Tag Archives: inflation

Governor Christopher J. Waller: The Economic Outlook and Monetary Policy

At The Global Interdependence Center’s 39th Annual Monetary and Trade Conference, The LeBow College of Business, Drexel University, Philadelphia, Pennsylvania (via webcast)

Thank you, Kathleen, and thank you, George and the Global Interdependence Center, for the invitation to speak to you this afternoon. I am with you to talk about my outlook for the U.S. economy and the implications for monetary policy.1 In the last week we have received employment and inflation reports that have garnered a lot of attention. Incorporating this information into my outlook, I have two messages today. The first is that, despite an unexpectedly weak jobs report, the U.S. economy is hitting the gas and continuing to make a very strong recovery from the severe COVID-19 recession. Let’s remember, and this applies to latest inflation data too, that a month does not make a trend—the trend for the economy is excellent. My second message is that, despite the unexpectedly high CPI inflation report yesterday, the factors putting upward pressure on inflation are temporary, and an accommodative monetary policy continues to have an important role to play in supporting the recovery.

The pandemic and resulting public health response led to the sharpest drop in employment and output the United States has likely ever experienced—22 million jobs lost in eight weeks and an annualized decline of 30 percent in real gross domestic output for the second quarter of 2020. These numbers are simply staggering, and they left us in a deep, deep hole. Not so long ago, it seemed like the economic damage from COVID-19 might be with us for a long time, and that a full recovery could take many years. But thanks to the rapid development of vaccines and aggressive fiscal and monetary policy, the economy is recovering much faster than anyone expected six months ago.

I said a few weeks ago that the economy was ready to rip, and in many respects, that is exactly what it is doing. The initial estimate of first quarter real gross domestic product (GDP) growth came in at a 6.4 percent annual rate, surpassing the level of output in the first quarter of 2020, before the full force of COVID-19 hit the economy. Second-quarter growth is likely to be as much as 8 percent, and the prospects are good that GDP will be close to trend output by the end of 2021. New home sales continue to be strong. We are seeing robust household spending on durable goods despite supply bottlenecks that I will discuss in a moment. Surveys of purchasing managers point to continued solid growth in both manufacturing and business services.

So, what about that jobs report? That thud you heard last Friday was the jaw of every forecaster hitting the floor. It was a big surprise for me and most people, but it probably should not have been, because it fits with what we have been hearing from businesses about labor supply shortages. GDP is back to its pre-pandemic level, but we have recovered only 14 million of the 22 million jobs lost last spring.

To fully understand how the labor market is performing, I like to refer to the Federal Reserve Bank of Atlanta’s labor market distribution spider chart.2 The chart plots data for 15 different labor market indicators in an easy-to-read manner. Using this chart, you can compare all these indicators for February 2020, April 2020, and March 2021. Looking at these months allows one to compare the very healthy labor market of February 2020 with the depths of the pandemic decline in April 2020 and see both how well we have rebounded since then and how much farther we still have to go.

The takeaway from that chart is that the labor market has recovered on many dimensions, such as hiring plans, job openings, quits rates, and firms unable to fill job openings. But on other dimensions, the labor market is far from recovering to its pre-pandemic level. Employment, as I said, is still below where it was in February 2020, by 8 million jobs. The unemployment rate is still 2.5 percentage points higher than it was in February 2020, and we know that it is even worse for some groups—nearly 10 percent for Black workers and nearly 8 percent for Hispanics. The employment-to-population ratio continues to be depressed from February 2020. The upshot is that several measures of labor market conditions have fully recovered, but other measures indicate that the overall labor market has a long way to go to get back to full strength. In short, some of the labor market’s cylinders are firing away, and some are still sputtering, so monetary accommodation continues to be warranted.

This chart, like the disappointing jobs report for April, shines a light on a current puzzle characterizing the U.S. labor market—a lot of job openings, but high unemployment rates and a low labor force participation rate. We hear repeatedly from our business contacts about firms boosting wages yet still being unable to attract workers.3 While clearly this is a real problem for some firms at the moment, I believe this mismatch is temporary.

I think of the current problem as follows. When the pandemic hit, both labor demand and labor supply fell dramatically. The combination of widespread vaccines and fiscal and monetary stimulus caused consumer demand to recover sharply. This situation, in turn, caused labor demand to rebound quickly, particularly in goods-producing industries. However, due to factors like continued fears of the virus, the enhanced unemployment insurance, child-care issues, and early retirements, labor supply has not rebounded in the same fashion, which led to a situation with excess demand for labor and upward pressure on wages.4 And that is exactly what we saw in the April jobs report. Average hourly earnings rose 20 cents in April for private-sector nonsupervisory workers, to $25.45.

But it is likely the labor supply shortage will be temporary. As vaccinations continue to climb, fears of reentering the labor force should decline. By September, most schools and daycare facilities are expected to fully reopen, resolving recent child-care issues for many families. Finally, the enhanced unemployment benefits passed in response to the pandemic expire in September, and research has shown repeatedly that the job-finding rate spikes as unemployment benefits run out.5 Thus, while labor demand is currently outrunning labor supply, supply should catch up soon.

Now let me turn to the other leg of the Fed’s dual mandate, price stability. That second thud you heard yesterday was forecasters’ bodies following their jaws to the floor after the CPI report was released. It was a surprise, but a look at its causes doesn’t alter my fundamental outlook, which is that the main pressures on inflation are temporary.

First, let me address concerns that strong growth threatens to unleash an undesired escalation in inflation. In August 2020, the Federal Open Market Committee (FOMC) adopted a new policy framework that includes flexible average inflation targeting and a policy stance based on economic outcomes as opposed to economic forecasts.

Flexible average inflation targeting means we aim to have inflation overshoot our 2 percent longer-run goal if inflation had been running persistently below target. Given that we missed our inflation target on the low side consistently for the past eight years or so, the FOMC has said that it will aim to moderately overshoot its inflation target for some period but then have it return to target. Our willingness to aim for above-target inflation also means we will not overreact to temporary overshoots of inflation—we need to see inflation overshoot our target for some time before we will react.

An outcomes-based policy stance means that we must see inflation before we adjust policy—we will not adjust based on forecasts of unacceptably high inflation as we did in the past. Call this the “Doubting Thomas” approach to monetary policy—we will believe it when we see it.

We asked to see it, and lo and behold, we are now starting to see inflation exceeding our inflation target. But the critical question is: for how long? Although inflation is starting to exceed our 2 percent target, in my view, this development is largely due to a set of transitory factors that are occurring all at once. I can think of at least six.

First, there is what we economists call “base effects,” which is the simple arithmetic of what happens when the very low inflation readings of the first half of 2020 fall out of our 12-month measure of inflation. That adjustment will be over in a few months. A second temporary factor is higher energy prices, which have rebounded this year as the economy strengthens but are expected to level off later this year. Retail gasoline prices have jumped in some areas due to the disruption of the Colonial Pipeline, but the effect on inflation should be temporary also.

A third factor is the significant fiscal stimulus to date. Stimulus checks put money in people’s pockets, and when they spend it, there will be upward pressure on prices. But when the checks are gone, the upward pressure on prices will ease.

A fourth factor is a reversal of the very high savings that households have built up over the past year. As households draw down these savings, demand for goods and services will increase, which again will put upward pressure on prices. But, just like stimulus checks, once the excess savings is gone, it is gone, and any price pressures from this factor will ease.

A fifth factor is supply bottlenecks that manufacturers and importers are currently experiencing; supply chain constraints are boosting prices, particularly for goods—less so for services. One strength of a capitalist system is that markets adjust. If demand and prices rise for a product, supply will follow, and bottlenecks will dissipate. So once again, price pressures induced by bottlenecks should reverse as supply chains catch up and orders get filled.

Finally, the excess demand for labor I described earlier is likely to continue to push wages up in the next couple of months. How much of this increase gets passed through to prices is unknown, but some of it will. However, as I argued earlier, once labor supply catches up, this wage pressure should ease.

I expect that all of these factors will cause inflation to overshoot our 2 percent longer-run goal in 2021. But they will not lead to sustained, high rates of inflation. Financial markets seem to think the same—5-year breakeven inflation expectations are around 2.5 percent, and 5-year, 5-year-forward measures are around 2 percent, when adjusted for the difference between CPI (consumer price index) and PCE (personal consumption expenditures) inflation rates.6 Hence, markets do not believe the current factors pushing up inflation will last for long.

While I fully expect the price pressure associated with these factors to ease and for some of the large increases in prices to reverse, it may take a while to do so. Shortages give producers pricing power that they will be reluctant to let go of right away. Wage increases for new workers may cause firms to raise wages for existing workers in order to keep them. Consequently, there may be knock-on effects from the current wage increases. The pandemic has also caused firms to restructure their supply chains, and, as a result, bottlenecks may last longer than currently anticipated as these supply chains are rebuilt. There are also asymmetric price effects from cost shocks—prices go up very quickly but often tend to come down more slowly, as consumers slowly learn that the bottlenecks have gone away.

For these reasons, I expect that inflation will exceed 2 percent this year and next year. After that, it should return to target. And in my view, this fluctuation is okay—our new framework is designed to tolerate a moderate overshoot of inflation for some time as long as longer-term inflation expectations remain well-anchored at 2 percent.

Before I turn to the implications of all this for monetary policy, a word about the housing market. As I said earlier, housing is a bright spot in the economy that is encouraging investment and lifting household wealth, which is all good, but with memories of recent history in mind, the fast growth in housing prices in most areas of the United States does bear close watching. Housing is becoming less affordable, and that price increase has the biggest effect on low-income individuals and families who have struggled the most since last spring and who are always the most vulnerable to rising rents and home prices. Prices for lumber and other inputs for housing are skyrocketing, and while that occurrence is not having a significant effect on inflation, it is limiting the supply of new homes and helping feed the house price boom. Fortunately, the banking system is strong and resilient—going through multiple Fed stress tests and a tough, real-life stress test this past year. Nevertheless, I am watching this sector closely for signs of stress and will continue to do so.

So, in summary, the economy is ripping, it is going gangbusters—pick your favorite metaphor. But we need to remember that it is coming out of a deep hole, and we are just getting back to where we were pre-pandemic. Labor market indicators are more mixed with 8 million workers still without jobs. But many of the problems holding back labor supply will dissipate over time, and we should return to the robust labor market we had in February 2020. Inflation is currently being driven above our 2 percent inflation target but is expected to return to target in subsequent years as transitory inflation shocks fade.

Highly accommodative monetary policy, in conjunction with unprecedented fiscal support, has supported a rapid recovery from a uniquely sharp, pandemic-caused recession. The improving economy is helping repair the significant economic damage suffered by individuals, families, and businesses, but there is still a way to go before we fully recover.

In light of that fact, I expect the FOMC to maintain an accommodative policy for some time. We have said our policy actions are outcome based, which means we need to see more data confirming the economy has made substantial further progress before we adjust our policy stance, because sometimes the data does not conform to expectations, as we saw last Friday. The May and June jobs report may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our policy stance. We also need to see if the unusually high price pressures we saw in the April CPI report will persist in the months ahead. The takeaway is that we need to see several more months of data before we get a clear picture of whether we have made substantial progress towards our dual mandate goals. Now is the time we need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises.

Thank you for the opportunity to speak to you, and I would be happy to respond to your questions.

Riksbank: Minutes of the Monetary Policy Meeting held on 26 April

The recovery is well underway, but it will take time before inflation is more permanently close to the target of 2 per cent. Continued expansionary monetary policy is therefore needed to support the economy and inflation. At the monetary policy meeting on 26 April, the Executive Board of the Riksbank decided to hold the repo rate unchanged at zero percent and it is expected to remain at this level in the years to come. The Riksbank is also continuing to purchase assets within the envelope of SEK 700 billion and to offer liquidity within all the programmes launched in 2020.

The recovery is continuing in the global economy despite an increase in the spread of infection. Rapid and powerful fiscal and monetary policy measures abroad and in Sweden have mitigated the economic downturn and prevented a financial crisis. The economic outlook is somewhat brighter now that at the monetary policy meeting in February. But at the same time, the board members noted that the crisis has resulted in a divergence across countries, sectors and various groups in the labour market. Parts of the service sectors are still weighed down by the restrictions. The ongoing vaccinations are an important condition for slowing down the spread of infection, easing the restrictions and enabling production in contact-intensive service sectors to pick up again.

The board members pointed out that there will be substantial volatility in inflation during the coming year, as a result of the pandemic and volatile energy prices. In this context, the importance of longer-term inflation expectations remaining stable at 2 per cent was also pointed out.

The recovery in the Swedish economy is well underway, but cost pressures are expected to rise relatively slowly and, as in the February forecast, it will take time before inflation is more permanently close to the target of 2 per cent. It is the assessment of the Executive Board that continued expansionary monetary policy will be needed over the coming years to support the economy and bring inflation close to the target more permanently. The members were therefore in agreement on leaving the repo rate unchanged at zero per cent and on the distribution of asset purchases during the third quarter of 2021. Several stressed the importance of, as announced, utilising the entire envelope for asset purchases of SEK 700 billion in 2021 and after that keeping the holdings more or less unchanged over next year. This is to avoid the risk of an unwanted tightening of financial conditions.

The members also discussed how monetary policy may be adapted if economic developments turn out differently to the main scenario. Several noted that if the recovery is stronger than expected and inflation overshoots the target, this does not need to be a reason to make monetary policy less expansionary. If monetary policy needs to be made more expansionary, a few members pointed out that a rate cut is fully possible.

At the meeting, some members highlighted the risks associated with developments in the housing market and underlined how important it is that Sweden gets to grips with existing structural problems in the housing market.

RBNZ: Monetary Stimulus Continued

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

The global economic outlook has continued to improve since the February Monetary Policy Statement. Ongoing fiscal and monetary stimulus are continuing to underpin the global recovery in economic activity. However, economic uncertainty remains elevated and divergences in economic growth both within and between countries are significant. New Zealand’s commodity export prices continue to benefit from robust global demand.

Economic activity in New Zealand slowed over the summer months following the earlier rebound in domestic spending. Short-term data continues to be highly variable as a result of the economic impacts of COVID-19.

The planned trans-Tasman travel arrangements should support incomes and employment in the tourism sector both in New Zealand and Australia. However, the net impact on overall domestic spending will be determined by the two-way nature of this travel. The extent of the dampening effect of the Government’s new housing policies on house price growth, and hence consumer price inflation and employment, will also take time to be observed.

Overall, our medium-term outlook for growth remains similar to the scenario presented in the February Statement. This outlook remains highly uncertain, determined in large part by both health-related restrictions, and business and consumer confidence.

Some temporary factors are leading to specific near-term price pressures. These factors include disruptions to global supply chains and higher oil prices. However, the Committee agreed that medium-term inflation and employment would likely remain below its remit targets 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 was prepared to lower the OCR if required.

Federal Reserve issues FOMC statement March 2021

FOMC statement: The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Implementation Note issued March 17, 2021

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

Federal Reserve issues FOMC statement – December 16, 2020

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

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

Implementation Note issued December 16, 2020

Strong short term support for EUR/USD at 1.11

Strong short term support for EUR/USD at 1.11

The most favorite currency pair remains unable to gather traction on Monday, relegating EUR/USD to the 1.1100 neighbourhood the Wall Street open.
Despite the prevailing selling interest on EUR, the forex pair manages quite well to keep the 1.1100 handle, a break of which could allow a re-visit of Friday’s lows in the 1.1080 region. The 100 hour MA has moved to 1.1065. The 38.2% is also at that level as is the high level from Feb 26 and the low from Feb 19. If there is a target on the downside today where support buyers should really have interest, it would be against that level.
Crude oil prices are intensifying their decline, hurting the riskier assets while the demand for the US dollar remains solid but not very strong.
Meanwhile ECB’S Villeroy states that Eurozone inflation remains too low.