Fed Governor Lael Brainard at the NBER ’s Monetary Economics Summer Institute

Normalization underway

“In the United States, in my assessment, normalization of the federal funds rate is now well under way, and the Federal Reserve is advancing plans to allow the balance sheet to run off at a gradual and predictable pace. And for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.”

 

The FOMC delayed balance sheet normalization for a reason

“the Federal Open Market Committee (FOMC) decided to delay balance sheet normalization until the federal funds rate had reached a high enough level to enable it to be cut materially if economic conditions deteriorate, thus guarding against the risk of returning to the effective lower bound (ELB) in an environment with a historically low neutral interest rate. The greater familiarity and past experience with the federal funds rate also weighed in favor of this instrument initially. Separately, for those central banks that, unlike the Federal Reserve, moved to negative interest rates, there may be special considerations associated with raising policy rates back into positive territory.”

He expects balance sheet normalization to start soon 

“If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate relatively soon to commence the gradual and predictable process of allowing the balance sheet to run off.”

He thinks the neutral real fed funds rates will remain close to zero

“In my view, the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term. If that is the case, we would not have much more additional work to do on moving to a neutral stance… in recent days, we have begun to hear acknowledgement from other major central banks that they too are seeing conditions that suggest policy normalization could be on the table before too long, against the backdrop of a brighter global outlook…the pace and timing of how central banks around the world proceed with normalization, and the importance of balance sheet policy relative to changes in short term rates in these normalization plans, could have important implications for exchange rates and financial conditions globally.”

 

https://www.federalreserve.gov/newsevents/speech/brainard20170713a.htm

Speech by Fed Vice Chairman Stanley Fischer

Appreciating asset prices increase the appetite for risk and leverage

“…elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. When asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage”

Banks have high regulatory capital

“Regulatory capital at large banks is now at multidecade highs. The largest banks have already met their fully phased-in capital requirements, including the conservation buffer and the capital surcharge for the global systemically important banks….Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.”

On debt levels

“In the private nonfinancial sector, which includes corporations and households, total debt remains well below its long-run trend, largely driven by subdued borrowing among households. However, the corporate business sector appears to be notably leveraged, with the current aggregate corporate-sector leverage standing near 20-year highs.”

Auto and Student loans are a spot of bother

“Auto loan balances and delinquency rates are high for borrowers with lower credit scores, meaning that the riskiest borrowers are borrowing more and not paying it back as often….Student loan balances keep rising, and delinquency rates on those loans are near historical highs”

We dare not be complacent on risk

“There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks.”

 

https://www.federalreserve.gov/newsevents/speech/fischer20170627a.htm

FOMC statement on monetary Policy 14th June 2017

Generally:

“…the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid..the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand.”

On inflation

“On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

Rates forecasted to remain low

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Balance sheet normalization to start this year

“The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program…would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities”

Federal Open Market Committee Member Quotes

U.S. Federal Reserve Governor Lael Brainard at the New York Association for Business Economics

Risks not flashing red

“Eight years into the recovery, it is important to recognize that financial conditions can change rapidly and bear special vigilance. Nonetheless, risks to the U.S. financial system do not appear to be flashing red in the way they did in the run-up to previous downturns….In recent quarters, the balance of risks has become more favorable, the global outlook has brightened, and financial conditions have eased on net.”

Economic improvement expected to continue

“On balance, when assessing economic activity and its likely evolution, it would be reasonable to conclude that further removal of accommodation will likely be appropriate soon…There are good reasons to believe that the improvement in real economic activity will continue.”

Balance Sheet normalization approaching

“The time for a change in balance sheet policy is coming into clearer view as normalization of the federal funds rate approaches the range that can be considered “well under way”….balance sheet normalization should be associated with higher term premiums, which in turn, other things held equal, should be associated with higher long-term Treasury yields. ”

 

John C. Williams, President and CEO, Fed Reserve Bank of San Francisco on CNBC and at the Symposium on Asian Banking and Finance


A fully recovered US economy

“The U.S. economy has fully recovered from the global financial crisis and the ensuing recession. In fact, the U.S. economy is about as close to the Fed’s dual mandate goals as we’ve ever been.”

Fiscal Policy Unclear

“There’s a lot of uncertainty about fiscal policy. I’m not sure what’s going to happen in terms of tax policy, spending policy, healthcare reform, trade immigration, all those policies. There’s not a lot of clarity around that.”

There still are risks

“When you’re docking a boat, you don’t run it in fast towards shore and hope you can reverse the engine hard later on. That looks cool in a James Bond movie, but in the real world it relies on everything going perfectly and can easily run afoul. Instead, the cardinal rule of docking is: Never approach a dock any faster than you’re willing to hit it. Similarly, in achieving sustainable growth, it is better to close in on the target carefully and avoid substantial overshooting.”

The optimism may be excessive

“I think a lot of people, maybe stock market investors and others, have counted up all the positives and kind of ignored how do you pay for that and the negatives. I think there may be some excessive optimism in the U.S. around how this will affect the economy.”

Normalization expected to start later this year

“we’re committed to slowly shrinking the balance sheet with the same sort of widely telegraphed, gradual, and—frankly—boring modus operandi that we’ve adopted for normalizing conventional monetary policy….Based on my forecast, this will occur sometime later this year.”

 

Dallas Fed President Robert S. Kaplan on CNBC

Expect around 2 rate hikes

“I don’t want to put a specific number on it. If somebody says in the 2s, that sounds about right to me,”

On Tax Reform

“If it’s tax reform, I think that could be helpful. If it’s a tax cut financed by increasing the deficit, my concern is that may give a short-term bump to GDP growth, but not a sustainable bump to GDP.”

Gradual normalization

“I think that removal of accommodation should be done gradually and patiently”

 

 

 

Federal Reserve FOMC statement 3.3.2017

Slowed economic activity this quarter

“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective.”

…one they view as transitory

“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced.”

The status quo remains for now

“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”

Chair Janet L. Yellen Before the Joint Economic Committee 17th November

Relatively steady unemployment rate

“Job gains averaged 180,000 per month from January through October, a somewhat slower pace than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force. The unemployment rate, which stood at 4.9 percent in October, has held relatively steady since the beginning of the year. The stability of the unemployment rate, combined with above-trend job growth, suggests that the U.S. economy has had a bit more “room to run” than anticipated earlier.”

Growth is picking up in the US

“…U.S. economic growth appears to have picked up from its subdued pace earlier this year. After rising at an annual rate of just 1 percent in the first half of this year, inflation-adjusted gross domestic product is estimated to have increased nearly 3 percent in the third quarter.”

On Inflation

“Turning to inflation, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 1-1/4 percent over the 12 months ending in September, a somewhat higher pace than earlier this year but still below the FOMC’s 2 percent objective. Much of this shortfall continues to reflect earlier declines in energy prices and in prices of non-energy imports. Core inflation, which excludes the more volatile energy and food prices and tends to be a better indicator of future overall inflation, has been running closer to 1-3/4 percent.”

Looking ahead:

“…I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee’s 2 percent objective over the next couple of years. This judgment reflects my view that monetary policy remains moderately accommodative and that ongoing job gains, along with low oil prices, should continue to support household purchasing power and therefore consumer spending. In addition, global economic growth should firm, supported by accommodative monetary policies abroad. As the labor market strengthens further and the transitory influences holding down inflation fade, I expect inflation to rise to 2 percent.”

Gradual increases in fed rates expected

“The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate–meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–appears to be currently quite low by historical standards…gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.”

On speculations that she may resign

“it is fully my intention to serve out my term.”

FOMC November 2016 Monetary Policy Decision

Inflation is up but low

“Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Rates are unchanged

“…the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. ”

…but gradual increases expected

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Fed Chair Janet L. Yellen at Jackson Hole, Wyoming

https://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm

Current economic situation in the US

“U.S. economic activity continues to expand, led by solid growth in household spending. But business investment remains soft and subdued foreign demand and the appreciation of the dollar since mid-2014 continue to restrain exports. While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market…Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved. Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices.”

Expect the federal funds rate to increase

“Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives…”

…Unless data to the contrary comes in.

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

The expanded toolkit has been helpful

“In light of the slowness of the economic recovery, some have questioned the effectiveness of asset purchases and extended forward rate guidance…Studies have found that our asset purchases and extended forward rate guidance put appreciable downward pressure on long-term interest rates and, as a result, helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2 percent objective.”

Interest on reserves seems to be here to stay

“…at some point after the process of raising the federal funds rate is well under way, we will cease or phase out reinvesting repayments of principal from our securities holdings. Once we stop reinvestment, it should take several years for our asset holdings–and the bank reserves used to finance them–to passively decline to a more normal level. But even after the volume of reserves falls substantially, IOER (Interest on Excess Reserves) will still be important as a contingency tool, because we may need to purchase assets during future recessions to supplement conventional interest rate reductions.”

Real neutral interest rate is close to zero presently

“By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving. If so, then the average level of the nominal federal funds rate down the road might turn out to be only 2 percent, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate.”

New tools to be considered

“Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy.”

In sum

“Although fiscal policies and structural reforms can play an important role in strengthening the U.S. economy, my primary message today is that I expect monetary policy will continue to play a vital part in promoting a stable and healthy economy. New policy tools, which helped the Federal Reserve respond to the financial crisis and Great Recession, are likely to remain useful in dealing with future downturns. Additional tools may be needed and will be the subject of research and debate. But even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively.”

Atlanta Fed President Dennis Lockhart Interview with WSJ

http://www.wsj.com/articles/transcript-atlanta-feds-dennis-lockhart-interview-in-jackson-hole-wyo-1472320365

The US economy is doing better

“I think the U.S. economy is expanding at a modest pace. The second quarter (gross domestic product) number—which was 1.1 (percent annual rate of growth), just revised slightly yesterday—I think overstates the slowdown or a slowdown. We have been looking through that number to an account in the GDP accounts called real final sales, which is GDP less inventory and what we see there is a better picture and a more consistent picture over the last few quarters. So I think the economy is chugging along, and I’m not one who is interpreting the headline GDP number as somehow suggesting that we have slowed from what was already a slow expansion.”

A more settled global risk environment

“…when you go all the way back to the beginning of the year, you had a lot of things related to China—the Chinese equity markets, the Chinese slowdown spilling over to emerging markets—and then later there was the buildup to Brexit. I think we’re past those things, and the overall global risk environment is a bit more settled in my opinion. So I think really, for me, the focus is on the domestic economy.”

On raising interest rates

“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting. ”

They are watching from a distance the phenomenon that is negative interest rates

“I don’t want to encourage the view that the (Federal Open Market Committee) or the Fed is in any serious way considering negative interest rates for this economy. I view it as an interesting experiment that’s going on elsewhere—fortunately, I think. We’ll see what the consequences of negative interest rates and the results that they produce…there could be institutional damage over time with negative interest rates, and it bears watching in Europe and Japan. ”

On the long term impact on negative interest rates

“One is real damage to the financial system through banks and other intermediaries like life insurance companies or insurance companies in general that depend upon fixed-income investments or lending that is priced off of short-term interest rates. Even in our low-rate environment in the United States, we are seeing some of those institutions really express a lot of stress…When you go to negative interest rates, you can—in theory, at least, you can really do some damage to some important industries…Do I see any direct evidence of that yet? I think it’s probably too early.”

Fed Vice Chairman Stanley Fischer Speech at The Aspen Institute

http://www.federalreserve.gov/newsevents/speech/fischer20160821a.htm

They are close to their targets on inflation and full employment

“The Fed’s dual mandate aims for maximum sustainable employment and an inflation rate of 2 percent, as measured by the price index for personal consumption expenditures (PCE). Employment has increased impressively over the past six years since its low point in early 2010, and the unemployment rate has hovered near 5 percent since August of last year, close to most estimates of the full-employment rate of unemployment. The economy has done less well in reaching the 2 percent inflation rate. Although total PCE inflation was less than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.”

Resilient employment figures

“…the behavior of employment has been remarkably resilient…Employment has continued to increase, and the unemployment rate is currently close to most estimates of the natural rate.”

…but slow labour productivity growth

“Turning briefly to recent developments, the pattern of high employment growth and low productivity growth that we have seen in recent years has continued this year..The combination of strong job gains and mediocre GDP growth has resulted in exceptionally slow labor productivity growth.”

We have good news and bad news

“Are we doomed to slow productivity growth for the foreseeable future? We don’t know.On the encouraging side, the technological frontier appears to be advancing rapidly in some sectors, and there are hints that the firm start-up rate is improving. On the more discouraging side, investment continues to disappoint–and so the current capital stock is smaller and embodies fewer frontier technologies than might otherwise be the case–and the productivity slowdown is a global phenomenon, suggesting that it may not be easily or quickly remedied.”

Look beyond monetary policy to boost productivity growth

“…monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth. Rather, the key to boosting productivity growth, and the long-run potential of the economy, is more likely to be found in effective fiscal and regulatory policies.”