Category Archives: Economics

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program.

The outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago. Global trade has picked up and commodity prices have increased over recent months. Even so, the recovery remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

The positive news on vaccines together with the prospect of further significant fiscal stimulus in the United States has seen longer-term bond yields increase considerably over the past month. This increase partly reflects a lift in expected inflation over the medium term to rates that are closer to central banks’ targets. Reflecting these global developments, there have been similar movements in Australian bond markets. Changes in bond yields globally have been associated with volatility in some other asset prices, including foreign exchange rates. The Australian dollar remains in the upper end of the range of recent years.

In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.4 per cent. Retail spending has been strong and most of the households and businesses that had deferred loan repayments have now recommenced repayments. The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is expected to return to its end-2019 level by the middle of this year.

Wage and price pressures are subdued and are expected to remain so for some years. The economy is still operating with considerable spare capacity and the unemployment rate remains higher than it has been for some years. Further progress in reducing spare capacity is expected, but it will be some time before the labour market is tight enough to generate wage increases that are consistent with achieving the inflation target. In the central scenario, the unemployment rate will still be around 6 per cent at the end of this year and 5½ per cent at the end of 2022. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022. CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions.

The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets. Together, monetary and fiscal policy are supporting the recovery in aggregate demand and the pick-up in employment.

Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently. Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates.

The Bank remains committed to the 3-year yield target and recently purchased bonds to support the target and will continue to do so as necessary. Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market. The Bank is prepared to make further adjustments to its purchases in response to market conditions. To date, a cumulative $74 billion of government bonds issued by the Australian Government and the states and territories have been purchased under the initial $100 billion program. A further $100 billion will be purchased following the completion of the initial program and the Bank is prepared to do more if that is necessary. Authorised deposit-taking institutions have drawn $91 billion under the Term Funding Facility and have access to a further $94 billion. Since the start of 2020, the RBA’s balance sheet has increased by around $175 billion.

The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

RBNZ: Prolonged Monetary Stimulus Necessary

The Monetary Policy Committee agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment remit. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent, and the Large Scale Asset Purchase (LSAP) Programme of up to $100 billion and the Funding for Lending Programme (FLP) operation unchanged.

Global economic activity has increased since the November Monetary Policy Statement. However, this lift in activity has been uneven both between and within countries.

The initiation of global COVID-19 vaccination programmes is positive for future health and economic activity. The Committee agreed, however, that there remains a significant period before widespread immunity is achieved. In the meantime, economic uncertainty will remain heightened as international border restrictions continue.

Economic activity in New Zealand picked up over recent months, in line with the easing of health-related social restrictions. Households and businesses also benefitted from significant fiscal and monetary policy support, bolstering their cash-flow and spending. International prices for New Zealand’s exports also supported export incomes, although the New Zealand dollar exchange rate has offset some of this support.

Some temporary factors were currently supporting consumer price inflation and employment. These one-off factors include higher oil prices, supply disruptions due to trade constraints, the recent suite of supportive fiscal stimulus, and a spending catch-up following the easing of social restrictions.

The economic outlook ahead remains highly uncertain, determined in large part by any future health-related social restrictions. This ongoing uncertainty is expected to constrain business investment and household spending growth. The Committee agreed that inflation and employment would likely remain below its remit targets over the medium term in the absence of prolonged monetary stimulus.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.

The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed.


Summary Record of Meeting

The Committee reviewed recent international and domestic economic developments, and their implications for the outlook for inflation and employment. Members noted the lift in domestic economic activity, as evident across a range of indicators including inflation, employment, household spending, GDP, and asset prices.

The Committee discussed the key factors supporting the pickup in economic activity. Household and business balance sheets have fared considerably better than was anticipated at the start of the pandemic. This is in part due to the responses of monetary and fiscal policy, but also due to a number of other factors, in particular the containment of COVID-19 that has enabled ongoing domestic economic activity. People who arrived in New Zealand during the early stages of the pandemic and subsequently stayed on, are contributing to both housing and broader demand pressures. New Zealand’s commodity export prices and volumes have also remained robust despite the global economic slowdown.

The Committee agreed that several of the factors supporting economic activity are likely to prove temporary. Fiscal policy will continue to support the economy, but its impulse is unlikely to be as strong as last year. In addition, economic uncertainty persists due to the sustained closure of international borders and the manifestation of new strains of the virus. These factors continue to weigh on business confidence and investment intentions.

Several members noted the projected increase in headline inflation can also in part be explained by one-off factors, particularly oil price increases. The Committee agreed that the interaction between the headline, core, and wage inflation, and inflation expectations, will be important in determining the sustainability of inflation pressures in the medium-term.

The Committee noted the labour market has proved more resilient than anticipated at the outset of the pandemic, although unemployment has risen. The Wage Subsidy scheme played an important role in helping businesses maintain employment. However, labour market conditions remain uneven across sectors and regions. Those sectors most reliant on tourism-related business activities continue to lag behind on job opportunities, with this likely to persist as long as international borders remain closed. Some members noted that labour effort is being reallocated to other activities and saw the potential for construction activity to remain strong. The Committee expects to see an ongoing gradual recovery in employment towards its maximum sustainable level.

The Committee noted that although the recovery in economic activity was uneven across countries, the performance of some of New Zealand’s main trading partners, in particular China, has been more resilient than expected. The stronger performance of economies geared more towards global goods demand, which has provided continued support to New Zealand’s commodity exports. However, the gains from higher export commodity prices have been somewhat offset by the stronger New Zealand dollar.

The Committee noted that the spread of more virulent strains of COVID-19 presents an ongoing risk to global economic activity. However, the development of effective COVID-19 vaccines has improved the medium-term economic outlook, helping to reduce uncertainty and boost confidence. Members noted the global economic recovery remains dependent on health outcomes and the success of the COVID-19 vaccine programmes.

The Committee noted that global financial asset prices have been inflated by both fiscal and monetary policy stimulus, and the expectations of the success of the vaccine programmes. Members also noted that long-term sovereign bond yields had increased, in part reflecting greater expected growth and inflation.

The Committee noted that domestic financial conditions remain highly stimulatory, that is, promoting spending and investing. Since the November Statement, international and domestic long-term interest rates have risen, driven by an improved growth and inflation outlook.

However, domestic borrowing rates faced by households and businesses have declined marginally. Members agreed that domestic borrowing costs would need to remain low to achieve the Committee’s objectives.

The Committee discussed the effectiveness of monetary policy settings in delivering the necessary monetary stimulus. The level of Official Cash Rate (OCR) and forward guidance had helped anchor short-term interest rates. The Funding for Lending (FLP) programme had helped keep downward pressure on retail interest rates. The Committee noted that the Large Scale Asset Purchase (LSAP) programme had continued to apply a downward influence on long-term interest rates and provide bond market liquidity.

Members noted the FLP will continue to lower bank funding costs, even if international wholesale borrowing costs rise. The Committee noted that the decline in bank funding costs provides banks with scope to further reduce interest rates for household and businesses. The Committee agreed it expects to see the full pass-through of lower funding costs to borrowing rates, and it will closely monitor progress.

The Committee discussed how monetary policy settings were affecting financial stability. Members noted that monetary policy actions had supported financial stability as they have improved the cashflow positions of households and businesses. The Committee noted that the recent changes to the Bank’s Loan-to-Value Ratio (LVR) requirements occurred to ensure that financial system soundness is maintained.

Overall, the Committee agreed that the risks to the economic outlook are balanced, in large part due to the anticipated prolonged period of monetary stimulus. The Committee reflected on the international experience of central banks following the Global Financial Crisis. The Committee agreed that it was important to be confident about the sustainability of an economic recovery before reducing monetary stimulus. Some members also reflected on the extended period of below-target inflation in many countries, including New Zealand, prior to the pandemic.

The Committee agreed that, in line with its least regrets framework, it would not change the stance of monetary policy until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives. The Committee expects that gaining this confidence will take considerable time and patience. While doing so, the Committee agreed to look through any temporary factors driving prices as required by the Remit, and noted that there will be periods during which inflation will be above the 2 percent target midpoint.

The Committee discussed the range and settings of its monetary policy tools. Members noted that the banking system is operationally ready for negative interest rates. The Committee assessed a negative OCR and the LSAP programme against its Principles for Alternative Monetary Policy. The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required.

The Committee discussed the LSAP programme and noted that many factors influence domestic long-term bond yields, including expectations for monetary policy, global bond yields, and the economic outlook. The Committee noted staff advice that reduced government bond issuance was placing less upward pressure on New Zealand government bond yields, and that domestic bond markets had continued to function well. Members noted that staff had adjusted purchase volumes since the November Statement, in light of these conditions.

The Committee agreed to continue with the LSAP programme with purchases of up to $100 billion by June 2022. The Committee also endorsed staff continuing to adjust weekly bond purchases as appropriate, taking into account market functioning. The Committee agreed that weekly changes in the LSAP do not represent a change in monetary policy stance.

The Committee agreed that current monetary policy settings were appropriate to achieve its inflation and employment remit. The Committee agreed it would maintain monetary stimulus until it is confident that consumer price inflation will be sustained around the 2 percent target midpoint and employment is at or above its maximum sustainable level. The Committee expects a prolonged period of time to pass before these conditions are met.

On Wednesday 24 February, the Committee reached a consensus to:

  • hold the OCR at 0.25 percent;
  • maintain the existing LSAP programme of a maximum of $100 billion by June 2022; and
  • maintain the existing FLP conditions.

Attendees:
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders
Observer: Bryan Chapple
Secretary: Nicholas Mulligan

Jerome H. Powell: Semiannual Monetary Policy Report to the Congress

Chairman Brown, Ranking Member Toomey, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report.

At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities. Today I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread. The resurgence in COVID-19 cases, hospitalizations, and deaths in recent months is causing great hardship for millions of Americans and is weighing on economic activity and job creation. Following a sharp rebound in economic activity last summer, momentum slowed substantially, with the weakness concentrated in the sectors most adversely affected by the resurgence of the virus. In recent weeks, the number of new cases and hospitalizations has been falling, and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.

Household spending on services remains low, especially in sectors that typically require people to gather closely, including leisure and hospitality. In contrast, household spending on goods picked up encouragingly in January after moderating late last year. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. The overall recovery in economic activity since last spring is due in part to unprecedented fiscal and monetary actions, which have provided essential support to many households, businesses, and communities.

As with overall economic activity, the pace of improvement in the labor market has slowed. Over the three months ending in January, employment rose at an average monthly rate of only 29,000. Continued progress in many industries has been tempered by significant losses in industries such as leisure and hospitality, where the resurgence in the virus and increased social distancing have weighed further on activity. The unemployment rate remained elevated at 6.3 percent in January, and participation in the labor market is notably below pre-pandemic levels. Although there has been much progress in the labor market since the spring, millions of Americans remain out of work. As discussed in the February Monetary Policy Report, the economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers and for African Americans, Hispanics, and other minority groups. The economic dislocation has upended many lives and created great uncertainty about the future.

The pandemic has also left a significant imprint on inflation. Following large declines in the spring, consumer prices partially rebounded over the rest of last year. However, for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft. Overall, on a 12-month basis, inflation remains below our 2 percent longer-run objective.

While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year. In particular, ongoing progress in vaccinations should help speed the return to normal activities. In the meantime, we should continue to follow the advice of health experts to observe social-distancing measures and wear masks.

Monetary Policy

I will now turn to monetary policy. In the second half of last year, the Federal Open Market Committee completed our first-ever public review of our monetary policy strategy, tools, and communication practices. We undertook this review because the U.S. economy has changed in ways that matter for monetary policy. The review’s purpose was to identify improvements to our policy framework that could enhance our ability to achieve our maximum-employment and price-stability objectives. The review involved extensive outreach to a broad range of people and groups through a series of Fed Listens events.

As described in the February Monetary Policy Report, in August, the Committee unanimously adopted its revised Statement on Longer-Run Goals and Monetary Policy Strategy. Our revised statement shares many features with its predecessor. For example, we have not changed our 2 percent longer-run inflation goal. However, we did make some key changes. Regarding our employment goal, we emphasize that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for low- and moderate-income communities. In addition, we state that our policy decisions will be informed by our “assessments of shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”1 This change means that we will not tighten monetary policy solely in response to a strong labor market. Regarding our price-stability goal, we state that we will seek to achieve inflation that averages 2 percent over time. This means that, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. With this change, we aim to keep longer-term inflation expectations well anchored at our 2 percent goal. Well-anchored inflation expectations enhance our ability to meet both our employment and inflation goals, particularly in the current low interest rate environment in which our main policy tool is likely to be more frequently constrained by the lower bound.

We have implemented our new framework by forcefully deploying our policy tools. As noted in our January policy statement, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial further progress has been made toward our goals. These purchases, and the associated increase in the Federal Reserve’s balance sheet, have materially eased financial conditions and are providing substantial support to the economy. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.

Since the onset of the pandemic, the Federal Reserve has been taking actions to support more directly the flow of credit in the economy, deploying our emergency lending powers to an unprecedented extent, enabled in large part by financial backing and support from Congress and the Treasury. Although the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) facilities are no longer open to new activity, our other facilities remain in place.

We understand that our actions affect households, businesses, and communities across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.

Yannis Stournaras: Welcome address – 4th ECB Simulation Conference

Welcome address by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 4th ECB Simulation Conference, organised by the “Get Involved” student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth,11 December 2020.

It is with great pleasure that I welcome you once again to the ECB Simulation Conference, the fourth one, organised by the “Get Involved” student initiative and supported by the Bank of Greece, the Department of Banking and Financial Management of the University of Piraeus and the General Secretariat for Youth.

During the year since the last conference we have all lived in unprecedented circumstances due to the COVID-19 pandemic outbreak around the globe. The pandemic has taken a heavy toll, primarily on human lives, as well as on citizens’ economic welfare. Governments both in Europe and elsewhere in the world had to respond by taking resolute action in order to shore up public healthcare systems and by imposing social distancing measures with a view to containing the spread of the pandemic, which have however further weighed on economic activity. In an effort to mitigate the socioeconomic effects of the pandemic and of the related containment measures, official authorities promptly took crucial decisions.

On the fiscal policy front, all European governments have resorted to high public spending to support output and employment, as well as to boost the economic recovery. Furthermore, at a collective level, the EU’s long-term budget (Multiannual Financial Framework) coupled with the establishment of the Next Generation EU recovery instrument constitute the largest ever package of recovery measures (totalling €1.8 trillion) in Europe to support workers, businesses and governments.

On the part of the Eurosystem, comprising the national central banks, including the Bank of Greece, which together with the European Central Bank (ECB) conduct monetary policy in the euro area, we have adopted exceptional and bold monetary policy and banking supervision measures aimed at addressing three major challenges: first, stabilise financial markets; second, ensure the continued flow of credit to every economic sector across the euro area; and third, rein in deflationary pressures. At the meetings of the Governing Council of the ECB, as early as last March when the first signs of the new crisis became visible, we made swift and effective decisions in order to preserve favourable financing conditions and facilitate lending, on top of the measures already in place prior to the pandemic, including a zero interest rate on the main refinancing operations and a negative deposit facility rate.

Specifically, we decided to promptly introduce the Pandemic Emergency Purchase Programme (PEPP) to play the dual role of stabilising financial markets and providing additional monetary accommodation.

In terms of its first role, i.e. smoothing out financial shocks, the design of the PEPP allows a high degree of flexibility in the composition of purchases, thereby ensuring the effective transmission of monetary policy across the euro area. More specifically, the monthly purchase volumes are not fixed but may vary over time depending on the prevailing financial conditions. Also, while the benchmark allocation of public sector securities across jurisdictions is guided by the key for subscription to the ECB’s capital of each national central bank (reflecting the size of its economy), national central banks have been given the discretion to conduct purchases temporarily in deviation from that capital key. This flexibility helps to address impairments in the monetary policy transmission mechanism, as a result of investors’ flight to safety amid uncertainty, and to counter fragmentation risks in the euro area.

Why is flexibility so important for the effectiveness of the PEPP? At the onset of the pandemic, some European countries were severely hit, while for some others the impact was comparatively milder. Given this unevenness, the former group of countries faced heightened uncertainty, high volatility in their financial markets and a surge in their government bond yields. Their yield spreads versus the latter group of countries, which saw milder increases in their yields, thus skyrocketed to high levels. Purchases under the PEPP, which were allocated relatively more towards bonds issued by harder hit countries, succeeded in drastically reducing those countries’ government bond yields and spreads.

As far as Greece is concerned, a crucial role in the stabilisation of domestic financial conditions was also played by the waiver of the minimum credit quality requirements, applicable under the existing Public Sector Purchase Programme (PSPP), which was granted for securities issued by the Greek government, making them eligible for PEPP purchases. This decision is a prime example of the efficiency related to the PEPP’s flexibility: as soon as the programme was announced, the Greek government bond yields declined sharply and now stand below their pre-pandemic levels. Guided by the need to safeguard the singleness of monetary policy throughout the euro area, the eligibility of Greek government bonds both for purchases under the PEPP and for acceptance as collateral by Greek banks in the Eurosystem liquidity providing operations should be maintained, although the credit rating criteria are not met, as decided in April along with a package of temporary collateral easing measures.

The second role of the PEPP refers to providing additional monetary stimulus, further to that already achieved through the Asset Purchase Programme (APP) implemented since 2015 in response to the then financial crisis. By purchasing bonds directly from banks, as well as corporations, we provide them with additional funding. This reduces their funding costs and facilitates banks’ capacity to increase credit supply, thus supporting consumption and investment. Hence, we are contributing to economic recovery and to inflation converging to rates consistent with price stability. In particular, the total APP holdings of the Eurosystem currently amount to almost €3 trillion, including the additional envelope decided last March (of €120 billion until the end of 2020). This amount is further augmented by the amount of assets purchased under the PEPP, which reached over €700 billion during 2020. Net asset purchases under the emergency programme will continue flexibly for at least until the end of March 2022 and in any case until it is determined that the pandemic crisis is over, up to a total amount of €1.85 trillion, as we decided at the Governing Council’s meeting on 10 December 2020, taking into account the continued pandemic-related negative effects on inflation and growth. Furthermore, given the need for support over a protracted period, we have decided that the maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2023.

With a view to ensuring that banks have sufficient liquidity and access to funding so that they can lend to households and firms at favourable rates, we deemed necessary to conduct additional pandemic emergency longer-term refinancing operations (PELTROs) and to effectively ease the terms for the third series of targeted longer-term refinancing operations (TLTRO-III). The interest rate on these longer-term operations (together providing liquidity of about €1.75 trillion at the current juncture) was set at negative levels, which in the case of TLTRO-III may even reach –1% for banks that maintain a steady growth rate of new loans to the private sector (PELTROs: –0.25%). Moreover, to facilitate banks’ participation in such operations, which are to be conducted until the end of 2021, we have decided that counterparties should benefit from collateral easing measures and that the range of eligible securities accepted as collateral should be temporarily expanded. In combination with the easing of banking supervision rules, such as allowing banks to operate with a lower capital adequacy ratio during the pandemic period and extending the flexibility towards loan repayments, as well as with the provision of government guarantees to loans, the aforementioned monetary policy measures make a decisive contribution to the protection of borrowers and the support of credit expansion.

Following the adoption of the above measures since the pandemic outbreak, the size of the Eurosystem’s balance sheet has grown from about €4.7 trillion in early 2020 to more than €6.9 trillion in December (over the same period, the balance sheet of the Bank of Greece has increased from around €110 billion to around €175 billion). The effectiveness of our prompt and decisive monetary interventions is evidenced by a normalisation in financial conditions and a strengthening of macroeconomic outcomes. As estimated by the ECB1, the package of these measures could add 1.3 percentage points to euro area GDP growth and 0.8 percentage points to inflation in the period 2020–2022, while it has helped to preserve one million jobs. Without these decisions, we would have faced much lower growth rates and more negative inflation rates than those currently observed.

Nevertheless, there is no room for complacency. We are currently amidst the second wave of the pandemic, which creates renewed uncertainty among citizens. We estimate that this uncertainty will remain elevated until an effective vaccine becomes widely available, which is expected in mid-2021. Until then, the necessary social distancing measures exacerbate the economic fallout of the pandemic and hamper the recovery. In light of the above, fiscal and monetary policies need to remain expansionary and mutually reinforcing, continuing to support citizens’ incomes, output and consumption across the euro area. We, the members of the Governing Council, are ready to adjust the instruments available to the ECB as appropriate in order to ensure that inflation moves on a sustained path towards levels consistent with our primary objective of price stability and that the euro area economy will recover.

In tandem with our monetary policy decisions, which are based on an assessment of financial conditions and current macroeconomic developments, since the beginning of this year we have been reviewing our monetary policy strategy. The aim of the review is to make sure that our strategy is appropriate for delivering on our mandate to maintain price stability. The strategy was last reviewed in 2003 and since then the world has undergone profound changes which call for a re-definition of our strategy. More specifically, a substantial fall in the natural interest rate (i.e. the interest rate at which the monetary policy stance becomes neutral) has been observed, diminishing the scope for an expansionary monetary policy through the conventional interest rate adjustment, as policy rates have reached historically low levels. Furthermore, developments such as the changing financial environment and the rapid digitalisation (including digital currencies), climate change, globalisation, as well as the slowdown in productivity and the ongoing population ageing, pose new challenges for central banks.

One of the issues to be addressed as part of our strategy review is the desirable level of inflation we should be aiming for, in order to ensure price stability in a perfectly symmetric way, thereby reducing downward deviations from the inflation aim. We will also evaluate the appropriate methodology for inflation measurement as well as the methods applied in our economic and monetary analyses. It is very important for our prompt and effective reaction to possible future shocks to fully grasp how inflation expectations are shaped, but also to incorporate the non-standard monetary policy measures that we have implemented over the past few years into our standard toolkit. Last but not least, we must incorporate the lessons learnt from the recent crises, as well as the need to respond to new challenges, so that our strategy becomes as effective as possible both now and in the future.

Our strategy review process is expected to be finalised next year, taking also into account feedback from the general public, as we wish all citizens to understand our mission and our decisions.

In this regard, your personal views on the following topics are indeed valuable:

What does price stability mean for you?

What are your economic expectations and concerns?

What other topics matter to you?

How can we best communicate with you?

We look forward to receiving your views and opinions through your participation in the Simulation Conference, a synopsis of which will be considered by the Governing Council of the ECB. You may also follow the relevant events currently organised by the Eurosystem.

The ECB held on 21 October a virtual event, bringing together a range of civil society organisations, hosted by President Christine Lagarde and Chief Economist Philip Lane. The event was broadcast live on the internet, while a summary report was published after the listening phase. Furthermore, the ECB offered all citizens the opportunity to express their views via the ‘ECB Listens Portal’ to better understand their perspectives on the economy and what they expect from their central bank.

On our part, we have scheduled our own listening event entitled ‘The Bank of Greece Listens’ in early 2021, with the participation of social partners and with the aim of promoting dialogue on the monetary policy strategy.

In closing, I would like to congratulate all those who have made this conference possible.

Jerome H. Powell: Getting Back to a Strong Labor Market

Chair Jerome H. Powell

At the Economic Club of New York 

Today I will discuss the state of our labor market, from the recent past to the present and then over the longer term. A strong labor market that is sustained for an extended period can deliver substantial economic and social benefits, including higher employment and income levels, improved and expanded job opportunities, narrower economic disparities, and healing of the entrenched damage inflicted by past recessions on individuals’ economic and personal well-being. At present, we are a long way from such a labor market. Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity.

The Labor Market of a Year Ago

We need only look to February of last year to see how beneficial a strong labor market can be. The overall unemployment rate was 3.5 percent, the lowest level in a half-century. The unemployment rate for African Americans had also reached historical lows (figure 1). Prime-age labor force participation was the highest in over a decade, and a high proportion of households saw jobs as “plentiful.”1 Overall wage growth was moderate, but wages were rising more rapidly for earners on the lower end of the scale. These encouraging statistics were reaffirmed and given voice by those we met and conferred with, including the community, labor, and business leaders; retirees; students; and others we met with during the 14 Fed Listens events we conducted in 2019.2

Many of these gains had emerged only in the later years of the expansion. The labor force participation rate, for example, had been steadily declining from 2008 to 2015 even as the recovery from the Global Financial Crisis unfolded. In fact, in 2015, prime-age labor force participation—which I focus on because it is not significantly affected by the aging of the population—reached its lowest level in 30 years even as the unemployment rate declined to a relatively low 5 percent. Also concerning was that much of the decline in participation up to that point had been concentrated in the population without a college degree (figure 2). At the time, many forecasters worried that globalization and technological change might have permanently reduced job opportunities for these individuals, and that, as a result, there might be limited scope for participation to recover.

Fortunately, the participation rate after 2015 consistently outperformed expectations, and by the beginning of 2020, the prime-age participation rate had fully reversed its decline from the 2008-to-2015 period. Moreover, gains in participation were concentrated among people without a college degree. Given that U.S. labor force participation has lagged relative to other advanced economy nations, this progress was especially welcome (figure 3).3

As I mentioned, we also saw faster wage growth for low earners once the labor market had strengthened sufficiently. Nearly six years into the recovery, wage growth for the lowest earning quartile had been persistently modest and well below the pace enjoyed by other workers. At the tipping point of 2015, however, as the labor market continued to strengthen, the trend reversed, with wage growth for the lowest quartile consistently and significantly exceeding that of other workers (figure 4).

At the end of 2015, the Black unemployment rate was still quite elevated, at 9 percent, despite the relatively low overall unemployment rate. But that disparity too began to shrink; as the expansion continued beyond 2015, Black unemployment reached a historic low of 5.2 percent, and the gap between Black and white unemployment rates was the narrowest since 1972, when data on unemployment by race started to be collected. Black unemployment has tended to rise more than overall unemployment in recessions but also to fall more quickly in expansions.4 Over the course of a long expansion, these persistent disparities can decline significantly, but, without policies to address their underlying causes, they may increase again when the economy ultimately turns down.

These late-breaking improvements in the labor market did not result in unwanted upward pressures on inflation, as might have been expected; in fact, inflation did not even rise to 2 percent on a sustained basis. There was every reason to expect that the labor market could have strengthened even further without causing a worrisome increase in inflation were it not for the onset of the pandemic.

The Labor Market Today

The state of our labor market today could hardly be more different. Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared. Employment in January of this year was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath (figure 5).

After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948.5 Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce. At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January. In addition, the Bureau of Labor Statistics reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January (figure 6).

Unfortunately, even those grim statistics understate the decline in labor market conditions for the most economically vulnerable Americans. Aggregate employment has declined 6.5 percent since last February, but the decline in employment for workers in the top quartile of the wage distribution has been only 4 percent, while the decline for the bottom quartile has been a staggering 17 percent (figure 7). Moreover, employment for these workers has changed little in recent months, while employment for the higher-wage groups has continued to improve. Similarly, the unemployment rates for Blacks and Hispanics have risen significantly more than for whites since February 2020 (figure 8). As a result, economic disparities that were already too wide have widened further.

In the past few months, improvement in labor market conditions stalled as the rate of infections sharply increased. In particular, jobs in the leisure and hospitality sector dropped over 1/2 million in December and a further 61,000 in January. The recovery continues to depend on controlling the spread of the virus, which will require mass vaccinations in addition to continued vigilance in social distancing and mask wearing in the meantime.

Since the onset of the pandemic, we have been concerned about its longer-term effects on the labor market. Extended periods of unemployment can inflict persistent damage on lives and livelihoods while also eroding the productive capacity of the economy.6 And we know from the previous expansion that it can take many years to reverse the damage.

At the start of the pandemic, the increase in unemployment was almost entirely due to temporary job losses.7 Temporarily laid-off workers tend to return to work much more quickly, on average, than those whose ties to their former employers are permanently severed. But as some sectors of the economy have continued to struggle, permanent job loss has increased (figure 9). So too has long-term unemployment. Still, as of January, the level of permanent job loss, as a fraction of the labor force, was considerably smaller than during the Great Recession. Research shows that the Paycheck Protection Program has played an important role in limiting permanent layoffs and preserving small businesses.8 The renewal of the program this year in the face of another surge in COVID-related job cuts is an encouraging development.

Of course, in a healthy market-based economy, perpetual churn will always render some jobs obsolete as they are replaced by new employment opportunities. Over time, workers and capital move from firm to firm and from sector to sector. It is likely that the pandemic has both increased the need for such movements and brought forward some movement that would have occurred eventually.9

Getting Back to a Strong Labor Market

So how do we get from where we are today back to a strong labor market that benefits all Americans and that starts to heal the damage already done? And what can we do to sustain those benefits over time? Experience tells us that getting to and staying at full employment will not be easy. In the near term, policies that bring the pandemic to an end as soon as possible are paramount. In addition, workers and households who struggle to find their place in the post-pandemic economy are likely to need continued support. The same is true for many small businesses that are likely to prosper again once the pandemic is behind us.

Also important is a patiently accommodative monetary policy stance that embraces the lessons of the past—about the labor market in particular and the economy more generally. I described several of those important lessons, as well as our new policy framework, at the Jackson Hole conference last year.10 I have already mentioned the broad-based benefits that a strong labor market can deliver and noted that many of these benefits only arose toward the end of the previous expansion. I also noted that these benefits were achieved with low inflation. Indeed, inflation has been much lower and more stable over the past three decades than in earlier times.

In addition, we have seen that the longer-run potential growth rate of the economy appears to be lower than it once was, in part because of population aging, and that the neutral rate of interest—or the rate consistent with the economy being at full employment with 2 percent inflation—is also much lower than before. A low neutral rate means that our policy rate will be constrained more often by the effective lower bound. That circumstance can lead to worse economic outcomes—particularly for the most economically vulnerable Americans.

To take these economic developments into account, we made substantial revisions to our monetary policy framework, as described in the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy.11 This revised statement shares many features with its predecessor, including our view that longer-run inflation of 2 percent is most consistent with our mandate to promote maximum employment and price stability. But it also has some innovations.

The revised statement emphasizes that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities. Recognizing the economy’s ability to sustain a robust job market without causing an unwanted increase in inflation, the statement says that our policy decisions will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”12 This means that we will not tighten monetary policy solely in response to a strong labor market. Finally, to counter the adverse economic dynamics that could ensue from declines in inflation expectations in an environment where our main policy tool is more frequently constrained, we now explicitly seek to achieve inflation that averages 2 percent over time. This means 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 in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.

Our January postmeeting statement on monetary policy implements this new framework.13 In particular, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities by $80 billion and $40 billion per month, respectively, until substantial further progress has been made toward our maximum-employment and price-stability goals.

The Broad Responsibility for Achieving Maximum Employment
Seventy-five years ago, in the wake of WWII, the United States faced the challenge of reemploying millions amid a major restructuring of the economy toward peacetime ends.14 Part of Congress’s response was the Employment Act of 1946, which states that “it is the continuing policy and responsibility of the federal government to use all practicable means . . . to promote maximum employment.”15 As later amended in the Humphrey-Hawkins Act, this provision formed the basis of the employment side of the Fed’s dual mandate. My colleagues and I are strongly committed to doing all we can to promote this employment goal.

Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector. The potential benefits of investing in our nation’s workforce are immense. Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families.16 I am confident that with our collective efforts across the government and the private sector, our nation will make sustained progress toward our national goal of maximum employment.

Stefan Ingves at the Riksdag Committee on Finance: Hearing on financial stability

“The pandemic has had a major impact on the economy, both in Sweden and abroad.” This comment was made by Governor Stefan Ingves today when he took part in the Riksdag Committee on Finance’s annual open hearing on financial stability. In addition to the Riksbank Governor, others taking part in the hearing included Minister for Financial Markets and Housing Per Bolund, Finansinspektionen’s Director General Erik Thedéen, and Swedish National Debt Office Director General Hans Lindblad.

Mr Ingves emphasised how the extensive support from central banks, governments and public authorities around the world has contributed to avoiding a global financial crisis. Although the spread of infection is still at a high level and continues to slow down the economic recovery, it is positive that vaccination has begun, as this is important for future prospects. However, Mr Ingves also pointed out that although the challenges arising from the pandemic have been handled well so far, the way forward remains uncertain.

Continued interaction between fiscal and monetary policy is important

Mr Ingves further pointed out that it is important that the different policy areas continue cooperating to aid the recovery. He emphasised that the Riksbank’s measures contribute to a functioning credit supply and to interest rates remaining low. If the crisis becomes more prolonged, more fiscal policy support may be needed, both general measures and measures targeting particularly vulnerable sectors and industries. The Riksbank stands ready to provide with the liquidity necessary to support credit supply. In addition, it is important that banks do what they can to supply sufficient credit to companies and households.

Stefan Ingves: Several risks to financial stability

Mr Ingves also discussed risks in the longer term. These include risks linked to the support measures implemented during the crisis, for instance, both private sector and public sector indebtedness have increased in several countries. Moreover, the support measures can lead to the financial sector counting on always being rescued by governments, central banks and other public authorities, which can lead to greater risk taking. Some risks are in certain aspects greater abroad, for instance, the banking sector in the euro area is in worse condition and the public finances are weaker than in many other countries. But there are also tangible risks in Sweden. Mr Ingves explained that the high level of household indebtedness makes the economy very vulnerable and reducing this vulnerability requires a more extensive review of taxation and housing policy, rather than patching over when problems arise.

The pandemic highlights the importance of good resilience in the financial system

“When the economic situation permits, resilience needs be strengthened again,” said Mr Ingves. If banks have used parts of their capital and liquidity buffers, they will need to gradually build them up again when the crisis is over. In addition, it is important that the established regulatory frameworks are retained and not undermined. It is therefore important that, for instance, the exemption from the amortisation requirement remains temporary. Finally, concluded Mr Ingves, climate-related risks should remain an important part of the supervision of financial institutions and be integrated into the financial stability analysis.

Richard H. Clarida: U.S. Economic Outlook and Monetary Policy

Vice Chair Richard H. Clarida

At the C. Peter McColough Series on International Economics Council on Foreign Relations, New York, New York 

It is my pleasure to meet virtually with you today at the Council on Foreign Relations.1 I regret that we are not doing this session in person, as we did last year, and I hope the next time I am back, we will be gathering together in New York City again. I look forward to my conversation with Steve Liesman and to your questions, but first, please allow me to offer a few remarks on the economic outlook, Federal Reserve monetary policy, and our new monetary policy framework.

Current Economic Situation and Outlook
In the second quarter of last year, the COVID-19 (coronavirus disease 2019) pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. Economic activity rebounded robustly in the third quarter and has continued to recover in the fourth quarter from its depressed second-quarter level, though the pace of improvement has moderated. Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level, supported in part by federal stimulus payments and expanded unemployment benefits. In contrast, spending on services remains well below pre-pandemic levels, particularly in sectors that typically require people to gather closely, including travel and hospitality. In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained, as many people were able to return to work. Inflation, following large declines in the spring of 2020, picked up over the summer but has leveled out more recently; for those sectors that have been most adversely affected by the pandemic, price increases remain subdued.

While gross domestic product growth in the fourth quarter downshifted from the once-in-a-century 33 percent annualized rate of growth reported in the third quarter, it is clear that since the spring of 2020, the economy has turned out to be more resilient in adapting to the virus, and more responsive to monetary and fiscal policy support, than many predicted. Indeed, it is worth highlighting that in the baseline projections of the Federal Open Market Committee (FOMC) summarized in the latest Summary of Economic Projections (SEP), most of my colleagues and I revised up our outlook for the economy over the medium term, projecting a relatively rapid return to levels of employment and inflation consistent with the Federal Reserve’s statutory mandate as compared with the recovery from the Global Financial Crisis (GFC).2 In particular, the median FOMC participant projects that by the end of 2023—a little less than three years from now—the unemployment rate will have fallen below 4 percent, and PCE (personal consumption expenditures) inflation will have returned to 2 percent. Following the GFC, it took more than eight years for employment and inflation to return to similar mandate-consistent levels.

While the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished. The two new SEP charts that we released for the first time following the December FOMC meeting speak to these issues by providing information on how the risks and uncertainties that surround the modal or baseline projections have evolved over time. While nearly all participants continued to judge that the level of uncertainty about the economic outlook remains elevated, fewer participants saw the balance of risks as weighted to the downside than in September. Although a little more than half of participants judged risks to be broadly balanced for economic activity, a similar number continued to see risks weighted to the downside for inflation.

The Latest FOMC Decision and the New Monetary Policy Framework
At our most recent FOMC meetings, the Committee made important changes to our policy statement that upgraded our forward guidance about the future path of the federal funds rate and asset purchases, and that also provided unprecedented information about our policy reaction function. As announced in the September statement and reiterated in November and December, with inflation running persistently below 2 percent, our policy will aim to achieve inflation outcomes that keep inflation expectations well anchored at our 2 percent longer-run goal.3 We expect to maintain an accommodative stance of monetary policy until these outcomes—as well as our maximum-employment mandate—are achieved. We also expect it will be appropriate to maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.

In addition, in the December statement, we combined our forward guidance for the federal fund rate with enhanced, outcome-based guidance about our asset purchases. We indicated that we will continue to increase our holdings of Treasury securities by at least $80 billion per month and our holdings of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward our maximum-employment and price-stability goals.

The changes to the policy statement that we made over the fall bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August.4 In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC’s estimates of “shortfalls [emphasis added] of employment from its maximum level”—not “deviations.” This language means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels. With regard to our price-stability mandate, while the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate. To this end, the new statement conveys the Committee’s judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it “seeks to achieve inflation that averages 2 percent over time,” and—in the same sentence—that therefore “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.” As Chair Powell indicated in his Jackson Hole remarks, we think of our new framework as an evolution from “flexible inflation targeting” to “flexible average inflation targeting.”5 While this new framework represents a robust evolution in our monetary policy strategy, this strategy is in service to the dual-mandate goals of monetary policy assigned to the Federal Reserve by the Congress—maximum employment and price stability—which remain unchanged.6

Concluding Remarks
While our interest rate and balance sheet tools are providing powerful support to the economy and will continue to do so as the recovery progresses, it will take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.


1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. I would like to thank Chiara Scotti for her assistance in preparing these remarks. Return to text

2. The most recent SEP is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

3. See the FOMC statements issued after the September, November, and December meetings, which are available (along with other postmeeting statements) on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htmReturn to text

4. The statement is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htmReturn to text

5. See Jerome H. Powell (2020), “New Economic Challenges and the Fed’s Monetary Policy Review,” speech delivered at “Navigating the Decade Ahead: Implications for Monetary Policy,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo. (via webcast), August 27. Return to text

6. See Richard H. Clarida (2020), “The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution,” speech delivered at the Peterson Institute for International Economics, Washington (via webcast), August 31; and Richard H. Clarida (2020), “The Federal Reserve’s New Framework: Context and Consequences,” speech delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington (via webcast), November 16. 

Brexit countdown for UK financial services sector

With one week to go until the end of the Brexit transition period, the FCA is urging financial services companies to ensure they are ready. Customers should also be aware of any changes that may apply to them. Irrespective of the outcome of the negotiations between the UK and the EU on a free trade agreement, firms will need to be prepared for the end of the transition period.

The Brexit transition period ends at 11pm on 31 December 2020. After this point EU law will no longer apply in the UK. For many financial services businesses, this will mean changes to existing systems and services. The FCA expects firms to have ensured they have assessed the impact on them and their customers, and have taken action so they are ready for the end of the transition period.

As part of the FCA’s preparations the FCA will be making changes to the Financial Services Register. This is to take account of the end of passporting for firms and funds and the start of the temporary permissions regime (TPR). To make these changes the register will be unavailable from late evening 31 December to early morning 4 January.  

More information about this can be found on the FCA website.

Nausicaa Delfas, Executive Director for International at the Financial Conduct Authority said:

‘With only a week to go, firms should have taken all the necessary steps to prepare for the end of the transition period.  At the FCA we have been working closely with other agencies in the UK and Europe, as well as with businesses, to ensure customers are protected and markets work well.’

Firm preparation

Passporting will no longer be possible after the end of the transition period. The FCA, working with other UK authorities, has introduced the temporary permissions regime (TPR). The TPR will allow EEA-based firms passporting into the UK to continue operating in the UK within the scope of their current permissions for a limited period, while they seek full FCA authorisation, if required. The deadline for EEA firms to notify the FCA they want to enter the TPR closes on 30 December 2020.

The TPR will enable various EEA funds to continue to be marketed in the UK for a limited period provided the fund manager has notified the FCA before the window for notification closes on 30 December 2020.

In addition, the FCA and other UK authorities have also introduced the financial services contracts regime (FSCR). This will allow EEA passporting firms that do not enter the TPR to wind down their UK business in an orderly fashion.

When passporting ends at the end of the transition period, the extent to which UK firms can continue to provide services to customers in the EEA will be dependant on local law and local regulators’ expectations. The FCA expects UK firms to take the steps available to them to ensure they act consistently with these local laws and expectations. The FCA is clear that firms’ decisions need to be guided by obtaining appropriate outcomes for their customers, wherever they are based.

Firms should also be prepared for any regulatory changes that will come into force. To help firms adapt to some of the new rules the Treasury has given the FCA new powers to make transitional provisions, known as the temporary transitional powers (TTP). Whilst the FCA has applied the TTP on a broad basis, there are some key exceptions where firms will need to comply with the changed requirements from the end of the transition period. Firms should check the implications of these for their business.

Systems and operational changes

The FCA continues to urge firms to be fully prepared for the end of the transition period. Whilst much progress has been made on preparations, the FCA recognises the challenges for firms in making the systems and operational changes required. The FCA intends to take a pragmatic approach to any issues should they arise, where firms can demonstrate that they have taken all reasonable steps to prepare.

The FCA’s focus during this time will be on our strategic objective of ensuring markets function well. The FCA will continue to monitor both primary market and associated secondary market activities closely, including for any misconduct by market participants, throughout this period during which some market volatility could arise.

This monitoring will include order book reporting, suspicious order and transacting reporting, inside information disclosures, price movement monitoring, and reporting on net short positions and the FCA will use its powers to request information and make enquiries where behaviour that may be abusive or creating a disorderly market is identified.

The FCA is calling on issuers to be particularly vigilant in ensuring procedures, systems and controls for the protection and disclosure of inside information are met and on market participants to be aware of the FCA’s significant detective capabilities.

Customers

For UK based customers, the FCA has put in place plans to ensure any possible disruption to UK financial services is minimised at the end of the transition period. Nevertheless, there will be some changes.  Customers should have been contacted by their firms if they will be impacted by any of these changes.

Customers living in the EEA could be affected if they have a UK provider who cannot continue to operate in the EEA in the same way after the transition period ends.  Many UK providers are planning to continue providing services. For example, some UK banks plan to continue providing services to customers resident in the EEA. If a bank is no longer able to provide services in the EEA, the FCA expects they should give customers sufficient notice that it plans to close an account. This will allow customers to look for alternative banking arrangements.

At the end of the transition period there may also be changes impacting travel insurance products that cover travel between the UK and the EEA. Customers who are likely to be impacted by this should visit the FCA website for information, and may want to check the position with their travel insurance provider in advance.

UK customers will still be able to make payments and cash withdrawals in the EEA after 31 December 2020, but these may be more expensive and could take longer. From 1 January 2021, banks and payment services providers will also have to provide additional information when making payments between the UK and the EEA, which includes the name and address of the payer and payee. If this information is not provided there could be disruption to payments. If customers have important payments, particularly direct debits, going out of their account to a European company, they may want to check these are going through as normal from 1 January 2021.

At the end of the transition period there will also be changes to some of the financial protections for customers. UK customers of a UK firm will continue to have the same access as currently to the Financial Ombudsman Service and the FSCS.

However, for UK customers of an EEA firm that’s operating in the UK under the TPR, or under the FSCR, protections may be different. Customers of EEA firms should also be aware that these firms will not have been authorised or otherwise assessed by UK regulatory authorities before entering into these temporary regimes.

Customers who are unsure whether they are covered by the FSCS or the Financial Ombudsman Service, should get in touch with the financial services provider to find out, or find out more about the TPR and FSCR.

Customers are advised to speak to their financial services providers now about any concerns, and to check the FCA’s updated information, available at: fca.org.uk/consumers/how-brexit-could-affect-you. Information can also be obtained from the Money Advice Service.

RBA Minutes of the December Monetary Policy Meeting

Members participating

Philip Lowe (Governor and Chair), Guy Debelle (Deputy Governor), Mark Barnaba AM, Wendy Craik AM, Ian Harper AO, Steven Kennedy PSM, Allan Moss AO, Carol Schwartz AO, Catherine Tanna

Others participating

Luci Ellis (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), Tony Richards (Head, Payments Policy Department)

Anthony Dickman (Secretary), Ellis Connolly (Deputy Secretary), Alexandra Heath (Head, International Department), Bradley Jones (Head, Economic Analysis Department), Marion Kohler (Head, Domestic Markets Department)

Michele Bullock (Assistant Governor, Financial System), for the paper on the future of money

International economic developments

Members commenced their discussion of the global economy by noting that some potential COVID-19 vaccines were reported as having a high efficacy rate and were nearing approval for emergency use in the United States, United Kingdom and the European Union. It was noted that should these vaccines prove effective in practice and be made widely available on a timely basis, this would reduce downside risks to the medium-term economic outlook.

Nevertheless, infections had risen notably in a number of large advanced economies since September. Hospitalisation rates had exceeded earlier peaks in many countries, and stress was being placed on some healthcare systems. Many governments had responded by tightening containment measures, including the re-introduction of full or partial lockdowns. This had contributed to a welcome reduction in the flow of new cases in Europe in recent weeks, while in the United States, where restrictions had been less stringent, numbers of new cases were yet to slow appreciably.

Members noted that global economic activity had bounced back faster than anticipated in the September quarter, but the tightening in containment measures in the December quarter had resulted in a loss of economic momentum. In Europe, some economies were now expected to contract in the December quarter. Members observed that, once most restrictions were lifted, the level of GDP in many economies had tended to recover to around 4 to 5 per cent below pre-pandemic levels. This sizeable shortfall reflected the remaining restrictions on some services industries as well as risk aversion and cost-cutting by firms, which had weighed on employment and investment.

In Asia, differences in the industry composition of economies explained some of the variation in recovery paths. Economies with large automotive industries had experienced a slower recovery in industrial production, compared with those whose exports of technology and electronics are more important. It was also noted that the composition of fiscal stimulus in China had contributed to the very strong rebound in industrial production there.

Members noted that housing prices in a number of advanced economies had been surprisingly resilient this year, and some economies had seen a notable increase in housing prices in recent months. New Zealand had experienced strong ongoing housing demand from population growth, expatriate buying interest and an earlier easing in lending standards. By comparison, these factors had been less relevant in Australia and, partly as a result, the increase in housing prices in Australia this year had been considerably smaller than in a number of other advanced economies.

Members discussed how global developments had affected Australian trade since the pandemic. Early in the pandemic, weak external demand had depressed exports, while supply disruptions had affected imports (as they had in a number of economies). The imposition by Chinese authorities of import bans and other obstacles to imports of some Australian products, particularly agricultural products and, more recently, coal, had also had an effect. However, it was also noted that Chinese demand for Australian iron ore exports remained firm.

Domestic economic developments

Turning to the domestic economy, members noted that the recovery had established reasonable momentum, aided by the lifting of restrictions in Victoria. Expectations for GDP growth in the September and December quarters had been upgraded over the preceding month, and employment had also recovered faster than anticipated. At the same time, members noted that there continued to be a significant amount of spare capacity in the labour market and the economy more generally. The recovery was still expected to be uneven and protracted, with inflation remaining low. Substantial policy support would therefore be required for a considerable period.

In reviewing recent data, members noted that the rebound in household consumption was well under way and evolving broadly as expected following a record contraction in the June quarter. A bounce-back in spending in Victoria had assisted this, consistent with more consumption possibilities opening up in that state. Indicators such as retail trade, new car sales and payments information indicated that the recovery in consumption would continue in the December quarter; high household savings was also likely to support consumption in the period ahead. At the same time, the ability of households to consume some services would continue to be constrained by pandemic-related restrictions. By the end of the year the level of consumption was still expected to be lower than a year earlier, in line with the experience of some other economies.

Members noted that conditions in the domestic housing market were improving but uneven. Regional housing prices had increased by more than those in capital cities since the onset of the pandemic. There was also considerable variation in changes in housing prices across the capital cities, with conditions in Sydney and Melbourne more subdued than elsewhere in the country. In addition, within Sydney and Melbourne in particular, conditions in the detached housing market were firmer than for higher-density markets. Overall, national housing prices had increased only a little since the outbreak of the pandemic.

Members agreed that an important factor in national housing market conditions had been the slowdown in population growth as a result of the closure of international borders; this had been more consequential in Australia than in many other economies. Members discussed how the decline in net overseas migration had affected conditions in the rental market in particular, with rents falling and rental vacancy rates in inner-city Sydney and Melbourne around their highest levels in many years. Rental vacancy rates were much lower in Perth, where growth in new supply had been relatively modest in recent years and international students accounted for a smaller share of rental housing demand.

Members noted that the recovery in the labour market was more advanced than expected, with employment having grown strongly in October. This was despite a tapering in the JobKeeper program and some restrictions on activity remaining in place in Melbourne during most of the month. Victoria accounted for around half of nationwide employment growth in October, in part because of the pick-up in employment in construction and manufacturing in that state as restrictions began to be eased. Related to the stronger employment outcomes, members also noted that the rebound in the participation rate had been surprisingly swift.

Despite these positive developments, members noted that the unemployment rate had ticked up in recent months and that broader measures of labour underutilisation remained high. Hours worked were around 4 per cent lower than before the pandemic, and many employed workers were still on reduced or zero hours. The recovery in employment and average hours worked for full-time workers had been much more subdued compared with those working part time. Members agreed that, on the whole, there was still a significant amount of spare capacity in the labour market and that this would remain a key policy challenge for some time.

A further indication of spare capacity in the labour market was low wages growth. Members noted that growth in the wage price index slowed to 0.1 per cent in the September quarter to be just 1.4 per cent in year-ended terms. This was the slowest wages growth in the two-decade history of the series. Over recent quarters, the slowdown in growth in wages set in individual agreements largely reflected wage freezes for many private sector employees and some, mostly temporary, wage reductions. The slowdown in award wages growth in the September quarter had been even more pronounced than in individual agreements, in part reflecting deferred increases for many awards. Members also observed that if new collective agreements (mostly enterprise bargaining agreements) were established at lower rates of growth than expiring agreements, this would place further downward pressure on wages growth. It was noted that a substantial tightening in the labour market would be required to lift wages growth and inflation outcomes over the medium term.

Members noted that non-mining business investment was expected to have declined further in the September quarter and the outlook remained weak. Surveys of businesses’ investment intentions indicated that expenditure on machinery and equipment and on non-residential construction would remain weak, although not as weak as expected a few months earlier; investment in machinery and equipment would have declined further in the absence of policy measures designed to encourage some firms to bring forward investment. Members discussed the risk that a prolonged period of weak capital investment could weigh on the economy’s productive capacity over time.

Members concluded their discussion of domestic economic conditions by noting that the unprecedented degree of fiscal and monetary policy stimulus since the outbreak of the pandemic had played a key role in supporting the economy. As part of the national fiscal response, state and territory governments had recently announced welcome additional increases in expenditure; this, combined with lower revenues, had seen the consolidated state and territory budget deficit for 2020/21 increase to around 5 per cent of output. The consolidated deficit across the Australian and state governments in 2020/21 was expected to be around 15 per cent of GDP, a substantial increase from 2019/20. Members agreed that national fiscal settings will provide significant support to the recovery in the period ahead.

International financial markets

Members observed that financial conditions were highly accommodative globally. News of progress in developing effective vaccines had boosted equity markets and had lowered credit risk premiums further during November, notwithstanding rising COVID-19 case numbers and tighter lockdown measures in many jurisdictions.

In the advanced economies, expectations for any further reductions in central banks’ policy rates had been scaled back, partly because of upward revisions to the economic outlook and partly because other policy tools were providing significant stimulus and could be scaled up if needed. At its most recent policy meeting, the US Federal Reserve had judged that immediate adjustments to the pace and composition of its asset purchases had not been necessary. The European Central Bank had signalled that it was likely to expand some of its programs at its upcoming meeting, but a further reduction in its negative policy rate was no longer anticipated by market participants. The Bank of England had announced an expansion of its asset purchase program in November and the Reserve Bank of New Zealand had introduced a program for providing long-term loans to banks. In contrast to previous months, market pricing had suggested that negative policy rates were unlikely to be adopted in either of these two economies.

Yields on long-term government bonds in the advanced economies had risen a little in response to the positive news on COVID-19 vaccines, but had remained at very low levels. Central bank bond buying programs had provided some offset to the effect on yields stemming from other influences, including the ongoing high level of government bond issuance. Members noted that, relative to GDP, the size of the Bank’s balance sheet was at the lower end of the range observed in other countries, although it was now rising steadily under the bond purchase program that had commenced in November.

Members noted that a range of asset prices had been supported by the more positive global outlook and the very accommodative stance of monetary policy. Spreads between corporate and government bond yields had narrowed further. Globally, equity prices had increased strongly following the vaccine developments, rising by at least 10 per cent in many cases, including in Australia. A reduction in uncertainty following the outcome of the US election, and better-than-expected earnings reports in advanced economies, had also supported equity prices.

Chinese government bond yields had increased and the Chinese renminbi had appreciated in recent months. Relatively higher interest rates and China’s recent inclusion in some global benchmark indices had encouraged continued inflows into Chinese bond markets. Also, Chinese authorities had continued to improve foreign access to these markets. Reflecting the better outlook for global growth and trade, many emerging market economies had experienced significant portfolio inflows and appreciating exchange rates.

The US dollar had depreciated during November in response to the improved medium-term outlook for global growth; on a trade-weighted basis it was a little below its level at the start of 2020. The same factors had supported commodity prices and seen the Australian dollar appreciate in November; on a trade-weighted basis the exchange rate had remained around 2 per cent below its peak in early September.

Domestic financial markets

Members noted that the most recent policy package had been working as expected. Money market rates had declined to be close to zero and the yield on the 3-year Australian Government bond had fallen to levels consistent with the Board’s target, aided by the Bank purchasing $5 billion of that bond in November. In addition, $19 billion of longer-dated government bonds had been purchased under the bond purchase program.

The bond purchase program had put downward pressure on bond yields and contributed to a lower exchange rate than otherwise. Yields on 10-year Australian Government Securities (AGS) had declined relative to 10-year government bond yields in other advanced countries in anticipation of the Bank’s bond purchase program. Since the announcement of the program, yields on 10-year AGS had remained at similar levels to those on 10-year US Treasury securities. The spread of semi-government bond yields relative to AGS had increased a little following the release of the state government budgets, but yields had remained at historically low levels. The markets for AGS and semi-government debt had continued to function smoothly.

Members observed that average outstanding interest rates on housing and business loans had declined to historic lows. Since the start of November, announcements of reductions in borrowing rates had largely been for fixed-rate housing loans as well as business loans under the Government’s Coronavirus Small and Medium Enterprises Guarantee Scheme. Some banks had also reduced rates on a range of deposit products.

Demand for housing finance had increased in recent months, particularly for loans to owner-occupiers, and credit to investors had stopped declining. Members noted that, in contrast, demand for business credit had remained weak and business credit had declined since May, unwinding the increase over March and April, when businesses had drawn on credit lines for precautionary reasons. Payments into offset and redraw accounts had remained high in October.

The future of money

Members considered a special paper on the future of money and changes in the way payments are made. They discussed the longer-term trend towards the use of electronic payment methods by households and the apparent acceleration in this trend as a result of the pandemic. Members noted that the shift from cash to electronic payments is further advanced in Australia than in a number of other countries. However, demand for cash as a store of value had continued to grow in Australia and most other advanced economies.

Members discussed different possible design features for a retail central bank digital currency (CBDC) and the associated public policy issues. They noted that there has been significant innovation in the Australian payments system in recent years, including the provision of real-time account-to-account payments that are available on a 24/7 basis. A retail CBDC might assist with some particular use cases, but it could fundamentally change the structure of the financial system and introduce new financial stability risks. It therefore did not appear that a public policy case for a retail CBDC currently existed in Australia. Members noted that there could be stronger arguments in favour of a wholesale CBDC and that it was important for the Bank to continue to conduct research in this area and monitor developments in other jurisdictions.

Considerations for monetary policy

In considering the policy decision, members observed that the global outlook remained uncertain. Infection rates had risen sharply in Europe and the United States and the recoveries in these economies had lost momentum or even reversed. However, the news about vaccines had been positive, which should support the recovery of the global economy. The recovery was also dependent on ongoing support from both fiscal and monetary policy. In labour markets in most countries, hours worked were noticeably below pre-pandemic levels. Inflation remained very low and below central bank targets.

In Australia, the economic recovery was under way and recent data had generally been better than expected. Consumer spending had risen as restrictions were eased, business and consumer confidence had lifted and housing markets had generally proved resilient. Employment had been recovering strongly and the peak in the unemployment rate was likely to be lower than the 8 per cent rate expected a month earlier. Nevertheless, the recovery was still expected to be uneven and protracted, and it remained dependent on significant policy support and favourable health outcomes. It would take some time for output to reach its pre-pandemic level and an extended period of high unemployment was in prospect. The high unemployment rate and excess capacity across the economy more broadly were expected to result in subdued wages growth and inflation over coming years. Given this environment, the Board viewed addressing the high rate of unemployment as an important national priority.

Following the significant policy changes made at the Board’s recent meetings, members decided to maintain the existing policy settings. Members agreed that the Board’s policy measures had lowered interest rates across the yield curve, which was assisting the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. The Term Funding Facility (TFF) was also supporting the supply of credit to businesses. The Board’s decisions were complementary to the significant steps taken by governments in Australia to support jobs and economic growth.

Since the start of the year, the Bank’s balance sheet had increased by around $130 billion. Authorised deposit-taking institutions had drawn down $84 billion of low-cost funding through the TFF and had access to a further $105 billion under the facility. Over the preceding month, the Bank had purchased $19 billion of government bonds under the bond purchase program and a further $5 billion of AGS in support of the 3-year yield target. The Bank remained prepared to purchase bonds in whatever quantity required to achieve the 3-year yield target. Members noted that the Australian banking system, with its strong capital and liquidity buffers, had remained resilient and was helping the economy traverse the current difficult period.

Given the outlook for both employment and inflation, members acknowledged that monetary and fiscal support will be required for some time. The Board remains committed to not increasing the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would have to be materially higher than recent levels. This would require significant gains in employment and a return to a tight labour market. Given the outlook, the Board does not expect to increase the cash rate for at least 3 years. The Board remains of the view that it would be appropriate to remove the yield target before the cash rate itself were increased.

Members agreed to keep the size of the bond purchase program under review. At its future meetings, the Board will closely monitor the effects of the bond purchases on the economy and on market functioning, as well as the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

The decision

The Board reaffirmed the existing policy settings, namely:

  • a target for the cash rate of 0.1 per cent
  • an interest rate of zero on Exchange Settlement balances held by financial institutions at the Bank
  • a target of around 0.1 per cent for the yield on the 3-year Australian Government bond
  • the expanded Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses, with an interest rate on new drawings of 0.1 per cent
  • the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the 6 months following the Board meeting on 3 November 2020.

Luigi Federico Signorini: Globalisation and monetary policy

Luigi Federico Signorini,
Deputy Governor of the Bank of Italy
CEPR International Macroeconomics and Finance (IMF) Programme Meeting Webinar, 10-11 December 2020

It is my privilege to open this meeting of the CEPR’s international finance and macro group. In these unusual times, one must forgo the benefits of informal, real-world interaction. We are now all of us well accustomed to making the most of virtual discussions. Nevertheless, I do hope that we shall soon be able, and have the opportunity, to welcome you here in Rome in person.
Globalisation is one of the key themes for this group. For over two decades, starting from the mid-eighties, the world saw cross-border movements of goods and (especially) capital increase apace, much faster than GDP. It was not, of course, the first instance of such a sustained process. It had happened during the ‘Belle Époque’ of globalisation, between 1870 and the outbreak of the First World War, and again after the Second.
Often, increased exchanges went hand-in-hand with accelerating economic growth, the dissemination of productivity-enhancing technology, the spread of new cultural models, and an internationally open mind-set, especially among the élites—in a knot of reciprocal causation links that is not easy to disentangle.
Globalisation was even stronger last time. At the onset of the global financial crisis, world exports amounted to more than a quarter of global GDP, against 13 per cent just before the Great War. Even more importantly, this time globalization went beyond Europe, North America and other traditionally advanced economies, unleashing powerful forces for economic development in much of continental Asia, for instance, and contributing
to an astonishing reduction in global poverty. After embracing globalisation, each in its own way, the two largest countries in the world started a process of convergence with advanced economies that scarcely anybody would have thought possible fifty years ago.
Many other economies did the same. Institutions and the rules for multilateral cooperation, strengthened after the end of the Cold War, accompanied and supported this process.
Eras of globalisation, however, seem to end abruptly. The Belle Époque waltzed unconscionably into the Great War. The post-WW2 era came to an end with the dissolution 2 of Bretton Woods, the oil crisis and stagflation. The latest period of globalisation closed with a global financial crisis. However, support for it had already been weakening for some
time, in advanced countries at least, in connection with a growing sense of lopsidedness, unfairness and alienation among many people.
Whatever the objective economic details this time (and they are not as one-sided as they are sometimes understood to be), one is tempted to search for similar undercurrents of estrangement during the years that led to the end of the two previous episodes. There are deep and difficult questions about globalisation reversals, which include but are not limited to economic issues. They cannot be discussed here to any meaningful extent.
So let us just look at the facts. International tensions over trade, capital flows and exchange rates have emerged forcefully in the past few years. Multilateralism has been in retreat. The return to a strategic use of customs duties, the difficulties world leaders find in agreeing on shared policy goals, and the problems encountered by the WTO are all signs of this process. Few economists welcome them.
The pandemic is now placing globalisation at an even more anxiety-generating crossroads. One cannot deny that increased flows of people and goods accelerated cross-country contagion. In the short term, as our virtual conference exemplifies, global mobility has shrunk dramatically. In the longer term, a question mark hangs over the international division of labour, with many pointing to a potential trade-off between efficiency and resilience (or safety), and potential tensions between the winners and
losers of reshoring.
If people and governments become convinced once again that it is but a zerosum game, the consequences can be serious. However, as so often in the economics of exchange, it is not a zero-sum game. Good economic reasoning and creative research must be key ingredients of the conversation.
This seminar will benefit from the insights provided by many first-rate economists, and address a number of interesting questions. One paper, for instance, discusses how the switch from a multilateral to a bilateral approach to trade affects the transmission of monetary policy. Another provides evidence on the link between trade, commodity prices, financial markets and monetary policy, through a comparison of the global
transmission of Chinese and US monetary policy. (A pity, though, that the euro area is not covered). Other topics include the impact of capital flows on the real economy, the implications of a dominant currency for monetary cooperation, the effect of a country’s banking structure on the current account, and the way tax havens affect firms’ riskiness. It is a rich menu.
Thanks are due to the organisers, presenters and discussants; to the keynote
speaker; to all of you. Interaction among researchers is important at all times; it is all the more important in times of heightened material, intellectual and policy uncertainty. I wish you two very constructive days of discussion.