Current Economic Issues: Fed Chair Jerome H. Powell

May 13, 2020

Current Economic Issues
Chair Jerome H. Powell

At the Peterson Institute for International Economics, Washington, D.C. (via webcast)


The coronavirus has left a devastating human and economic toll in its wake as it has spread around the globe. This is a worldwide public health crisis, and health-care workers have been the first responders, showing courage and determination and earning our lasting gratitude. So have the legions of other essential workers who put themselves at risk every day on our behalf.

As a nation, we have temporarily withdrawn from many kinds of economic and social activity to help slow the spread of the virus. Some sectors of the economy have been effectively closed since mid-March. People have put their lives and livelihoods on hold, making enormous sacrifices to protect not just their own health and that of their loved ones, but also their neighbors and the broader community. While we are all affected, the burden has fallen most heavily on those least able to bear it.

The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased. Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs. A Fed survey being released tomorrow reflects findings similar to many others: Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March.1 This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future.

This downturn is different from those that came before it. Earlier in the post– World War II period, recessions were sometimes linked to a cycle of high inflation followed by Fed tightening.2 The lower inflation levels of recent decades have brought a series of long expansions, often accompanied by the buildup of imbalances over time—asset prices that reached unsupportable levels, for instance, or important sectors of the economy, such as housing, that boomed unsustainably. The current downturn is unique in that it is attributable to the virus and the steps taken to limit its fallout. This time, high inflation was not a problem. There was no economy-threatening bubble to pop and no unsustainable boom to bust. The virus is the cause, not the usual suspects—something worth keeping in mind as we respond.

Today I will briefly discuss the measures taken so far to offset the economic effects of the virus, and the path ahead. Governments around the world have responded quickly with measures to support workers who have lost income and businesses that have either closed or seen a sharp drop in activity. The response here in the United States has been particularly swift and forceful.

To date, Congress has provided roughly $2.9 trillion in fiscal support for households, businesses, health-care providers, and state and local governments—about 14 percent of gross domestic product. While the coronavirus economic shock appears to be the largest on record, the fiscal response has also been the fastest and largest response for any postwar downturn.

At the Fed, we have also acted with unprecedented speed and force. After rapidly cutting the federal funds rate to close to zero, we took a wide array of additional measures to facilitate the flow of credit in the economy, which can be grouped into four areas.

• First, outright purchases of Treasuries and agency mortgage-backed securities to restore functionality in these critical markets. 
• Second, liquidity and funding measures, including discount window measures, expanded swap lines with foreign central banks, and several facilities with Treasury backing to support smooth functioning in money markets. 
• Third, with additional backing from the Treasury, facilities to more directly support the flow of credit to households, businesses, and state and local governments. 
• And fourth, temporary regulatory adjustments to encourage and allow banks to expand their balance sheets to support their household and business customers.

The Fed takes actions such as these only in extraordinary circumstances, like those we face today. For example, our authority to extend credit directly to private nonfinancial businesses and state and local governments exists only in "unusual and exigent circumstances" and with the consent of the Secretary of the Treasury. When this crisis is behind us, we will put these emergency tools away.

While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks. Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions:

• How quickly and sustainably will it be brought under control? 
• Can new outbreaks be avoided as social-distancing measures lapse? 
• How long will it take for confidence to return and normal spending to resume? 
• And what will be the scope and timing of new therapies, testing, or a vaccine? 

The answers to these questions will go a long way toward setting the timing and pace of the economic recovery. Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.

The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes. But the coronavirus crisis raises longer-term concerns as well.

1. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy.3 
2. Avoidable household and business insolvencies can weigh on growth for years to come. 
3. Long stretches of unemployment can damage or end workers' careers as their skills lose value and professional networks dry up, and leave families in greater debt.4 
4. The loss of thousands of small- and medium-sized businesses across the country would destroy the life's work and family legacy of many business and community leaders and limit the strength of the recovery when it comes. These businesses are a principal source of job creation—something we will sorely need as people seek to return to work. 
5. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.

We ought to do what we can to avoid these outcomes, and that may require additional policy measures. At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way. Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.

Thank you. I look forward to our discussion.


https://www.federalreserve.gov/newsevents/speech/powell20200513a.htm?fbclid=IwAR0ZrRkqMbUqbmzWnv4l5MG0Fwqns_nD1eThWL-PoRe5zSCWLdsHU5_uRX4

Fed Chairman Powell Belongs 'On a Pedestal'

"I always had Paul Volcker on a pedestal in terms of Fed chairmen," Buffett said. "[Current Fed Chairman] Jay Powell, in my view, belongs with him on that pedestal," he added. "They [the Fed] acted with unprecedented speed and determination" to prop up the economy in the wake of COVID-19 crisis. Regarding the massive expansion of the Fed's balance sheet, he said, "We don't know the consequences of doing that, but we do know the consequences of doing nothing, and we owe the Fed a great thank you."

Among the various initiatives launched by the Fed to prop up the U.S. economy in the midst of the crisis are:

• Primary Market Corporate Credit Facility (PMCCF)
• Secondary Market Corporate Credit Facility (SMCCF)
• Commercial Paper Funding Facility (CPFF)
• Money Market Mutual Fund Liquidity Facility
• Paycheck Protection Program Liquidity Facility (PPPLF)
• Main Street Lending Program
• Municipal Liquidity Facility (MLF)

 

Later, in response to a shareholder question about whether Berkshire is considering lending out its large and growing cash hoard, Buffett said: "This is a great time to borrow money. It may not be a good time to lend money." Noting that corporate debt issuance has proceeded at a record pace as the Fed has provided liquidity, he asserted, "We are not in the business of subsidizing companies with [our] shareholder money."


https://www.investopedia.com/5-takeaways-from-the-2020-berkshire-hathaway-annual-meeting-4843875

‘Balancing of raising rates too much versus not enough’

‘Balancing of raising rates too much versus not enough’
November 16, 2018, Friday

WASHINGTON: The US central bank is aiming to prolong the economic expansion but must balance the risk of raising interest rates too much or not enough, Federal Reserve chairman Jerome Powell said.

Amid increasing concerns in financial markets that the Fed will have to become more aggressive to head off inflation, Powell likened the job to walking in a dark room full of furniture.

In a discussion about the economy with Dallas Federal Reserve Bank President Robert Kaplan, Powell said the central bank is trying to steer between two common errors.

Holding the benchmark lending rate too low for too long could allow inflation to gain a foothold, he cautioned.

But the “other mistake – and we had plenty of advice to do this – is to raise rates too soon, and prematurely terminate an expansion.

“We haven’t done that,” Powell said.

However, “We’re at a point now where we have to take both of those risks very seriously, and that’s why we’ve been raising rates quite gradually.”

Economists almost unanimously expect the fourth rate increase of the year in December, but with a recent report showing wages finally beginning to rise, they are watching for indications about the likely pace of moves in 2019.

The Fed has repeatedly said it is likely to continue to raise rates gradually, with inflation holding right around its two percent target despite very low unemployment and continued job gains.

But Powell stressed that officials have not made the decision yet and will watch incoming data.

Likening the policymaking to “walking through a room full of furniture and the lights go off,” Powell asked, “What do you do? You slow down, you stop probably and feel your way. It’s not different with policy.”

The Fed chief also noted that the global economic outlook is slightly less optimistic this year.

There have been “growing signs of bit of a slowdown, and it is concerning,” he said.

Asked about the impact of President Donald Trump’s aggressive trade policies on the economy, Powell said while officials hear complaints from businesses, the effect of higher tariffs have not yet showed up in lower growth or higher inflation.

“We’re very pleased about state of the economy right now,” he said.

“If you look down the road you see challenges ahead” and “we have to be thinking about how much further to raise rates and the pace at which we will raise rates.”

Starting in December, Powell will hold a press conference after every policy meeting, rather than just four times a year, which he said means markets will have to get used to the possibility a rate move could come at any time. — AFP

http://www.theborneopost.com/2018/11/16/balancing-of-raising-rates-too-much-versus-not-enough/

A rate hike in US will lead to flow of money from emerging markets. Emerging markets are vulnerable to negative risks.

Falling rupee depreciates 17 paise at 68.73/$

India Infoline News Service

November 24, 2016

The Indian rupee ended at lowest level today since August 28, 2013. The Indian Rupee closed lower by 17 paise at 68.73/$ on Thursday.

The Indian rupee ended at its lowest level today since August 28, 2013. The rupee hit a record low of 68.86 per dollar on Thursday. The rupee crashed to nearly a 39-month low of 68.84 amid sustained foreign fund outflows and the greenback's surge in overseas markets.

The rupee breached the 68.80 mark as upbeat economic data strengthened the prospect for higher US interest rates, while the dollar's bull run continued as US bond yields hovered near multi-year highs.

The rupee has fallen against the dollar since Donald Trump won the presidential election in the US on November 9, 2016 from its 66.43 level, it reached the 68.8325 mark today.

On the global front, Federal Reserve chair Janet Yellen has announced that trump's election has done nothing to change the federal reserve's plans for a rate increase "relatively soon". A rate hike in US will lead to flow of money from emerging markets leaving their currencies and assets vulnerable to the negative risks.

Chinese Yuan is also sinking, with values tumbling to a record low of 6.9378 against US dollar at one point of time yesterday in the offshore markets. US dollar index will witness further gains, with values are expected to hit 105 in the coming weeks. Euro seems to be the most vulnerable, influenced by the uncertainty over Italian constitutional referendum in the first week of December.

The Indian Rupee closed lower by 17 paise at 68.73/$ on Thursday. The local unit hit a high of 68.57/$ and a low of 68.83/$ today.

The Reserve Bank of India’s (RBI) reference rate for the dollar stood at 68.65 while for the Euro it was 72.38. The RBI’s reference rate for the Yen stood at 60.90; reference rate for the Great Britain Pound (GBP) stood at 85.3600.


http://www.indiainfoline.com/article/news-top-story/falling-rupee-depreciates-17-paise-at-68-73-rupee-116112400393_1.html

A plea for help: How China asked the Fed for its stock crash play book

 March 22, 2016, Tuesday

WASHINGTON: Confronted with a plunge in its stock markets last year, China’s central bank swiftly reached out to the US Federal Reserve, asking it to share its play book for dealing with Wall Street’s ‘Black Monday’ crash of 1987.

The request came in a July 27 email from a People’s Bank of China official with a subject line: “Your urgent assistance is greatly appreciated!”

In a message to a senior Fed staffer, the PBOC’s New York-based chief representative for the Americas, Song Xiangyan, pointed to the day’s 8.5 per cent drop in Chinese stocks and said “my Governor would like to draw from your good experience.”

It is not known whether the PBOC had contacted the Fed to deal with previous incidents of market turmoil.

The Chinese central bank and the Fed had no comment when reached by Reuters.

In a Reuters analysis last year, Fed insiders, former Fed employees and economists said that there was no official hotline between the PBOC and the Fed and that the Chinese were often reluctant to engage at international meetings.

The Chinese market crash triggered steep declines across global financial markets and within a few hours the Fed sent China’s central bank a trove of publicly-available documents detailing the US central bank’s actions in 1987.

Fed policymakers started a two-day policy meeting the next day and took note of China’s stock sell-off, according the meeting’s minutes. Several said a Chinese economic slowdown could weigh on America.

Financial market contagion from China was one of the reasons cited by the Fed in September when it put off a rate hike that many analysts had expected, a sign of how important China has become both as an industrial powerhouse and as a financial market.

The messages, which Reuters obtained through an Freedom of Information Act request, show how alarmed Beijing has become over the deepening financial turmoil and offer a rare insight into one of the least understood major central banks.

The exchanges also show that while the two central banks have a collegial relationship, they might not share secrets even during a crisis.

“Could you please inform us ASAP about the major measures you took at the time,” Song asked the director of the Fed’s International Finance Division, Steven Kamin in the July 27 email.

The message registered in Kamin’s account just after 11 a.m. in Washington. Kamin quickly replied from his Blackberry: “We’ll try to get you something soon.”

What followed five hours later was a 259-word summary of how the Fed worked to calm markets and prevent a recession after the S&P 500 stock index tumbled 20 percent on Oct. 19, 1987.

Kamin also sent notes to guide PBOC officials through the many dozens of pages of Fed transcripts, statements and reports that were attached to the email.

All of the attached documents had long been available on the Fed’s website and it is unclear if they played a role in shaping Beijing’s actions.

Kamin’s documents detail how the Fed began issuing statements the day after the market crash, known as Black Monday, pledging to supply markets with plenty of cash so they could function.

By the time Song wrote to Kamin, China had spent a month fighting a stock market slide and many of the actions taken by the PBOC and other Chinese authorities shared the contours of the Fed’s 1987 game plan. — Reuters

Read more: http://www.theborneopost.com/2016/03/22/a-plea-for-help-how-china-asked-the-fed-for-its-stock-crash-play-book/#ixzz43i5QBQDZ

A History of the Fed Funds Rate Since 1979

The Best Video to comprehend how the Economic Machine Works.

Published on 22 Sep 2013

Economics 101 -- "How the Economic Machine Works."

Created by Ray Dalio this simple but not simplistic and easy to follow 30 minute, animated video answers the question, "How does the economy really work?" Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.


To learn more about Economic Principles visit: http://www.economicprinciples.org.


[Also Available In Chinese] 经济这台机器是怎样运行的: http://www.youtube.com/watch?v=-ZbeYe...

The FED raises interest rate by 0.25%.

After 7 years of near zero interest rate, the Fed raises interest rate by 0.25% from 0.25% to 0.5%.

Reasons given for raising interest rate today are:

• GDP growing at 2% to 2.5% sustainably for some time.
• Employment has dropped from 10% to 5%.
• Inflation is still below the 2% target at 1.3%, but the Fed wants to be ahead of the curve.

To understand the action of the Fed better, watch this very instructive video on the yield curve.


What is a yield curve?
https://youtu.be/mXiwY_e4nC0?list=PLD3EB06EC4A19BFB8


For those who wish to understand the Fed better, watch this video.

What is the FED?
https://youtu.be/2QGqXeDOkIU?list=PLECECA66C0CE68B1E


US economy has improved.  Consumer spending, autocar buying and housing sector activities are up.  Wages have not risen much so far.



Read also this very good post:
http://unclezmalaysia.blogspot.my/2015/12/300pm-ny-time-wednesday-16-december-2015.html#comment-form

A Brief History of the Federal Reserve of U.S.

Click here for bigger image
http://www.nytimes.com/imagepages/2008/01/19/magazine/20bernanketimeline.ready.html

Who owns the Federal Reserve

The Federal Discount Rate, Repo and Federal Reserve Balance Sheet

Why The Fed Can't Be Counted On To Save The Economy

Written by Jim Powell - Forbes
Wednesday, December 21, 2011

The Federal Reserve was established in 1913 supposedly to maintain economic stability, but it presided over America’s worst depression (1930s), the worst peacetime inflation (mid-1960s to mid-1980s) and probably the worst asset bubble and bust (early 2000s to the present). In addition, there have been 18 recessions or depressions during the Fed era, generally the result of prior inflations.

How could such a problematic track record be possible? The Federal Reserve was billed as an improvement over the gold standard. For starters, maintaining economic stability is at best a central bank’s second priority after doing whatever might be necessary to support government financing activities in war and peace, which can conflict with the goal of maintaining economic stability. Moreover, there are congressional directives, such as the Employment Act of 1946 that makes the Fed responsible for achieving “full” employment.

Over the years, the Fed has been directed to achieve more and more conflicting priorities, including economic growth, price stability, interest-rate stability, financial market stability and exchange?rate stability as well as government funding and full employment. Multiple objectives have made the Fed’s behavior more unpredictable, because nobody knows what the top priority is going to be – or for how long. Consequently, it’s more difficult for people to make decisions \about business and personal finances.

Read Full Article http://www.forbes.com/sites/jimpowell/2011/12/20/why-the-fed-cant-be-counted-on-to-save-the-economy/

The Economic Climate (11): Fed and Money Supply

The agency in charge of climate control is the Federal Reserve System, also known as the Fed. 

It has a special way of heating things up and cooling things down - not by blowing on them, but by adding and subtracting money.  Given its huge importance, it's amazing how few people know what the Fed is all about.

In a survey from several years ago, some people said the Federal Reserve was a national park, while others thougth it was a brand of whiskey.

In fact, it's the central banking system that controls the money supply. (Monetary policy)



Whenever the economy is cooling off too much, the Fed does 2 things. 

(1)  It lowers the interest rates that banks must pay when they borrow money from the government. 

• This causes the banks to lower the interest rates they charge to their customers, so people can afford to take out more loans and buy more cars and more houses. 
• The economy begins to heat up.

(2)  The Fed also pumps money directly into the banks, so they have more to lend. 

• This pumping of money also causes interest rates to go down. 

And in certain situations, the government can spend more money and stimulate the economy the same way you do every time you spend money at a store. (Fiscal policy)



If the economy is too hot, the Fed can take the opposite approach:  raising interest rates and draining money from the banks. 

This causes the supply of money to shrink , and interest rates go higher. 

• When this happens, bank loans become too expensive for many consumers, who stop buying cars and houses. 
• The economy starts to cool off. 
• Business lose business, workers lose jobs, and store owners get lonely and slash prices to attract customers.

Then at some point, when the economy is thoroughly chilled, the Fed steps in and heats it up again.  The process goes on endlessly, and Wall Street is always worried about it.

The Economic Climate (10): The Government and the Fed

The US federal government is much bigger than it was during the last Great Depression. 

Back then, it didn't have much economic clout. 

• There was no welfare, no social security, no housing department, none of the hundreds of departments that exist today. 
• In 1935, the entire federal budget was $6.4 billion, about 1/10th of the total US economy. 
• In 1995, it was $1.5 trillion, and nearly 1/4 of the total economy.

An important divide in US:  As of 1992, more people worked in local, state, and federal governments than in manufacturing.  This so-called public sector pays so many salaries and pumps so much money into the economy that it keeps the economy out of the deep freeze.  

• Whether business is bad or good, millions of government employees, social security recipients, and welfare recipients still have money to spend. 
• And when people get laid off, they get unemployment compensation for several months while they look for another job.

The dark side of this story is that the government has gotten out of whack, with huge budget deficits that

• soak up investment capital and
• keep the economy from growing as fast it as once did. 

Too much of a good thing has become a bad thing.

The agency in charge of climate control is the Federal Reserve System, also known as the Fed.