jan 23, 15 | 0.9 | 57.7 | 1.6 | 69.3 |
| Jan 30, 15 | -2.9 | 53.2 | -2.8 | 64.6 |
| Feb 06, 15 | 3.8 | 59.1 | 3.0 | 69.6 |
| Feb 13, 15 | 1.1 | 60.8 | 2.0 | 73.0 |
| Feb 20, 15 | 0.7 | 61.9 | 0.6 | 74.1 |
| Feb 27, 15 | 0.0 | 61.8 | -0.3 | 73.6 |
| Feb 6, 15 | -1.5 | 59.4 | -1.6 | 70.9 |
| Feb 13, 15 | -0.6 | 58.4 | -0.9 | 69.4 |
| Feb 20, 15 | 2.1 | 61.8 | 2.7 | 73.9 |
| Feb 27, 15 | -2.3 | 58.1 | -2.2 | 70.0 |
| Apr 03, 15 | 0.3 | 58.5 | 0.3 | 70.5 |
| Apr 10, 15 | 1.7 | 61.2 | 1.7 | 73.4 |
| Apr 17, 15 | -1.3 | 59.1 | -1.0 | 71.7 |
| Apr 24, 2015 | 1.4 | 61.4 | 1.8 | 74.7 |
| May 1, 2015 | -0.3 | 60.9 | -0.4 | 73.9 |
| May 8, 2015 | 0.9 | 62.3 | 0.4 | 74.6 |
| May 15, 2015 | 0.4 | 63.1 | 0.3 | 75.1 |
| May 22, 2015 | -0.2 | 62.7 | 0.2 | 75.4 |
| May 29, 2015 | -1.2 | 60.7 | -0.9 | 73.9 |
| Jun 5, 2015 | -0.9 | 59.3 | -0.7 | 72.7 |
| Jun 12, 2015 | 0.3 | 59.7 | 0.1 | 72.8 |
| Jun 19, 2015 | 0.7 | 60.8 | 0.8 | 74.1 |
| Jun 26, 2015 | -0.4 | 60.2 | -0.4 | 73.4 |
| Jul 3, 2015 | -1.2 | 58.2 | -1.2 | 71.3 |
| Jul 10, 2015 | 0.2 | 58.5 | 0.0 | 71.3 |
| Jul 17, 2015 | 1.8 | 61.4 | 2.4 | 75.5 |
| Jul 24, 2015 | -2.9 | 56.8 | -2.2 | 71.6 |
| Jul 31, 2015 | 0.7 | 57.9 | 1.2 | 73.6 |
| Aug 7, 2015 | -1.8 | 55.0 | -1.2 | 71.4 |
| Aug 14, 2015 | 0.6 | 56.0 | 0.7 | 72.6 |
| Aug 21, 2015 | -5.8 | 46.9 | -5.8 | 62.6 |
| Aug 28, 2015 | 1.1 | 48.5 | 0.9 | 64.1 |
| Sep 4, 2015 | -3.2 | 43.7 | -3.4 | 58.5 |
| Sep 11, 2015 | 2.1 | 46.7 | 2.1 | 61.8 |
| Sep 18, 2015 | -0.3 | 46.2 | -0.2 | 61.5 |
| Sep 25, 2015 | -0.4 | 45.6 | -1.4 | 59.3 |
| Oct 2, 2015 | 1.0 | 47.0 | 1.0 | 70.1 |
| Oct 9, 2015 | 3.7 | 52.5 | 3.3 | 66.2 |
| Oct 16, 2015 | 0.8 | 53.6 | 0.9 | 67.7 |
| Oct 23, 2015 | 2.5 | 57.5 | 2.1 | 71.2 |
| Oct 30, 2015 | 0.1 | 57.6 | 0.2 | 71.6 |
| Nov 6, 2015 | 0.4 | 59.8 | 1.0 | 73.2 |
| Nov 13, 2015 | -3.7 | 53.9 | -3.6 | 66.9 |
| Nov 20, 2015 | 3.4 | 59.1 | 3.3 | 72.4 |
| Nov 27, 2015 | -0.1 | 58.8 | 0.0 | 72.4 |
| Dec 4, 2015 | 0.3 | 59.3 | 0.1 | 72.6 |
| Dec 11, 2015 | -3.3 | 54.1 | -3.8 | 66.0 |
| Dec 18, 2015 | -0.8 | 52.9 | -0.3 | 65.5 |
| Dec 23, 2015 | 2.5 | 56.6 | 2.8 | 70.0 |
| Dec 31, 2015 | -0.7 | 55.5 | -0.8 | 68.6 |
| Jan 08, 2016 | -6.2 | 45.9 | -6.0 | 58.6 |
| Jan 15, 2016 | -2.2 | 42.7 | -2.2 | 55.1 |
| Jan 22, 2016 | 0.7 | 43.6 | 1.4 | 57.3 |
| Jan 29, 2016 | 2.3 | 47.0 | 1.7 | 60.1 |
| Feb 05, 2016 | -1.6 | 44.6 | -3.1 | 55.1 |
| Feb 12, 2016 | -1.4 | 42.6 | -0.8 | 53.9 |
| Feb 19, 2016 | 2.6 | 46.3 | 2.8 | 58.2 |
| Feb 26, 2016 | 1.5 | 48.5 | 1.6 | 60.7 |
| Mar 04, 2016 | 2.2 | 51.8 | 2.7 | 65.0 |
| Mar 11, 2016 | 1.2 | 53.6 | 1.1 | 66.8 |
| Mar 18, 2016 | 2.3 | 57.1 | 1.4 | 69.1 |
| Mar 25, 2016 | -0.5 | 56.3 | -0.7 | 68.0 |
| Apr 01, 2016 | 1.6 | 58.8 | 1.8 | 71.0 |
| Apr 08, 2016 | -1.2 | 56.9 | -1.2 | 68.9 |
| Apr 15, 2016 | 1.8 | 59.7 | 1.6 | 71.7 |
| Apr 22, 2016 | 0.6 | 60.7 | 0.5 | 72.6 |
| Apr 29, 2016 | -1.3 | 58.6 | -1.3 | 70.4 |
| May 6, 2016 | -0.2 | 58.3 | -0.4 | 69.7 |
| May 13, 2016 | -1.2 | 56.5 | -0.5 | 68.9 |
| May 20, 2016 | -0.2 | 56.2 | 0.3 | 69.3 |
| May 27, 2016 | 2.1 | 59.5 | 2.3 | 73.2 |
| Jun 03, 2016 | -0.4 | 58.9 | 0.0 | 73.2 |
| Jun 10, 2016 | 0.3 | 59.4 | -0.1 | 72.9 |
| Jun 17, 2016 | -1.1 | 57.7 | -1.2 | 70.9 |
| Jun 24, 2016 | -1.6 | 55.3 | -1.6 | 68.1 |
| Jul 01, 2016 | 3.2 | 60.2 | 3.2 | 73.5 |
| Jul 08, 2016 | 1.1 | 62.0 | 1.3 | 75.7 |
| Jul 15, 2016 | 2.0 | 65.3 | 1.5 | 78.4 |
| Jul 22, 2016 | 0.3 | 65.7 | 0.6 | 79.5 |
| Jul 29, 2016 | -0.7 | 64.5 | -0.1 | 79.3 |
| Aug 05, 2016 | 0.6 | 65.5 | 0.4 | 80.1 |
| Aug 12, 2016 | 0.2 | 65.8 | 0.1 | 80.2 |
| Aug 19, 2016 | -0.1 | 65.6 | 0.0 | 80.2 |
| Aug 26, 2016 | -0.8 | 64.2 | -0.7 | 79.0 |
| Sep 02, 2016 | 0.5 | 65.0 | 0.5 | 79.9 |
| Sep 09, 2016 | -2.2 | 61.4 | -2.4 | 75.6 |
| Sep 16, 2016 | 0.2 | 61.7 | 0.5 | 76.5 |
| Sep 23, 2016 | 0.8 | 63.0 | 1.2 | 78.6 |
| Sep 30, 2016 | 0.3 | 63.4 | 0.2 | 78.9 |
| Oct 07, 2016 | -0.4 | 62.8 | -0.7 | 77.7 |
| Oct 14, 2016 | -0.6 | 61.9 | -1.0 | 76.0 |
| Oct 21, 2016 | 0.0 | 61.9 | 0.4 | 87.3 |
| Oct 28, 2016 | 0.1 | 62.1 | -0.7 | 75.4 |
| Nov 04, 2016 | -1.5 | 59.6 | -1.9 | 72.0 |
| Nov 11, 2016 | 5.4 | 68.2 | 3.8 | 78.6 |
| Nov 18, 2016 | 0.1 | 68.4 | 0.8 | 94.8 |
| Nov 25, 2016 | 1.5 | 70.9 | 1.4 | 82.6 |
| Dec 02, 2016 | 0.1 | 71.1 | -1.0 | 80.8 |
| Dec 09, 2016 | 3.1 | 76.3 | 3.1 | 86.4 |
| Dec 16, 2016 | 0.4 | 77.1 | -0.1 | 86.3 |
| Dec 23, 2016 | 0.5 | 77.9 | 0.3 | 86.8 |
| Dec 30, 2016 | -0.9 | 76.4 | -1.1 | 84.7 |
| Jan 06, 2017 | 1.0 | 78.2 | 1.7 | 87.9 |
| Jan 13, 2017 | -0.4 | 77.5 | -0.1 | 87.7 |
| Jan 20, 2017 | -0.3 | 76.9 | -0.1 | 122.1 |
| Jan 27, 2017 | 1.3 | 79.3 | 1.0 | 89.3 |
| Feb 03, 2017 | -0.1 | 79.1 | 0.1 | 89.5 |
| Feb 10, 2017 | 1.0 | 80.9 | 0.8 | 91.1 |
| Feb 17, 2017 | 1.7 | 84.1 | 1.5 | 94.0 |
| Feb 24, 2017 | 1.0 | 85.8 | 0.7 | 95.3 |
| Mar 03, 2017 | 0.9 | 87.5 | 0.7 | 96.6 |
| Mar 10, 2017 | -0.5 | 86.5 | -0.4 | 95.8 |
| Mar 17, 2017 | 0.1 | 86.7 | 0.2 | 96.2 |
| Mar 24, 2017 | -1.5 | 83.8 | -1.4 | 93.4 |
| Mar 31, 2017 | 0.3 | 84.4 | 0.8 | 94.9 |
| Apr 07, 2017 | 0.0 | 84.3 | -0.3 | 94.3 |
| Apr 14, 2017 | -1.0 | 82.5 | -1.1 | 92.1 |
| Apr 21, 2017 | 0.5 | 83.4 | 0.8 | 93.8 |
| Apr 28, 2017 | 1.9 | 86.9 | 1.5 | 96.7 |
| May 05, 2017 | 0.3 | 87.5 | 0.6 | 98.0 |
| May 12, 2017 | -0.5 | 86.5 | -0.3 | 97.3 |
| Mar 19, 2017 | -0.4 | 85.7 | -0.4 | 96.5 |
| Mar 26, 2017 | 1.3 | 88.1 | 1.4 | 99.3 |
| Jun 02, 2017 | 0.6 | 89.3 | 1.0 | 101.2 |
| Jun 09, 2017 | 0.3 | 89.8 | -0.3 | 100.6 |
| Jun 16, 2017 | 0.5 | 90.8 | 0.1 | 100.7 |
| Jun 23, 2017 | 0.0 | 90.9 | 0.2 | 101.2 |
| Jun 30, 2017 | -0.2 | 90.5 | -0.6 | 99.9 |
| Jul 07, 2017 | 0.3 | 91.1 | 0.1 | 100.1 |
| Jul 14, 2017 | 1.0 | 93.1 | 1.4 | 102.9 |
| Jul 21, 2017 | -0.3 | 92.6 | 0.5 | 104.0 |
| Jul 28, 2017 | 1.2 | 94.8 | 0.0 | 104.0 |
| Aug 04, 2017 | 1.2 | 97.2 | 0.2 | 104.4 |
| Aug 11. 2017 | -1.1 | 95.1 | -1.4 | 101.4 |
| Aug 18, 2017 | -0.8 | 93.4 | -0.6 | 100.1 |
| Aug 25, 2017 | 0.6 | 94.7 | 0.7 | 101.6 |
| Sep 01, 2017 | 0.8 | 96.2 | 1.4 | 104.3 |
| Sep 08, 2017 | -0.9 | 94.5 | -0.6 | 103.1 |
| Sep 15, 2017 | 2.2 | 98.7 | 1.6 | 106.3 |
| Sep 22, 2017 | 0.4 | 99.5 | 0.1 | 106.4 |
| Sep 29, 2017 | 0.2 | 100.0 | 0.7 | 107.9 |
| Oct 06, 2017 | 1.6 | 103.2 | 1.2 | 110.3 |
| Oct 13, 2017 | 0.4 | 104.1 | 0.2 | 110.6 |
| Oct 20, 2017 | 2.0 | 108.2 | 0.9 | 112.5 |
| Oct 27, 2017 | 0.5 | 109.1 | 0.2 | 113.0 |
| Nov 03, 2017 | 0.4 | 110.1 | 0.3 | 113.5 |
| Nov 10, 2017 | -0.5 | 109.0 | -0.2 | 113.1 |
| Nov 17, 2017 | -0.3 | 108.5 | -0.1 | 112.8 |
| Nov 24, 2017 | 0.9 | 110.2 | 0.9 | 114.7 |
| Dec 01, 2017 | 2.9 | 116.3 | 1.5 | 118.0 |
| Dec 08, 2017 | 0.4 | 117.1 | 0.4 | 118.8 |
| Dec 15, 2017 | 1.3 | 120.0 | 0.9 | 120.8 |
| Dec 22, 2017 | 0.4 | 120.9 | 0.3 | 121.4 |
| Dec 29, 2017 | -0.1 | 120.6 | -0.4 | 120.6 |
| Jan 05, 2018 | 2.3 | 125.8 | 2.6 | 126.3 |
| Jan 12, 2018 | 2.0 | 130.3 | 1.6 | 129.9 |
| Jan 19, 2018 | 1.0 | 132.7 | 0.9 | 131.9 |
| Jan 26, 2018 | 2.1 | 137.5 | 2.2 | 137.0 |
| Feb 02, 2018 | -4.1 | 127.8 | -3.9 | 127.9 |
| Feb 09, 2018 | -5.2 | 115.9 | -5.2 | 116.1 |
| Feb 16, 2018 | 4.3 | 125.1 | 4.3 | 125.4 |
| Feb 23, 2018 | 0.4 | 125.9 | 0.6 | 126.7 |
| Mar 02, 2018 | -3.0 | 119.0 | -2.0 | 122.0 |
| Mar 09, 2018 | 3.3 | 126.1 | 3.5 | 129.9 |
| Mar 16, 2018 | -1.5 | 122.6 | -1.2 | 127.1 |
| Mar 23, 2018 | -5.7 | 110.0 | -6.0 | 113.5 |
| Mar 30, 2018 | 2.4 | 115.1 | 2.0 | 117.9 |
| Apr 06, 2018 | -0.7 | 113.6 | -1.4 | 114.9 |
| Apr 13, 2018 | 1.8 | 117.4 | 2.0 | 119.2 |
| Apr 20, 2018 | 0.4 | 118.3 | 0.5 | 120.3 |
| Apr 27, 2018 | -0.6 | 117.0 | 0.0 | 120.3 |
| May 04, 2018 | -0.2 | 116.5 | -0.2 | 119.7 |
| May 11, 2018 | 2.3 | 121.6 | 2.4 | 125.1 |
| May 18, 2018 | -0.5 | 120.6 | -0.5 | 123.8 |
| May 25, 2018 | 0.2 | 120.9 | 0.3 | 124.5 |
| Jun 01, 2018 | -0.5 | 119.9 | 0.5 | 125.6 |
| Jun 08, 2018 | 2.8 | 125.9 | 2.4 | 130.9 |
| Jun 15, 2018 | -0.9 | 123.9 | -0.7 | 129.3 |
| Jun 22, 2018 | -2.0 | 119.4 | -0.9 | 127.3 |
| Jun 29, 2018 | -1.3 | 116.6 | -1.3 | 124.3 |
| Jul 06, 2018 | 0.8 | 118.3 | 1.5 | 127.7 |
| Jul 13, 2018 | 2.3 | 123.3 | 1.5 | 131.1 |
| Jul 20, 2018 | 0.2 | 123.6 | 0.0 | 131.2 |
| Jul 27, 2018 | 1.6 | 127.1 | 0.6 | 132.6 |
| Aug 03, 2018 | 0.0 | 127.2 | 0.8 | 134.3 |
| Aug 10, 2018 | -0.6 | 125.9 | -0.2 | 133.8 |
| Aug 17, 2018 | 1.4 | 129.1 | 0.6 | 135.1 |
| Aug 24, 2018 | 0.5 | 130.2 | 0.9 | 137.2 |
| Aug 31, 2018 | 0.7 | 131.7 | 0.9 | 139.4 |
| Sep 07, 2018 | -0.2 | 131.3 | -1.0 | 136.9 |
| Sep 14, 2018 | 0.9 | 133.4 | 1.2 | 139.7 |
| Sep 21, 2018 | 2.3 | 138.7 | 0.8 | 141.7 |
| Sep 28, 2018 | -1.1 | 136.1 | -0.5 | 140.4 |
| Oct 05, 2018 | 0.0 | 136.0 | -1.0 | 138.1 |
| Oct 12, 2018 | -4.2 | 126.1 | -4.1 | 128.3 |
| Oct 19, 2018 | 0.4 | 127.1 | 0.0 | 128.4 |
| Oct 26, 2018 | -3.0 | 120.3 | -3.9 | 119.4 |
| Nov 02, 2018 | 2.4 | 125.5 | 2.4 | 124.7 |
| Nov 09, 2018 | 2.8 | 131.9 | 2.1 | 129.4 |
| Nov 16, 2018 | -2.2 | 126.8 | -1.6 | 125.8 |
| Nov 23, 2018 | -4.4 | 116.7 | -3.8 | 117.2 |
| Nov 30, 2018 | 5.2 | 127.9 | 4.8 | 127.7 |
| Dec 07, 2018 | -4.5 | 117.7 | -4.6 | 117.2 |
| Dec 14, 2018 | -1.2 | 115.1 | -1.3 | 114.5 |
| Dec 21, 2018 | -6.9 | 100.3 | -7.1 | 99.4 |
| Dec 28, 2018 | 2.7 | 105.8 | 2.9 | 105.1 |
| Jan 04, 2019 | 1.6 | 109.1 | 1.9 | 108.9 |
| Jan 11, 2019 | 2.4 | 114.2 | 2.5 | 114.2 |
| Jan 18, 2019 | 3.0 | 120.5 | 2.9 | 120.3 |
| Jan 25, 2019 | 0.1 | 120.8 | -0.2 | 119.9 |
| Feb 01, 2019 | 1.3 | 123.7 | 1.6 | 123.3 |
| Feb 08, 2019 | 0.2 | 124.1 | 0.0 | 123.4 |
| Feb 15, 2019 | 3.1 | 131.0 | 2.5 | 129.0 |
| Feb 22, 2019 | 0.6 | 132.3 | 0.6 | 130.4 |
| Mar 01, 2019 | 0.0 | 132.3 | 0.4 | 131.3 |
| Mar 08, 2019 | -2.2 | 127.1 | -2.2 | 126.3 |
| Mar 15, 2019 | 1.6 | 130.7 | 2.9 | 132.9 |
| Mar 22, 2019 | -1.3 | 127.6 | -0.8 | 131.1 |
| Mar 29, 2019 | 1.7 | 131.4 | 1.2 | 133.9 |
| Apr 05, 2019 | 1.9 | 135.8 | 2.1 | 138.7 |
| Apr 12, 2019 | 0.0 | 135.7 | 0.5 | 139.9 |
| Apr 19, 2019 | 0.6 | 137.0 | -0.1 | 139.7 |
| Apr 26, 2019 | -0.1 | 136.9 | 1.2 | 142.6 |
| May 03, 2019 | -0.1 | 136.5 | 0.2 | 143.0 |
| May 10, 2019 | -2.1 | 131.5 | -2.2 | 137.7 |
| May 17, 2019 | -0.7 | 129.9 | -0.8 | 135.9 |
| May 24, 2019 | -0.7 | 128.3 | -1.2 | 133.2 |
| May 31, 2019 | -3.0 | 121.5 | -2.6 | 127.1 |
| Jun 07, 2019 | 4.7 | 131.9 | 4.4 | 137.1 |
| Jun 14, 2019 | 0.4 | 132.8 | 0.5 | 138.2 |
| Jun 21, 2019 | 2.4 | 138.5 | 2.2 | 143.4 |
| Jun 28, 2019 | -0.4 | 137.4 | -0.3 | 142.7 |
| Jul 05, 2019 | 1.2 | 140.3 | 1.7 | 146.7 |
| Jul 12, 2019 | 1.5 | 143.9 | 0.8 | 148.7 |
| Jul 19, 2019 | -0.7 | 142.3 | -1.2 | 145.6 |
| Jul 26, 2019 | 0.1 | 142.7 | 1.7 | 149.6 |
| Aug 02, 2019 | -2.6 | 136.4 | -3.1 | 141.9 |
| Aug 09, 2019 | -0.7 | 134.6 | -0.5 | 140.8 |
| Aug 16, 2019 | -1.5 | 131.0 | -1.0 | 138.3 |
| Aug 23, 2019 | -1.0 | 128.7 | -1.4 | 134.9 |
| Aug 30, 2019 | 3.0 | 135.6 | 2.8 | 141.4 |
| Sep 06, 2019 | 1.5 | 139.2 | 1.8 | 145.8 |
| Sep 13, 2019 | 1.6 | 142.9 | 1.0 | 148.1 |
| Sep 20, 2019 | -1.0 | 140.4 | -0.5 | 146.9 |
| Sep 27, 2019 | -0.4 | 139.4 | -1.0 | 144.4 |
| Oct 04, 2019 | -0.9 | 137.2 | -0.3 | 143.6 |
| Oct 11, 2019 | 0.9 | 139.3 | 0.6 | 145.1 |
| Oct 18, 2019 | -0.2 | 138.9 | 0.5 | 146.4 |
| Oct 25, 2019 | 0.7 | 140.6 | 1.2 | 149.4 |
| Nov 01, 2019 | 1.4 | 144.1 | 1.5 | 153.0 |
| Nov 08, 2019 | 1.2 | 147.0 | 0.9 | 155.2 |
| Nov 15, 2019 | 1.2 | 149.9 | 0.9 | 157.5 |
| Nov 22, 2019 | -0.5 | 148.8 | -0.3 | 156.6 |
| Nov 29, 2019 | 0.6 | 150.3 | 1.0 | 159.1 |
| Dec 06, 2019 | -0.1 | 150.0 | 0.2 | 159.6 |
| Dec 13, 2019 | 0.4 | 151.1 | 0.7 | 161.4 |
| Dec 20, 2019 | 1.1 | 153.9 | 1.7 | 165.8 |
| Dec 27, 2019 | 0.7 | 155.6 | 0.6 | 167.3 |
| Jan 03, 2020 | 0.0 | 155.6 | -0.2 | 166.9 |
| Jan 10, 2020 | 0.7 | 157.2 | 0.9 | 169.4 |
| Jan 17, 2020 | 1.8 | 161.9 | 2.0 | 174.7 |
| Jan 24, 2020 | -1.2 | 158.7 | -1.0 | 171.9 |
| Jan 31, 2020 | -2.5 | 152.2 | -2.1 | 166.1 |
| Feb 07, 2020 | 3.0 | 159.7 | 3.2 | 174.6 |
| Feb 14, 2020 | 1.0 | 162.4 | 1.6 | 178.9 |
| Feb 21, 2020 | -1.4 | 158.7 | -1.3 | 175.4 |
| Feb 28, 2020 | -12.4 | 126.8 | -11.5 | 143.7 |
| Mar 06, 2020 | 1.8 | 130.8 | 0.6 | 145.2 |
| Mar 13, 2020 | -10.4 | 106.9 | -8.8 | 123.7 |
| Mar 20, 2020 | -17.3 | 71.1 | -15.0 | 90.2 |
| Mar 27, 2020 | 12.8 | 93.1 | 10.3 | 109.7 |
| Apr 03, 2020 | -2.7 | 87.9 | -2.1 | 105.3 |
| Apr 10, 2020 | 12.7 | 111.7 | 12.1 | 130.2 |
| Apr 17, 2020 | 2.2 | 116.4 | 3.0 | 137.2 |
| Apr 24, 2020 | -1.9 | 112.2 | -1.3 | 134.0 |
| May 01, 2020 | -0.2 | 111.7 | -0.2 | 133.5 |
| May 08, 2020 | 2.6 | 117.1 | 3.5 | 141.7 |
| May 15, 2020 | -2.7 | 111.4 | -2.3 | 126.3 |
| May 22, 2020 | 3.3 | 118.3 | 3.2 | 143.8 |
| May 29, 2020 | 3.8 | 126.5 | 3.0 | 151.2 |
| Jun 05, 2020 | 6.8 | 142.0 | 4.9 | 163.5 |
| Jun 12, 2020 | -5.6 | 128.5 | -4.8 | 150.9 |
| Jun 19, 2020 | 1.0 | 130.9 | 1.9 | 155.6 |
| Jun 26, 2020 | -3.3 | 123.3 | -2.9 | 148.3 |
| Jul 03, 2020 | 3.2 | 130.5 | 4.0 | 158.2 |
| Jul 10, 2020 | 1.0 | 132.7 | 1.8 | 162.8 |
| Jul 17, 2020 | 2.3 | 138.0 | 1.2 | 166.1 |
| Jul 24, 2020 | -0.8 | 136.2 | -0.3 | `65.3 |
| Jul 31, 2020 | -0.2 | 135.9 | 1.7 | 169.9 |
| Aug 07, 2020 | 3.8 | 144.8 | 2.5 | 176.5 |
| Aug 14, 2020 | 1.8 | 149.3 | 0.6 | 178.3 |
| Aug 21, 2020 | 0.0 | 149.3 | 0.7 | 180.3 |
| Aug 28, 2020 | 2.6 | 155.7 | 3.3 | 189.4 |
| Sep 04, 2020 | -1.8 | 151.1 | -2.3 | 182.7 |
| Sep 11, 2020 | -1.7 | 146.9 | -2.5 | 175.6 |
| Sep 18, 2020 | 0.0 | 146.8 | -0.6 | 173.9 |
| Sep 25, 2020 | -1.7 | 142.5 | -0.6 | 172.1 |
| Oct 02, 2020 | 1.9 | 147.1 | 1.5 | 176.3 |
| Oct 09, 2020 | 3.3 | 155.1 | 3.8 | 186.9 |
| Oct 16, 2020 | 0.1 | 155.3 | 0.2 | 187.4 |
| Oct 23, 2020 | -0.9 | 152.9 | -0.5 | 185.9 |
| Oct 30, 2020 | -6.5 | 136.5 | -5.6 | 169.8 |
| Nov 06, 2020 | 6.9 | 152.8 | 7.3 | 189.5 |
| Nov 13, 2020 | 4.1 | 163.1 | 2.2 | 195.8 |
| Nov 20, 2020 | -0.7 | 161.2 | -0.8 | 193.5 |
| Nov 27, 2020 | 2.2 | 166.9 | 2.3 | 200.2 |
| Dec 04, 2020 | 1.0 | 169.7 | 1.7 | 205.2 |
| Dec 11, 2020 | -0.6 | 168.2 | -1.0 | 202.3 |
| Dec 18, 2020 | 0.4 | 169.3 | 1.3 | 206.0 |
| Dec 25, 2020 | 0.1 | 169.5 | -0.2 | 205.5 |
| Jan 01, 2021 | 1.3 | 173.1 | 1.4 | 209.9 |
| Jan 08, 2021 | 1.6 | 177.5 | 1.8 | 215.6 |
| Jan 15, 2021 | -0.9 | 175.0 | -1.5 | 210.9 |
| Jan 22, 2021 | 0.6 | 176.6 | 1.9 | 216.9 |
| Jan 29, 2021 | -3.3 | 167.6 | -3.3 | 206.4 |
| Feb 05, 2021 | 3.9 | 178.0 | 4.6 | 220.7 |
| Feb 12, 2021 | 1.0 | 180.8 | 1.2 | 224.6 |
| Feb 19, 2021 | 0.1 | 181.1 | -0.7 | 222.3 |
| Feb 26, 2021 | -1.8 | 176.1 | -2.4 | 214.4 |
| Mar 05, 2021 | 1.8 | 181.9 | 0.8 | 217.0 |
| Mar 12, 2021 | 4.1 | 192.5 | 2.6 | 225.3 |
| Mar 19, 2021 | -0.5 | 191.2 | -0.8 | 222.8 |
| Mar 26, 2021 | 1.4 | 195.2 | 1.6 | 227.9 |
| Apr 02, 2021 | 0.2 | 195.9 | 1.1 | 231.7 |
| Apr 09, 2021 | 2.0 | 201.7 | 2.7 | 240.6 |
| Apr 16, 2021 | 1.2 | 205.2 | 1.4 | 245.3 |
| Apr 23, 2021 | -0.5 | 203.8 | -0.1 | 244.9 |
| Apr 30, 2021 | -0.5 | 202.3 | 0.0 | 245.0 |
| May 07, 2021 | 2.7 | 210.4 | 1.2 | 249.2 |
| May 14, 2021 | -1.1 | 206.8 | -1.4 | 244.4 |
| May 21, 2021 | -0.5 | 205.3 | -0.4 | 242.9 |
| May 28, 2021 | 0.9 | 208.2 | 1.2 | 246.9 |
| Jun 04, 2021 | 0.7 | 210.2 | 0.6 | 249.0 |
| Jun 11, 2021 | -0.8 | 207.7 | 0.4 | 250.4 |
| Jun 18, 2021 | -3.4 | 197.1 | -1.9 | 243.8 |
| Jun 25, 2021 | 3.4 | 207.3 | 2.7 | 253.2 |
| Jul 02, 2021 | 1.0 | 210.5 | 1.7 | 259.1 |
| Jul 09, 2021 | 0.2 | 211.2 | 0.4 | 260.5 |
| Jul 16, 2021 | -0.5 | 209.6 | -1.0 | 257.0 |
| Jul 23, 2021 | 1.1 | 212.9 | 2.0 | 264.0 |
| Jul 30, 2021 | -0.4 | 211.8 | -0.4 | 262.6 |
| Aug 06, 2021 | 0.8 | 214.2 | 0.9 | 266.0 |
| Aug 13, 2021 | 0.9 | 217.0 | 0.7 | 268.6 |
| Aug 20, 2021 | -1.1 | 213.4 | -0.6 | 266.5 |
| Aug 27, 2021 | 1.0 | 216.4 | 1.5 | 272.0 |
| Sep 03, 2021 | -0.2 | 215.7 | 0.6 | 274.2 |
| Sep 10, 2021 | -2.2 | 208.9 | -1.7 | 267.9 |
| Sep 17, 2021 | -0.1 | 208.7 | -0.6 | 265.7 |
| Sep 24, 2021 | 0.6 | 210.6 | 0.5 | 267.6 |
| Oct 01, 2021 | -1.4 | 206.3 | -2.2 | 259.5 |
| Oct 08, 2021 | 1.2 | 210.01 | 0.8 | 262.3 |
| Oct 15, 2021 | 1.6 | 215.0 | 1.8 | 268.9 |
| Oct 22, 2021 | 1.1 | 218.4 | 1.6 | 275.0 |
| Oct 29, 2021 | 0.4 | 219.7 | 1.3 | 280.0 |
| Nov 05, 2021 | 1.4 | 224.2 | 2.0 | 287.6 |
| Nov 12, 2021 | -0.6 | 222.2 | -0.3 | 286.4 |
| Nov 19, 2021 | -1.4 | 217.7 | 0.3 | 287.6 |
| Nov 26, 2021 | -2.0 | 211.5 | -2.2 | 279.1 |
| Dec 03, 2021 | -0.9 | 208.6 | -1.2 | 274.4 |
| Dec 10, 2021 | 4.0 | 221.0 | 3.8 | 288.8 |
| Dec 17, 2021 | -1.7 | 215.6 | -1.9 | 281.2 |
| Dec 24, 2021 | 1.7 | 220.8 | 2.3 | 289.9 |
| Dec 31, 2021 | 1.1 | 224.3 | 0.9 | 293.2 |
| Jan 07, 2022 | -0.3 | 223.4 | -1.9 | 285.9 |
| Jan 14, 2022 | -0.9 | 220.5 | -0.3 | 284.7 |
| Jan 21, 2022 | -4.6 | 205.8 | -5.7 | 262.9 |
| Jan 28, 2022 | 1.3 | 209.9 | 0.8 | 265.6 |
| Feb 04,2022 | 1.0 | 213.2 | 1.5 | 271.3 |
| Feb 11, 2022 | -1.0 | 210.0 | -1.8 | 264.6 |
| Feb 18, 2022 | -1.9 | 204.1 | -1.6 | 258.8 |
| Feb 25, 2022 | -0.1 | 204.0 | 0.8 | 261.8 |
| Mar 04, 2022 | -1.3 | 200.0 | -1.3 | 257.2 |
| Mar 11, 2022 | -2.0 | 194.0 | -2.9 | 246.9 |
| Mar 18, 2022 | 5.5 | 210.2 | 6.2 | 268.2 |
| Mar 25, 2022 | 0.3 | 211.1 | 1.8 | 274.8 |
| Apr 01, 2022 | -0.1 | 210.7 | 0.1 | 275.1 |
| Apr 08, 2022 | -0.3 | 209.9 | -1.3 | 270.3 |
| Apr 15, 2022 | -0.8 | 207.5 | -2.1 | 262.4 |
Source:
http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
Table VI-6, updated with every blog comment, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation/fluctuation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now near zero interest rates indefinitely but with interruptions caused by risk aversion events. On Aug 27, 2020, the Federal Open Market Committee changed its Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The new policy can affect relative exchange rates depending on relative inflation rates and country risk issues. Jon Sindreu, in an article on “The Dollar Helped Fuel an ‘Everything Rally—But It could Bite Back,” published in the Wall Street Journal, on Sep 30, 2020, analyzes the impact of the weakening dollar on valuations of risk financial assets. Caitlin Ostroff, in an article on “Dollar Regains Appeal in Carry Trades,” published in the Wall Street Journal, on Sep 29, 2020, analyzes the carry trade of borrowing in dollars to invest in assets of higher risk assets in countries such as Brazil with positions also in gaining from relative revaluation of the Chinese Yuan. The euro has devalued 47.1 percent relative to the US dollar from the high on Jul 15, 2008 to Apr 8, 2022. There are complex economic, financial and political effects of the withdrawal of the UK from the European Union or BREXIT after the referendum on Jun 23, 2016 (https://next.ft.com/eu-referendum for extensive coverage by the Financial Times). The British pound (GBP) depreciated 6.3 percent from the trough of USD/₤1.388 on Jan 2, 2009 to USD/₤1.3060 on Apr 15, 2022 and devalued 53.6 percent from the high of USD/₤2.006 on Jul 15, 2008, exchange rate changes measuring ₤/USD. Such similar event occurred in the week of Sep 23, 2011, reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. The Bank of England reduced the Bank Rate to 0.25 percent on Aug 4, 2016, and announced new measures of quantitative easing
(http://www.bankofengland.co.uk/publications/Pages/news/2016/008.aspx). The Bank of England increased the policy interest rate by 0.25 percentage points to 0.75 percent at the meeting of its Monetary Policy Committee on Aug 1, 2018 (https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2018/august-2018). Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets because of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008. Subsequently, the ZAR appreciated to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating 102.2 percent to ZAR 14.6365/USD on Apr 15, 2022, which is depreciation of 26.4 percent relative to Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) that depreciated at the peak of SGD 1.553/USD on Mar 3, 2009. The SGD appreciated by 13.6 percent to the trough of SGD 1.3480/USD on Aug 9, 2010 but is now depreciating 0.7 percent at SGD 1.3573/USD on Apr 8, 2022 relative to the trough of depreciation but still stronger by 12.6 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008. The BRL appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 170.7 percent relative to the trough to BRL 4.7022/USD on Apr 15, 2022 but depreciating by 93.5 percent relative to the peak on Dec 5, 2008. At one point in 2011, the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil (BCB), Brazil’s central bank, decreased its policy rate SELIC for ten consecutive meetings (http://www.bcb.gov.br/?INTEREST) of its monetary policy committee, COPOM. Brazil’s central bank increased the SELIC rate at its most recent meeting (https://www.bcb.gov.br/en/pressdetail/2434/nota):
“245th Meeting of the Monetary Policy Committee (COPOM) of the Central Bank of Brazil Press Release
03/16/2022
In its 245th meeting, the COPOM unanimously decided to increase the Selic rate to 11.75 percent per year” (https://www.bcb.gov.br/en/pressdetail/2434/nota). The Banco Central do Brasil is engaging in repurchase operations in foreign currency beginning Mar 18, 2020 (https://www.bcb.gov.br/en/pressdetail/2319/nota). The monetary authorities also provides multiple measures to face the COVID-19 event (https://www.bcb.gov.br/en/pressdetail/2322/nota). The Banco Central do Brasil also engaged in FX auctions (http://www.bcb.gov.br/en/#!/c/news/1828):
“BC announces FX auctions program 22/08/2013 6:44:00 PM
With the aim of providing FX ‘hedge” (protection) to the economic agents and liquidity to the FX market, the Banco Central do Brasil informs that a program of FX swap auctions and US dollar sale auctions with repurchase program will begin, as of Friday, August 23. This program will last, at least, until December 31, 2013. The swap auctions will occur every Monday, Tuesday, Wednesday and Thursday, when US$500 million will be offered per day. On Fridays, a credit line of US$1 billion will be offered to the market, through sale auctions with repurchase agreement. If it is considered appropriate, the Banco Central do Brasil will carry out additional operations.”
Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. Jeff Fick, writing on “Brazil shifts tack to woo wary investors,” on Jun 5, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324299104578527000680111188.html), analyzes the lifting in the week of Jun 7, 2013, of the tax on foreign transactions designed in Oct 2010 to contain the flood of foreign capital into Brazil that overvalued its currency. Jeffrey T. Lewis, writing on “Brazil’s real closes weaker,” on Jun 14, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323734304578545680335302180.html), analyzes measures to contain accelerated depreciation such as currency swaps and the lifting of the 1 percent tax on exchange derivatives on Jun 12, 2013. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.
Table VI-6, Exchange Rates
| Peak | Trough | ∆% P/T | Apr 15, 2022 | ∆% T Apr 15, 2022 | ∆% P Apr 15, 2022 | |
| EUR USD | 7/15 | 6/7 2010 | 04/15/2022 | |||
| Rate | 1.59 | 1.192 | 1.0814 | |||
| ∆% | -33.4 | -10.2 | -47.1 | |||
| JPY USD | 8/18 | 9/15 | 04/15/2022 | |||
| Rate | 110.19 | 83.07 | 126.45 | |||
| ∆% | 24.6 | -52.2 | -14.8 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 04/15/2022 | |||
| Rate | 1.225 | 1.025 | 0.9341 | |||
| ∆% | 16.3 | 8.9 | 23.7 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 04/15/2022 | |||
| Rate | 2.006 | 1.388 | 1.3060 | |||
| ∆% | -44.5 | -6.3 | -53.6 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 04/15/2022 | |||
| Rate | 1.0215 | 1.6639 | 0.7394 | |||
| ∆% | -62.9 | 18.7 | -32.4 | |||
| ZAR USD | 10/22 2008 | 8/15 | 04/15/2022 | |||
| Rate | 11.578 | 7.238 | 14.6365 | |||
| ∆% | 37.5 | -102.2 | -26.4 | |||
| SGD USD | 3/3 | 8/9 | 04/15/2022 | |||
| Rate | 1.553 | 1.348 | 1.3573 | |||
| ∆% | 13.2 | -0.7 | 12.6 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 04/15/2022 | |||
| Rate | 7.813 | 7.752 | 7.8441 | |||
| ∆% | 0.8 | -1.2 | -0.4 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 04/15/2022 | |||
| Rate | 2.43 | 1.737 | 4.7022 | |||
| ∆% | 28.5 | -170.7 | -93.5 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 04/15/2022 | |||
| Rate | 22.19 | 18.693 | 22.593 | |||
| ∆% | 15.7 | -20.9 | -1.8 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 04/15/2022 | |||
| Rate | 9.313 | 7.108 | 9.5434 | |||
| ∆% | 23.7 | -34.3 | -2.5 | |||
| CNY USD | 7/20 2005 | 7/15 | 04/15/2022 | |||
| Rate | 8.2765 | 6.8211 | 6.3712 | 6.6 | 23.0 | |
| ∆% | 17.6 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
https://markets.ft.com/data/currencies
There are major ongoing and unresolved realignments of exchange rates in the international financial system as countries and regions seek parities that can optimize their productive structures. Seeking exchange rate parity or exchange rate optimizing internal economic activities is complex in a world of unconventional monetary policy of zero interest rates and even negative nominal interest rates of government obligations such as negative yields for the two-year government bond of Germany. Regulation, trade and devaluation conflicts should have been expected from a global recession (Pelaez and Pelaez (2007), The Global Recession Risk, Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008a)): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars” (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the Federal Reserve System provides the key exchange rate of US dollars (USD) per euro (EUR) from Jan 4, 1999 to Apr 8, 2022. US recession dates are in shaded areas. The rate on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate depreciated 21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of the 1 percent interest rate between Jun 2003 and Jun 2004 together with a form of quantitative easing by suspension of auctions of the 30-year Treasury, which was equivalent to withdrawing supply from markets. Another depreciation of 17.5 percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the shaded area of the global recession. The flight to the USD and obligations of the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct 27, 2008. In the return of the carry trade after stress tests showed sound US bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov 25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed risk appetite depreciated the rate 24.4 percent to USD 1.4875/EUR on May 3, 2011. The rate appreciated 9.1 percent to USD 1.0874/EUR on Apr 8, which is the last point in Chart VI-2. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-2, US Dollars (USD) per Euro (EUR), Jan 4, 1999 to Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-3 provides three currency indexes of the dollar from Jan 4, 1995 to Apr 8, 2021. Chart VI-3A provides the overnight fed funds rate and yields of the three-month constant maturity Treasury bill, the ten-year constant maturity Treasury note and Moody’s Baa bond from Jan 4, 1995 to Jul 7, 2016. Chart VI-3B provides the overnight fed funds rate and yields of the three-month constant maturity Treasury bill and the ten-year constant maturity Treasury from Jan 4, 1995 to Apr 14, 2022. The first phase from 1995 to 2001 shows sharp trend of appreciation of the USD while interest rates remained at relatively high levels. The dollar revalued partly because of the emerging market crises that provoked inflows of financial investment into the US and partly because of a deliberate strong dollar policy. DeLong and Eichengreen (2001, 4-5) argue:
“That context was an economic and political strategy that emphasized private investment as the engine for U.S. economic growth. Both components of this term, "private" and "investment," had implications for the administration’s international economic strategy. From the point of view of investment, it was important that international events not pressure on the Federal Reserve to raise interest rates, since this would have curtailed capital formation and vitiated the effects of the administration’s signature achievement: deficit reduction. A strong dollar -- or rather a dollar that was not expected to weaken -- was a key component of a policy which aimed at keeping the Fed comfortable with low interest rates. In addition, it was important to create a demand for the goods and services generated by this additional productive capacity. To the extent that this demand resided abroad, administration officials saw it as important that the process of increasing international integration, of both trade and finance, move forward for the interest of economic development in emerging markets and therefore in support of U.S. economic growth.”
The process of integration consisted of restructuring “international financial architecture” (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Debtors and Creditors (2005)). Policy concerns subsequently shifted to the external imbalances, or current account deficits, and internal imbalances, or government deficits (Pelaez and Pelaez, The Global Recession Risk: Dollar Devaluation and the World Economy (2007)). Fed policy consisted of lowering the policy rate or fed funds rate, which is close to the marginal cost of funding of banks, toward zero during the past decade. Near zero interest rates induce carry trades of selling dollar debt (borrowing), shorting the USD and investing in risk financial assets. Without risk aversion, near zero interest rates cause devaluation of the dollar. Chart VI-3 shows the weakening USD between the recession of 2001 and the contraction after IVQ2007. There was a flight to dollar assets and especially obligations of the US government after Sep 2008. Cochrane and Zingales (2009) show that flight was coincident with proposals of TARP (Troubled Asset Relief Program) to withdraw “toxic assets” in US banks (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a) and Regulation of Banks and Finance (2009b)). There are shocks to globalization in the form of regulation, trade and devaluation wars and breakdown of international cooperation (Pelaez and Pelaez, Globalization and the State: Vol. I (2008a), Globalization and the State: Vol. II (2008b) and Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c)). As evident in Chart VI-3A, there is no exit from near zero interest rates without a financial crisis and economic contraction, verified by the increase of interest rates from 1 percent in Jun 2004 to 5.25 percent in Jun 2006. The Federal Open Market Committee (FOMC) lowered the target of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85). The FOMC implemented increments of 25 basis points of the fed funds target from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006, as shown in Chart VI-3A. The gradual exit from the first round of unconventional monetary policy from 1.00 percent in Jun 2004 (http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm) to 5.25 percent in Jun 2006 (http://www.federalreserve.gov/newsevents/press/monetary/20060629a.htm) caused the financial crisis and global recession. There are conflicts on exchange rate movements among central banks. There is concern of declining inflation in the euro area and appreciation of the euro. On Jun 5, 2014, the European Central Bank introduced cuts in interest rates and a negative rate paid on deposits of banks (http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605.en.html):
“5 June 2014 - Monetary policy decisions
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.15%, starting from the operation to be settled on 11 June 2014.
- The interest rate on the marginal lending facility will be decreased by 35 basis points to 0.40%, with effect from 11 June 2014.
- The interest rate on the deposit facility will be decreased by 10 basis points to -0.10%, with effect from 11 June 2014. A separate press release to be published at 3.30 p.m. CET today will provide details on the implementation of the negative deposit facility rate.”
The ECB also introduced new measures of monetary policy on Jun 5, 2014 (http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_2.en.html):
“5 June 2014 - ECB announces monetary policy measures to enhance the functioning of the monetary policy transmission mechanism
In pursuing its price stability mandate, the Governing Council of the ECB has today announced measures to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. In particular, the Governing Council has decided:
- To conduct a series of targeted longer-term refinancing operations (TLTROs) aimed at improving bank lending to the euro area non-financial private sector [1], excluding loans to households for house purchase, over a window of two years.
- To intensify preparatory work related to outright purchases of asset-backed securities (ABS).”
The President of the European Central Bank (ECB) Mario Draghi analyzed the measures at a press conference (http://www.ecb.europa.eu/press/pressconf/2014/html/is140605.en.html). At the press conference following the meeting of the ECB on Jul 3, 2014, Mario Draghi stated (http://www.ecb.europa.eu/press/pressconf/2014/html/is140703.en.html): “In fact, as I said, interest rates will stay low for an extended period of time, and the Governing Council is unanimous in its commitment to use also nonstandard, unconventional measures to cope with the risk of a too-prolonged period of time of low inflation.”
The President of the ECB Mario Draghi analyzed unemployment in the euro area and the policy response policy in a speech at the Jackson Hole meeting of central bankers on Aug 22, 2014 (http://www.ecb.europa.eu/press/key/date/2014/html/sp140822.en.html):
“We have already seen exchange rate movements that should support both aggregate demand and inflation, which we expect to be sustained by the diverging expected paths of policy in the US and the euro area (Figure 7). We will launch our first Targeted Long-Term Refinancing Operation in September, which has so far garnered significant interest from banks. And our preparation for outright purchases in asset-backed security (ABS) markets is fast moving forward and we expect that it should contribute to further credit easing. Indeed, such outright purchases would meaningfully contribute to diversifying the channels for us to generate liquidity.”
On Sep 4, 2014, the European Central Bank lowered policy rates (http://www.ecb.europa.eu/press/pr/date/2014/html/pr140904.en.html):
“4 September 2014 - Monetary policy decisions
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.05%, starting from the operation to be settled on 10 September 2014.
- The interest rate on the marginal lending facility will be decreased by 10 basis points to 0.30%, with effect from 10 September 2014.
- The interest rate on the deposit facility will be decreased by 10 basis points to -0.20%, with effect from 10 September 2014.”
The President of the European Central Bank announced on Sep 4, 2014, the decision to expand the balance sheet by purchases of asset-backed securities (ABS) in a new ABS Purchase Program (ABSPP) and covered bonds (http://www.ecb.europa.eu/press/pressconf/2014/html/is140904.en.html):
“Based on our regular economic and monetary analyses, the Governing Council decided today to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.05% and the rate on the marginal lending facility by 10 basis points to 0.30%. The rate on the deposit facility was lowered by 10 basis points to -0.20%. In addition, the Governing Council decided to start purchasing non-financial private sector assets. The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP). This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June. In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme (CBPP3). Interventions under these programmes will start in October 2014. The detailed modalities of these programmes will be announced after the Governing Council meeting of 2 October 2014. The newly decided measures, together with the targeted longer-term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet.”
At the Thirtieth Meeting of the International Monetary and Financial Committee of the IMF (IMFC), the President of the European Central Bank (ECB), Mario Draghi stated (http://www.ecb.europa.eu/press/key/date/2014/html/sp141010.en.html):
“Our monetary policy continues to aim at firmly anchoring medium to long-term inflation expectations, in line with our objective of maintaining inflation rates below, but close to, 2% over the medium term. In this context, we have taken both conventional and unconventional measures that will contribute to a return of inflation rates to levels closer to our aim. Our unconventional measures, more specifically our TLTROs (Targeted Longer-Term Refinancing Operations) and our new purchase programmes for ABSs and covered bonds, will further enhance the functioning of our monetary policy transmission mechanism and facilitate credit provision to the real economy. Should it become necessary to further address risks of too prolonged a period of low inflation, the ECB’s Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.”
In a speech on “Monetary Policy in the Euro Area,” on Nov 21, 2014, the President of the European Central Bank, Mario Draghi, advised of the determination to bring inflation back to normal levels by aggressive holding of securities in the balance sheet (http://www.ecb.europa.eu/press/key/date/2014/html/sp141121.en.html):
“In short, there is a combination of policies that will work to bring growth and inflation back on a sound path, and we all have to meet our responsibilities in achieving that. For our part, we will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us.
If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”
In the Introductory Statement to the press conference on Dec 4, 2014, the President of the European Central Bank Mario Draghi advised that (http://www.ecb.europa.eu/press/pressconf/2014/html/is141204.en.html):
“In this context, early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments. We will also evaluate the broader impact of recent oil price developments on medium-term inflation trends in the euro area. Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council remains unanimous in its commitment to using additional unconventional instruments within its mandate. This would imply altering early next year the size, pace and composition of our measures.”
The Swiss National Bank (SNB) announced on Jan 15, 2015, the termination of its peg of the exchange rate of the Swiss franc to the euro (http://www.snb.ch/en/mmr/speeches/id/ref_20150115_tjn/source/ref_20150115_tjn.en.pdf):
“The Swiss National Bank (SNB) has decided to discontinue the minimum exchange rate of
CHF 1.20 per euro with immediate effect and to cease foreign currency purchases associated with enforcing it.”
The SNB also lowered interest rates to nominal negative percentages (http://www.snb.ch/en/mmr/speeches/id/ref_20150115_tjn/source/ref_20150115_tjn.en.pdf):
“At the same time as discontinuing the minimum exchange rate, the SNB will be lowering the interest rate for balances held on sight deposit accounts to –0.75% from 22 January. The exemption thresholds remain unchanged. Further lowering the interest rate makes Swiss-franc investments considerably less attractive and will mitigate the effects of the decision to discontinue the minimum exchange rate. The target range for the three-month Libor is being lowered by 0.5 percentage points to between –1.25% and –0.25%.”
The Swiss franc rate relative to the euro (CHF/EUR) appreciated 18.7 percent on Jan 15, 2015. The Swiss franc rate relative to the dollar (CHF/USD) appreciated 17.7 percent. Central banks are taking measures in anticipation of the quantitative easing by the European Central Bank.
On Jan 22, 2015, the European Central Bank (ECB) decided to implement an “expanded asset purchase program” with combined asset purchases of €60 billion per month “until at least Sep 2016 (http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html). The objective of the program is that (http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html):
“Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%.”
The President of the ECB, Mario Draghi, explains the coordination of asset purchases with NCBs (National Central Banks) of the euro area and risk sharing (http://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html):
“In March 2015 the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key. Some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme. As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Eurosystem’s monetary policy. The Eurosystem will make use of decentralised implementation to mobilise its resources. With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.”
The President of the ECB, Mario Draghi, rejected the possibility of seigniorage in the new asset purchase program, or central bank financing of fiscal expansion (http://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html):
“As I just said, it would be a big mistake if countries were to consider that the presence of this programme might be an incentive to fiscal expansion. They would undermine the confidence, so it’s not directed to monetary financing at all. Actually, it’s been designed as to avoid any monetary financing.”
The President of the ECB, Mario Draghi, does not find effects of monetary policy in inflating asset prices (http://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html):
“On the first question, we monitor closely any potential instance of risk to financial stability. So we're very alert to that risk. So far we don't see bubbles. There may be some local episodes of certain specific markets where prices are going up fast. But to have a bubble, besides having that, one should also identify, detect an increase, dramatic increase in leverage or in bank credit, and we don't see that now. However, we, as I said, we are alert. If bubbles are of a local nature, they should be addressed by local instruments, namely macro-prudential instruments rather than by monetary policy.”
Dan Strumpf and Pedro Nicolaci da Costa, writing on “Fed’s Yellen: Stock Valuations ‘Generally are Quite High,’” on May 6, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-cites-progress-on-bank-regulation-1430918155?tesla=y ), quote Chair Yellen at open conversation with Christine Lagarde, Managing Director of the IMF, finding “equity-market valuations” as “quite high” with “potential dangers” in bond valuations. The DJIA fell 0.5 percent on May 6, 2015, after the comments and then increased 0.5 percent on May 7, 2015 and 1.5 percent on May 8, 2015.
| Fri May 1 | Mon 4 | Tue 5 | Wed 6 | Thu 7 | Fri 8 |
| DJIA 18024.06 -0.3% 1.0% | 18070.40 0.3% 0.3% | 17928.20 -0.5% -0.8% | 17841.98 -1.0% -0.5% | 17924.06 -0.6% 0.5% | 18191.11 0.9% 1.5% |
There are two approaches in theory considered by Bordo (2012Nov20) and Bordo and Lane (2013). The first approach is in the classical works of Milton Friedman and Anna Jacobson Schwartz (1963a, 1987) and Karl Brunner and Allan H. Meltzer (1973). There is a similar approach in Tobin (1969). Friedman and Schwartz (1963a, 66) trace the effects of expansionary monetary policy into increasing initially financial asset prices: “It seems plausible that both nonbank and bank holders of redundant balances will turn first to securities comparable to those they have sold, say, fixed-interest coupon, low-risk obligations. But as they seek to purchase these they will tend to bid up the prices of those issues. Hence they, and also other holders not involved in the initial central bank open-market transactions, will look farther afield: the banks, to their loans; the nonbank holders, to other categories of securities-higher risk fixed-coupon obligations, equities, real property, and so forth.”
The second approach is by the Austrian School arguing that increases in asset prices can become bubbles if monetary policy allows their financing with bank credit. Professor Michael D. Bordo provides clear thought and empirical evidence on the role of “expansionary monetary policy” in inflating asset prices (Bordo2012Nov20, Bordo and Lane 2013). Bordo and Lane (2013) provide revealing narrative of historical episodes of expansionary monetary policy. Bordo and Lane (2013) conclude that policies of depressing interest rates below the target rate or growth of money above the target influences higher asset prices, using a panel of 18 OECD countries from 1920 to 2011. Bordo (2012Nov20) concludes: “that expansionary money is a significant trigger” and “central banks should follow stable monetary policies…based on well understood and credible monetary rules.” Taylor (2007, 2009) explains the housing boom and financial crisis in terms of expansionary monetary policy. Professor Martin Feldstein (2016), at Harvard University, writing on “A Federal Reserve oblivious to its effects on financial markets,” on Jan 13, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/a-federal-reserve-oblivious-to-its-effect-on-financial-markets-1452729166), analyzes how unconventional monetary policy drove values of risk financial assets to high levels. Quantitative easing and zero interest rates distorted calculation of risks with resulting vulnerabilities in financial markets.
Another hurdle of exit from zero interest rates is “competitive easing” that Professor Raghuram Rajan, former governor of the Reserve Bank of India, characterizes as disguised “competitive devaluation” (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). The fed has been considering increasing interest rates. The European Central Bank (ECB) announced, on Mar 5, 2015, the beginning on Mar 9, 2015 of its quantitative easing program denominated as Public Sector Purchase Program (PSPP), consisting of “combined monthly purchases of EUR 60 bn [billion] in public and private sector securities” (http://www.ecb.europa.eu/mopo/liq/html/pspp.en.html). Expectation of increasing interest rates in the US together with euro rates close to zero or negative cause revaluation of the dollar (or devaluation of the euro and of most currencies worldwide). US corporations suffer currency translation losses of their foreign transactions and investments (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) while the US becomes less competitive in world trade (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), Government Intervention in Globalization (2008c)). The DJIA fell 1.5 percent on Mar 6, 2015 and the dollar revalued 2.2 percent from Mar 5 to Mar 6, 2015. The euro has devalued 47.1 percent relative to the dollar from the high on Jul 15, 2008 to Apr 15, 2022.
| 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 47.1 percent relative to the dollar from the high on Jul 15, 2008 to Apr 15, 2022.
| Fri Oct 30 | Mon 2 | Tue 3 | Wed 4 | Thu 5 | Fri 6 |
| USD/ EUR 1.1007 0.1% -0.3% | 1.1016 -0.1% -0.1% | 1.0965 0.4% 0.5% | 1.0867 1.3% 0.9% | 1.0884 1.1% -0.2% | 1.0742 2.4% 1.3% |
The release on Nov 18, 2015 of the minutes of the FOMC (Federal Open Market Committee) meeting held on Oct 28, 2015 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20151028.htm) states:
“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions [for interest rate increase] could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period… It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow.”
Markets could have interpreted a symbolic increase in the fed funds rate at the meeting of the FOMC on Dec 15-16, 2015 (http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm) followed by “shallow” increases, explaining the sharp increase in stock market values and appreciation of the dollar after the release of the minutes on Nov 18, 2015:
| Fri Nov 13 | Mon 16 | Tue 17 | Wed 18 | Thu 19 | Fri 20 |
| USD/ EUR 1.0774 -0.3% 0.4% | 1.0686 0.8% 0.8% | 1.0644 1.2% 0.4% | 1.0660 1.1% -0.2% | 1.0735 0.4% -0.7% | 1.0647 1.2% 0.8% |
| DJIA 17245.24 -3.7% -1.2% | 17483.01 1.4% 1.4% | 17489.50 1.4% 0.0% | 17737.16 2.9% 1.4% | 17732.75 2.8% 0.0% | 17823.81 3.4% 0.5% |
| DAX 10708.40 -2.5% -0.7% | 10713.23 0.0% 0.0% | 10971.04 2.5% 2.4% | 10959.95 2.3% -0.1% | 11085.44 3.5% 1.1% | 11119.83 3.8% 0.3% |
In testimony before The Joint Economic Committee of Congress on Dec 3, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20151203a.htm), Chair Yellen reiterated that the FOMC (Federal Open Market Committee) “anticipates that even after employment and inflation are near mandate-consistent levels, economic condition may, for some time, warrant keeping the target federal funds rate below the Committee views as normal in the longer run.” Todd Buell and Katy Burne, writing on “Draghi says ECB could step up stimulus efforts if necessary,” on Dec 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/draghi-says-ecb-could-step-up-stimulus-efforts-if-necessary-1449252934), analyze that the President of the European Central Bank (ECB), Mario Draghi, reassured financial markets that the ECB will increase stimulus if required to raise inflation the euro area to targets. The USD depreciated 3.1 percent on Thu Dec 3, 2015 after weaker than expected measures by the European Central Bank. DJIA fell 1.4 percent on Dec 3 and increased 2.1 percent on Dec 4. DAX fell 3.6 percent on Dec 3.
| Fri Nov 27 | Mon 30 | Tue 1 | Wed 2 | Thu 3 | Fri 4 |
| USD/ EUR 1.0594 0.5% 0.2% | 1.0565 0.3% 0.3% | 1.0634 -0.4% -0.7% | 1.0616 -0.2% 0.2% | 1.0941 -3.3% -3.1% | 1.0885 -2.7% 0.5% |
| DJIA 17798.49 -0.1% -0.1% | 17719.92 -0.4% -0.4% | 17888.35 0.5% 1.0% | 17729.68 -0.4% -0.9% | 17477.67 -1.8% -1.4% | 17847.63 0.3% 2.1% |
| DAX 11293.76 1.6% -0.2% | 11382.23 0.8% 0.8% | 11261.24 -0.3% -1.1% | 11190.02 -0.9% -0.6% | 10789.24 -4.5% -3.6% | 10752.10 -4.8% -0.3% |
At the press conference following the meeting of the FOMC on Dec 16, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20151216.pdf page 8):
“And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent, and as we've emphasized, gradual manner. It's been a long time since the Federal Reserve has raised interest rates, and I think it's prudent to be able to watch what the impact is on financial conditions and spending in the economy and moving in a timely fashion enables us to do this.”
The implication of this statement is that the state of the art is not accurate in analyzing the effects of monetary policy on financial markets and economic activity. The US dollar appreciated and equities fluctuated:
| Fri Dec 11 | Mon 14 | Tue 15 | Wed 16 | Thu 17 | Fri 18 |
| USD/ EUR 1.0991 -1.0% -0.4% | 1.0993 0.0% 0.0% | 1.0932 0.5% 0.6% | 1.0913 0.7% 0.2% | 1.0827 1.5% 0.8% | 1.0868 1.1% -0.4% |
| DJIA 17265.21 -3.3% -1.8% | 17368.50 0.6% 0.6% | 17524.91 1.5% 0.9% | 17749.09 2.8% 1.3% | 17495.84 1.3% -1.4% | 17128.55 -0.8% -2.1% |
| DAX 10340.06 -3.8% -2.4% | 10139.34 -1.9% -1.9% | 10450.38 -1.1% 3.1% | 10469.26 1.2% 0.2% | 10738.12 3.8% 2.6% | 10608.19 2.6% -1.2% |
On January 29, 2016, the Policy Board of the Bank of Japan introduced a new policy to attain the “price stability target of 2 percent at the earliest possible time” (https://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf). The new framework consists of three dimensions: quantity, quality and interest rate. The interest rate dimension consists of rates paid to current accounts that financial institutions hold at the Bank of Japan of three tiers zero, positive and minus 0.1 percent. The quantitative dimension consists of increasing the monetary base at the annual rate of 80 trillion yen. The qualitative dimension consists of purchases by the Bank of Japan of Japanese government bonds (JGBs), exchange traded funds (ETFs) and Japan real estate investment trusts (J-REITS). The yen devalued sharply relative to the dollar and world equity markets soared after the new policy announced on Jan 29, 2016:
| Fri 22 | Mon 25 | Tue 26 | Wed 27 | Thu 28 | Fri 29 |
| JPY/ USD 118.77 -1.5% -0.9% | 118.30 0.4% 0.4% | 118.42 0.3% -0.1% | 118.68 0.1% -0.2% | 118.82 0.0% -0.1% | 121.13 -2.0% -1.9% |
| DJIA 16093.51 0.7% 1.3% | 15885.22 -1.3% -1.3% | 16167.23 0.5% 1.8% | 15944.46 -0.9% -1.4% | 16069.64 -0.1% 0.8% | 16466.30 2.3% 2.5% |
| Nikkei 16958.53 -1.1% 5.9% | 17110.91 0.9% 0.9% | 16708.90 -1.5% -2.3% | 17163.92 1.2% 2.7% | 17041.45 0.5% -0.7% | 17518.30 3.3% 2.8% |
| Shanghai 2916.56 0.5% 1.3 | 2938.51 0.8% 0.8% | 2749.79 -5.7% -6.4% | 2735.56 -6.2% -0.5% | 2655.66 -8.9% -2.9% | 2737.60 -6.1% 3.1% |
| DAX 9764.88 2.3% 2.0% | 9736.15 -0.3% -0.3% | 9822.75 0.6% 0.9% | 9880.82 1.2% 0.6% | 9639.59 -1.3% -2.4% | 9798.11 0.3% 1.6% |
In testimony on the Semiannual Monetary Policy Report to the Congress on Feb 10-11, 2016, Chair Yellen (http://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm) states: “U.S. real gross domestic product is estimated to have increased about 1-3/4 percent in 2015. Over the course of the year, subdued foreign growth and the appreciation of the dollar restrained net exports. In the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of just 3/4 percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment.”
Jon Hilsenrath, writing on “Yellen Says Fed Should Be Prepared to Use Negative Rates if Needed,” on Feb 11, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/yellen-reiterates-concerns-about-risks-to-economy-in-senate-testimony-1455203865), analyzes the statement of Chair Yellen in Congress that the FOMC (Federal Open Market Committee) is considering negative interest rates on bank reserves. The Wall Street Journal provides yields of two and ten-year sovereign bonds with negative interest rates on shorter maturities where central banks pay negative interest rates on excess bank reserves:
| Sovereign Yields 2/12/16 | Japan | Germany | USA |
| 2 Year | -0.168 | -0.498 | 0.694 |
| 10 Year | 0.076 | 0.262 | 1.744 |
On Mar 10, 2016, the European Central Bank (ECB) announced (1) reduction of the refinancing rate by 5 basis points to 0.00 percent; decrease the marginal lending rate to 0.25 percent; reduction of the deposit facility rate to 0,40 percent; increase of the monthly purchase of assets to €80 billion; include nonbank corporate bonds in assets eligible for purchases; and new long-term refinancing operations (https://www.ecb.europa.eu/press/pr/date/2016/html/pr160310.en.html). The President of the ECB, Mario Draghi, stated in the press conference (https://www.ecb.europa.eu/press/pressconf/2016/html/is160310.en.html): “How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases…We don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.”
The dollar devalued relative to the euro and open stock markets traded lower after the announcement on Mar 10, 2016, but stocks rebounded on Mar 11:
| Fri 4 | Mon 7 | Tue 8 | Wed 9 | Thu10 | Fri 11 |
| USD/ EUR 1.1006 -0.7% -0.4% | 1.1012 -0.1% -0.1% | 1.1013 -0.1% 0.0% | 1.0999 0.1% 0.1% | 1.1182 -1.6% -1.7% | 1.1151 -1.3% 0.3% |
| DJIA 17006.77 2.2% 0.4% | 17073.95 0.4% 0.4% | 16964.10 -0.3% -0.6% | 17000.36 0.0% 0.2% | 16995.13 -0.1% 0.0% | 17213.31 1.2% 1.3% |
| DAX 9824.17 3.3% 0.7% | 9778.93 -0.5% 0.5% | 9692.82 -1.3% -0.9% | 9723.09 -1.0% 0.3% | 9498.15 -3.3% -2.3% | 9831.13 0.1% 3.5% |
At the press conference after the FOMC meeting on Sep 21, 2016, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20160921.pdf ): “However, the economic outlook is inherently uncertain.” In the address to the Jackson Hole symposium on Aug 26, 2016, Chair Yellen states: “I believe the case for an increase in in federal funds rate has strengthened in recent months…And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course” (http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm). In a speech at the World Affairs Council of Philadelphia, on Jun 6, 2016 (http://www.federalreserve.gov/newsevents/speech/yellen20160606a.htm), Chair Yellen finds that “there is considerable uncertainty about the economic outlook.” There are fifteen references to this uncertainty in the text of 18 pages double-spaced. In the Semiannual Monetary Policy Report to the Congress on Jun 21, 2016, Chair Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20160621a.htm), “Of course, considerable uncertainty about the economic outlook remains.” Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. Is there a “science” or even “art” of central banking under this extreme uncertainty in which policy does not generate higher volatility of money, income, prices and values of
Focus is shifting from tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds now currently at 0 to ¼ percent and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Markets overreacted to the so-called “paring” of outright purchases to $25 billion of securities per month for the balance sheet of the Fed. Focus is shifting from tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds now currently at 0 to ¼ percent and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Markets overreacted to the so-called “paring” of outright purchases to $25 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 1/4 to 1/2 percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220316a.htm): “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. 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). The Chairman of the Federal Reserve Board, Jerome H Powell, stated after the FOMC meeting on Dec 15, 2021 (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20211215.pdf): “All FOMC participants forecast that this remaining test will be met next year. The median projection for the appropriate level of the federal funds rate is 0.9 percent at the end of 2022, about a half a percentage point higher than projected in September. Participants expect a gradual pace of policy firming, with the level of the federal funds rate generally near estimates of its longer-run level by the end of 2024. Of course, these projections do not represent a Committee decision or plan, and no one knows with any certainty where the economy will be a year or more from now.”
There are multiple new policy measures, including purchases of Treasury securities and mortgage-backed securities for the balance sheet of the Fed (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.”In the Opening Remarks to the Press Conference on Oct 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20191030.pdf): “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective. We believe monetary policy is in a good place to achieve these outcomes. Looking ahead, we will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the fed funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.” In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm) with significant changes (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf). In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”
In the Introductory Statement on Jul 25, 2019, in Frankfurt am Main, the President of the European Central Bank, Mario Draghi, stated (https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html): “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.
We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity.
The Federal Open Market Committee (FOMC) decided to lower the target range of the federal funds rate by 0.50 percent to 1.0 to 1¼ percent on Mar 3, 2020 in a decision outside the calendar meetings (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm):
March 03, 2020
Federal Reserve issues FOMC statement
For release at 10:00 a.m. EST
The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
For media inquiries, call 202-452-2955.
Implementation Note issued March 3, 2020
In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):
“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”
Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and re the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+re). Thus, g = [(r/re) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dre>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.
In presenting the Semiannual Monetary Policy Report to Congress on Jul 17, 2018, the Chairman of the Board of Governors of the Federal Reserve System, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm): “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data.”
The decisions of the FOMC (Federal Open Market Committee) depend on incoming data. There are unexpected swings in valuations of risk financial assets by “carry trades” from interest rates below inflation to exposures in stocks, commodities and their derivatives. Another issue is the unexpected “data surprises” such as the sharp decline in 12 months rates of increase of real disposable income, or what is left after taxes and inflation, and the price indicator of the FOMC, prices of personal consumption expenditures (PCE) excluding food and energy. There is no science or art of monetary policy that can deal with this uncertainty.
| Real Disposable Personal Income | Real Personal Consumption Expenditures | Prices of Personal Consumption Expenditures | PCE Prices Excluding Food and Energy |
| ∆%12M | ∆%12M | ∆%12M | ∆%12M |
| 6/2017 | 6/2017 | 6/2017 | 6/2017 |
| 1.2 | 2.4 | 1.4 | 1.5 |
In presenting the Semiannual Monetary Policy Report to Congress on Jul 17, 2018, the Chairman of the Board of Governors of the Federal Reserve System, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm): “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data.”
At an address to The Clearing House and The Bank Policy Institute Annual Conference (https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm), in New York City, on Nov 27, 2018, the Vice Chairman of the Fed, Richard H. Clarida, analyzes the data dependence of monetary policy. An important hurdle is critical unobserved parameters of monetary policy (https://www.federalreserve.gov/newsevents/speech/clarida20181127a.htm): “But what if key parameters that describe the long-run destination of the economy are unknown? This is indeed the relevant case that the FOMC and other monetary policymakers face in practice. The two most important unknown parameters needed to conduct‑‑and communicate‑‑monetary policy are the rate of unemployment consistent with maximum employment, u*, and the riskless real rate of interest consistent with price stability, r*. As a result, in the real world, monetary policy should, I believe, be data dependent in a second sense: that incoming data can reveal at each FOMC meeting signals that will enable it to update its estimates of r* and u* in order to obtain its best estimate of where the economy is heading.” Current robust economic growth, employment creation and inflation close to the Fed’s 2 percent objective suggest continuing “gradual policy normalization.” Incoming data can be used to update u* and r* in designing monetary policy that attains price stability and maximum employment. Clarida also finds that the current expansion will be the longest in history if it continues into 2019. In an address at The Economic Club of New York, New York City, Nov 28, 2018 (https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm), the Chairman of the Fed, Jerome H. Powell, stated (https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm): “For seven years during the crisis and its painful aftermath, the Federal Open Market Committee (FOMC) kept our policy interest rate unprecedentedly low--in fact, near zero--to support the economy as it struggled to recover. The health of the economy gradually but steadily improved, and about three years ago the FOMC judged that the interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates. We therefore began to raise our policy rate gradually toward levels that are more normal in a healthy economy. Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.” The market focused on policy rates “just below the broad range of estimates of the level that would be neutral for the economy—that is, neither speeding up nor slowing down growth.” There was a relief rally in the stock market of the United States:
| Fri 23 | Mon 26 | Tue 27 | Wed 28 | Thu 29 | Fri 30 |
| USD/EUR 1.1339 0.7% 0.6% | 1.1328 0.1% 0.1% | 1.1293 0.4% 0.3% | 1.1368 -0.3% -0.7% | 1.1394 -0.5% -0.2% | 1.1320 0.2% 0.6% |
| DJIA 24285.95 -4.4% -0.7% | 24640.24 1.5% 1.5% | 24748.73 1.9% 0.4% | 25366.43 4.4% 2.5% | 25338.84 4.3% -0.1% | 25538.46 5.2% 0.8% |
At a meeting of the American Economic Association in Atlanta on Friday, January 4, 2019, the Chairman of the Fed, Jerome H. Powell, stated that the Fed would be “patient” with interest rate increases, adjusting policy “quickly and flexibly” if required (https://www.aeaweb.org/webcasts/2019/us-federal-reserve-joint-interview). Treasury yields declined and stocks jumped.
| Fri 28 | Mon 31 | Tue 1 | Wed 2 | Thu 3 | Fri 4 |
| 10Y Note 2.736 | 2.683 | 2.683 | 2.663 | 2.560 | 2.658 |
| 2Y Note 2.528 | 2.500 | 2.500 | 2.488 | 2.387 | 2.480 |
| DJIA 23062.40 2.7% -0.3% | 23327.46 1.1% 1.1% | 23327.46 1.1% 0.0% | 23346.24 1.2% 0.1% | 22686.22 -1.6% -2.8% | 23433.16 1.6% 3.3% |
| Dow Global 2718.19 1.3% 0.8% | 2734.40 0.6% 0.6% | 2734.40 0.6% 0.0% | 2729.74 0.4% -0.2% | 2707.29 -0.4% -0.8% | 2773.12 2.0% 2.4% |
In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm).
| Fri 25 | Mon 28 | Tue 29 | Wed 30 | Thu 31 | Fri 1 |
| DJIA 24737.20 0.1% 0.7% | 24528.22 -0.8% -0.8% | 24579.96 -0.6% 0.2% | 25014.86 1.1% 1.8% | 24999.67 1.1% -0.1% | 25063.89 1.3% 0.3% |
| Dow Global 2917.27 0.5% 1.0% | 2899.74 -0.6% -0.6% | 2905.29 -0.4% 0.2% | 2927.10 0.3% 0.8% | 2945.73 1.0% 0.6% | 2947.87 1.0% 0.1% |
| DJ Asia Pacific NA | NA | NA | NA | NA | NA |
| Nikkei 20773.56 0.5% 1.0% | 20649.00 -0.6% -0.6% | 20664.64 -0.5% 0.1% | 20556.54 -1.0% -0.5% | 20773.49 0.0% 1.1% | 20788.39 0.1% 0.1% |
| Shanghai 2601.72 0.2% 0.4% | 2596.98 -0.2% -0.2% | 2594.25 -0.3% -0.1% | 2575.58 -1.0% -0.7% | 2584.57 -0.7% 0.3% | 2618.23 0.6% 1.3% |
| DAX 11281.79 0.7% 1.4% | 11210.31 -0.6% -0.6% | 11218.83 -0.6% 0.1% | 11181.66 -0.9% -0.3% | 11173.10 -1.0% -0.1% | 11180.66 -0.9% 0.1% |
| BOVESPA 97677.19 1.6% 0.0% | 95443.88 -2.3% -2.3% | 95639.33 -2.1% 0.2% | 96996.21 -0.7% 1.4% | 97393.75 -0.3% 0.4% | 97861.27 0.2% 0.5% |
Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. The FOMC statement on Jun 19, 2019 analyzes uncertainty in the outlook (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190619a.htm): “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” In the Semiannual Monetary Policy Report to the Congress, on Jul 10, 2019, Chair Jerome H. Powell states (https://www.federalreserve.gov/newsevents/testimony/powell20190710a.htm): “Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data.
”(emphasis added). European Central Bank President, Mario Draghi, stated at a meeting on “Twenty Years of the ECB’s Monetary Policy,” in Sintra, Portugal, on Jun 18, 2019, that (https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190618~ec4cd2443b.en.html): “In this environment, what matters is that monetary policy remains committed to its objective and does not resign itself to too-low inflation. And, as I emphasised at our last monetary policy meeting, we are committed, and are not resigned to having a low rate of inflation forever or even for now. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required. In our recent deliberations, the members of the Governing Council expressed their conviction in pursuing our aim of inflation close to 2% in a symmetric fashion. Just as our policy framework has evolved in the past to counter new challenges, so it can again. In the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity. The harmonized index of consumer prices of the euro zone increased 1.2 percent in the 12 months ending in May 2019 and the PCE inflation excluding food and energy increased 1.6 percent in the 12 months ending in Apr 2019. Inflation below 2 percent with symmetric targets in both the United States and the euro zone together with apparently weakening economic activity could lead to interest rate cuts. Stock markets jumped worldwide in renewed risk appetite during the week of Jun 19, 2019 in part because of anticipation of major central bank rate cuts and also because of domestic factors:
| Fri 14 | Mon 17 | Tue 18 | Wed 19 | Thu 20 | Fri 21 |
| DJIA 26089.61 0.4% -0.1% | 26112.53 0.1% 0.1% | 26465.54 1.4% 1.4% | 26504.00 1.6% 0.1% | 26753.17 2.5% 0.9% | 26719.13 2.4% -0.1% |
| Dow Global 2998.79 0.2% -0.4% | 2999.93 0.0% 0.0% | 3034.59 1.2% 1.2% | 3050.80 1.7% 0.5% | 3077.81 2.6% 0.9% | 3081.62 2.8% 0.1% |
| DJ Asia Pacific NA | NA | NA | NA | NA | NA |
| Nikkei 21116.89 1.1% 0.4% | 21124.00 0.0% 0.0% | 20972.71 -0.7% -0.7% | 21333.87 1.0% 1.7% | 21462.86 1.6% 0.6% | 21258.64 0.7% -1.0% |
| Shanghai 2881.97 1.9% -1.0% | 2887.62 0.2% 0.2% | 2890.16 0.3% 0.1% | 2917.80 1.2% 1.0% | 2987.12 3.6% 2.4% | 3001.98 4.2% 0.5% |
| DAX 12096.40 0.4% -0.6% | 12085.82 -0.1% -0.1% | 12331.75 1.9% 2.0% | 12308.53 1.8% -0.2% | 12355.39 2.1% 0.4% | 12339.92 2.0% -0.1% |
| BOVESPA 98040.06 0.2% -0.7% | 97623.25 -0.4% -0.4% | 99404.39 1.4% 1.8% | 100303.41 2.3% 0.9% | 100303.41 2.3% 0.0% | 102012.64 4.1% 1.7% |
Chart VI-3, US Dollar Currency Indexes, Jan 4, 1995-Apr 8, 2022
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-3B, US, Overnight Fed Funds Rate, Yield of Three-Month Treasury Constant Maturity and Yield of Ten-Year Treasury Constant Maturity, Jan 4, 1995 to Apr 14, 2022
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Chart VI-4A of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates in periods of significant risk aversion such as flight into US government obligations in late 2008 and early 2009 and in the various risks concerns generated by the European sovereign debt crisis. There was depreciation of the dollar followed by recent appreciation/depreciation.
Chart VI-4, US Dollars per Euro, 2015-2022
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=e85cfb140ce469e13bec458013262fa1&lastObs=780&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/RXI$US_N.B.EU%7d
Carry trades induced by zero interest rates increase capital flows into emerging markets that appreciate exchange rates. Portfolio reallocations away from emerging markets depreciate their exchange rates in reversals of capital flows. Chart VI-4A provides the exchange rate of the Mexican peso (MXN) per US dollar from Nov 8, 1993 to Apr 8, 2022. The first data point in Chart VI-4A is MXN 3.1520 on Nov 8, 1993. The rate devalued to 11.9760 on Nov 14, 1995 during emerging market crises in the 1990s and the increase of interest rates in the US in 1994 that stressed world financial markets (Pelaez and Pelaez, International Financial Architecture 2005, The Global Recession Risk 2007, 147-77). The MXN depreciated sharply to MXN 15.4060/USD on Mar 2, 2009, during the global recession. The rate moved to MXN 11.5050/USD on May 2, 2011, during the sovereign debt crisis in the euro area. The rate depreciated to 11.9760 on May 9, 2013. The final data point is MXN 20.0770/USD on Apr 8, 2022.
Chart VI-4A, Mexican Peso (MXN) per US Dollar (USD), Nov 8, 1993 to Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
htps://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
In remarkable anticipation in 2005, Professor Raghuram G. Rajan (2005) warned of low liquidity and high risks of central bank policy rates approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career as an academic economist in finance and was chief economist of the International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed Raghuram G Rajan, who is the former Governor of the Reserve Bank of India, which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this interview, Rajan argues that central banks should avoid unintended consequences on emerging market economies of inflows and outflows of capital triggered by monetary policy. Professor Rajan, in an interview with Kartik Goyal of Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of breakdown of global policy coordination. Professor Willem Buiter (2014Feb4), a distinguished economist currently Global Chief Economist at Citigroup (http://www.willembuiter.com/resume.pdf), writing on “The Fed’s bad manners risk offending foreigners,” on Feb 4, 2014, published in the Financial Times (http://www.ft.com/intl/cms/s/0/fbb09572-8d8d-11e3-9dbb-00144feab7de.html#axzz2suwrwkFs), concurs with Raghuram Rajan. Buiter (2014Feb4) argues that international policy cooperation in monetary policy is both in the interest of the world and the United States. Portfolio reallocations induced by combination of zero interest rates and risk events stimulate carry trades that generate wide swings in world capital flows. In a speech at the Brookings Institution on Apr 10, 2014, Raghuram G. Rajan (2014Apr10, 1, 10) argues:
“As the world seems to be struggling back to its feet after the great financial crisis, I want to draw attention to an area we need to be concerned about: the conduct of monetary policy in this integrated world. A good way to describe the current environment is one of extreme monetary easing through unconventional policies. In a world where debt overhangs and the need for structural change constrain domestic demand, a sizeable portion of the effects of such policies spillover across borders, sometimes through a weaker exchange rate. More worryingly, it prompts a reaction. Such competitive easing occurs both simultaneously and sequentially, as I will argue, and both advanced economies and emerging economies engage in it. Aggregate world demand may be weaker and more distorted than it should be, and financial risks higher. To ensure stable and sustainable growth, the international rules of the game need to be revisited. Both advanced economies and emerging economies need to adapt, else I fear we are about to embark on the next leg of a wearisome cycle. A first step to prescribing the right medicine is to recognize the cause of the sickness. Extreme monetary easing, in my view, is more cause than medicine. The sooner we recognize that, the more sustainable world growth we will have.”
Professor Raguram G Rajan, former governor of the Reserve Bank of India, which is India’s central bank, warned about risks in high valuations of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor Rajan demystifies in the interview “competitive easing” by major central banks as equivalent to competitive devaluation.
Chart VI-4B provides the rate of the Indian rupee (INR) per US dollar (USD) from Jan 2, 1973 to Apr 8, 2022. The first data point is INR 8.0200 on Jan 2, 1973. The rate depreciated sharply to INR 51.9600 on Mar 3, 2009, during the global recession. The rate appreciated to INR 44.0300/USD on Jul 28, 2011 in the midst of the sovereign debt event in the euro area. The rate overshot to INR 68.8000 on Aug 28, 2013. The final data point is INR 75.9300/USD on Apr 8, 2022.
Chart VI-4B, Indian Rupee (INR) per US Dollar (USD), Jan 2, 1973 to Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
htps://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-5 provides the exchange rate of JPY (Japan yen) per USD (US dollars). The first data point on the extreme left is JPY 357.7300/USD for Jan 14, 1971. The JPY has appreciated over the long term relative to the USD with fluctuations along an evident long-term appreciation. Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The use of the JPY as safe haven is evident by sharp appreciation during the global recession to JPY 110.4800/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan 21, 2009. The final data point in Chart VI-5 is JPY 124.3100/USD on Apr 8, 2022 for depreciation of 0.2 percent relative to JPY 124.0900/USD on Jun 29, 2007 before the global recession and expansion characterized by recurring bouts of risk aversion. Takashi Nakamichi and Eleanor Warnock, writing on “Japan lashes out over dollar, euro,” on Dec 29, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323530404578207440474874604.html?mod=WSJ_markets_liveupdate&mg=reno64-wsj), analyze the “war of words” launched by Japan’s new Prime Minister Shinzo Abe and his finance minister Taro Aso, arguing of deliberate devaluations of the USD and EUR relative to the JPY, which are hurting Japan’s economic activity. Gerard Baker and Jacob M. Shlesinger, writing on “Bank of Japan’s Kuroda signals impatience with Abe government,” on May 23, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303480304579579311491068756?KEYWORDS=bank+of+japan+kuroda&mg=reno64-wsj), analyze concerns of the Governor of the Bank of Japan Haruhiko Kuroda that the JPY has strengthened relative to the USD, partly eroding earlier depreciation. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, Jan 4, 1971-Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
The causes of the financial crisis and global recession were interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Zero interest rates in the United States forever tend to depreciate the dollar against every other currency if there is no risk aversion preventing portfolio rebalancing toward risk financial assets, which include the capital markets and exchange rates of emerging-market economies. The objective of unconventional monetary policy as argued by Yellen 2011AS) is to devalue the dollar to increase net exports that increase US economic growth. Increasing net exports and internal economic activity in the US is equivalent to decreasing net exports and internal economic activity in other countries.
Continental territory, rich endowment of natural resources, investment in human capital, teaching and research universities, motivated labor force and entrepreneurial initiative provide Brazil with comparative advantages in multiple economic opportunities. Exchange rate parity is critical in achieving Brazil’s potential but is difficult in a world of zero interest rates. Chart IV-6 of the Board of Governors of the Federal Reserve System provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL 1.2074/USD on Jan 4, 1999 to BRL 4.7495/USD on Apr 8, 2022. The rate reached BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008 during worldwide flight from risk. The rate appreciated again by 41.3 percent to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 4.7495/USD on Apr 8, 2022 for depreciation of 208.9 percent. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-6, Brazilian Real (BRL) per US Dollar (USD) Jan 4, 1999 to Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-7 of the Board of Governors of the Federal Reserve System provides the history of the BRL beginning with the first data point of BRL 0.8400/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880 on Sep 21, 2001 relative to Mar 3, 1999.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2, 1995 to Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-7A provides the exchange of the Brazilian Real/USD, BRL/USD, from Jan 2, 2019 to Apr 1, 2022. The first data point is 3.7149 BRL/USD on Jan 16, 2019. The rate depreciated 59.3 percent from Jan 2, 2019 to May 4, 2019, appreciating to 4.9542 BRL/USD on Jun 5, 2020 during fed funds rate held at 0 to ¼ percent per year and massive increase of the balance sheet of the Federal Reserve System. On Aug 27, 2020, the Federal Open Market Committee changed its Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The new policy can affect relative exchange rates depending on relative inflation rates and country risk issues. Jon Sindreu, in an article on “The Dollar Helped Fuel an ‘Everything Rally—But It could Bite Back,” published in the Wall Street Journal, on Sep 30, 2020, analyzes the impact of the weakening dollar on valuations of risk financial assets. Caitlin Ostroff, in an article on “Dollar Regains Appeal in Carry Trades,” published in the Wall Street Journal, on Sep 29, 2020, analyzes the carry trade of borrowing in dollars to invest in assets of higher risk assets in countries such as Brazil with positions also in gaining from relative revaluation of the Chinese Yuan.
Chart VI-7A, Brazilian Real (BRL) per US Dollar (USD) Jan 2, 2019 to Apr 8, 2022
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.
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