Bank of Japan’s Economic Outlook

The monetary policy statement is at http://www.boj.or.jp/en/announcements/release_2013/k130522a.pdf. CPI is still negative, but “some indicators suggest a rise in inflatoin expectations.” The outlook:

“Japan’s economy has started picking up.  Exports have stopped decreasing as overseas  economies have been moving out of the deceleration phase that had continued since last year  and are gradually heading toward a pick-up.  Business fixed investment continues to show  resilience in nonmanufacturing and appears to have stopped weakening on the whole.   Public investment has continued to increase, and housing investment has generally been  picking up.  Private consumption has seen increased resilience, assisted by the improvement  in consumer sentiment.  Reflecting these developments in demand both at home and abroad,  industrial production has stopped decreasing and signs of picking up have become  increasingly evident.  Meanwhile, financial conditions are accommodative.  On the price  front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh  food) has been negative, due to the reversal of the previous year’s movements in energy-related and durable consumer goods.  Some indicators suggest a rise in inflation  expectations.

With regard to the outlook, Japan’s economy is expected to return to a moderate recovery  path, mainly against the background that domestic demand remains resilient due to the effects  of monetary easing as well as various economic measures, and that growth rates of overseas  economies gradually pick up.  The year-on-year rate of change in the CPI is expected to  register smaller declines for the time being, and thereafter is likely to gradually turn positive.”

Also of interest:

“Mr. T. Kiuchi proposed that the Bank will aim to achieve the price stability target of 2 percent in the  medium to long term and designate quantitative and qualitative monetary easing as an intensive  measure with a time frame of about two years.  The proposal was defeated by an 8-1 majority vote.   Voting for the proposal: Mr. T. Kiuchi.  Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr.  H. Nakaso, Mr. R. Miyao, Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, and Mr. T. Sato.”

Central Bank Independence

From a recent Reuters article titled “Japan government piles pressure on BOJ ahead of October 30 meeting”:

Japan's government piled fresh pressure on the central bank to expand monetary stimulus on Tuesday, as the economics minister said he wanted to attend a rate review meeting next week to reiterate a call for bolder action to bolster an economy wounded by both the global slowdown and a diplomatic row with China.

But Jojima said there is no truth to a media report that the government is requesting the central bank to increase asset purchases by 20 trillion yen ($251 billion) to bolster economic growth.

Central bank independence is tenuous and often under tremendous pressure during bad times.

Ex-post, from a Bloomberg article on October 30th titled “Bank of Japan Expands Stimulus as GDP Poised to Decline: Economy”

The Bank of Japan expanded its asset-purchase program for the second time in two months, a move that failed to cheer investors as stocks slumped amid mounting evidence that the economy contracted last quarter.

The fund will increase by 11 trillion yen ($138 billion) to 66 trillion yen while a separate credit loan program will stay at 25 trillion yen, the bank said in Tokyo, acting hours after data showed the biggest decline in industrial output since last year’s earthquake. The BOJ will also offer unlimited loans to banks to boost credit demand.

For those keeping track, the BOJ increased the program by 11 trillion yen instead of the falsely reported government request of 20 trillion yen.

FOMC Statement Changes (October 2012)

A statement about nothing – or changes between the October and September FOMC:

Release Date: September 13October 24, 2012

For immediate release

Information received since the Federal Open Market Committee met in AugustSeptember suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advanceadvanced a bit more quickly, but growth in business fixed investment appears to have has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee isremains concerned that, without furthersufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation bywill continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omitdisagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.

Yield changes before and after the FOMC statement are minor:

The changes in the statement suggest that:

• household spending advanced more quickly than last month,
• business investment slowed,
• inflation picked up due to higher energy prices, and
• Bank President Lacker no longer thinks a highly accommodative stance of monetary policy is appropriate (presumably given the stronger economic data in the past month).

Risks to Nominal GDP Path Targeting?

Quoting from a paper by Professor Michael Woodford, titled "Methods of Policy Accommodation at the Interest-Rate Lower Bound" (available here):

A more useful form of forward guidance, I believe, would be one that emphasizes the target criterion that will be used to determine when it is appropriate to raise the federal funds rate target above its current level, rather than estimates of the “lift-off” date. If such an explicit criterion made it clear that short-term interest rates will not immediately be increased as soon as a Taylor rule descriptive of past FOMC behavior would justify a funds rate above 25 basis points, this would provide a reason for market participants to expect easier future monetary and financial conditions than they may currently be anticipating, and that should both ease current financial conditions and provide an incentive for increased spending. 

An example of a suitable target criterion would be a commitment to return nominal GDP to the trend path that it had been on up until the fall of 2008. This would both make it clear that policy will have to remain looser in the near term than a purely forward-looking Taylor rule would imply, and at the same time provide assurance that the unusually stimulative current policy stance does not imply any intention to tolerate continuing inflation above the Fed’s declared long-run inflation target — that in fact, it will not led to a future level of nominal income any higher than what people had reason to anticipate at the time that they acquired their existing nominal assets and undertook their existing nominal obligations.

If the Federal Reserve decides to do this and then inflation hits 5% with GDP continues to lag - then what? Shouldn't a threshold for inflation also be announced along with the GDP target path - perhaps 3% over the medium term as Chicago Fed President Charles Evans suggests?

Now, if both the GDP targeting and an inflation threshold are announced by the Federal Reserve, could someone plausibly infer this to be a negative outlook on the economy? I.e., someone viewing the Federal Reserve as believing stagflation as possible (due to quantitative easing, labor market structural issues, oil shock, and a plethora of possibilities)?

Path targeting can be beneficial, but it has some risks that need to be weighed against.

Comments on FOMC Actions (June 20, 2012)

From the FOMC statement last week (June 20, 2012):

“In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Late 2014 is about two and a half years from now, and this date is unchanged from the April FOMC statement. What has change is the end date of the maturity extension program:

“The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less.”

Contrast this with the original program announcement in the September 2011 FOMC statement from last year:

The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.

The range of securities being purchased and sold has not change, though there are certainly fewer 3 years or less Treasury being own by the Federal Reserve than there were in September of last year given the $400 million sale of short Treasuries. From the Federal Reserve’s H.4.1 Release (data: here), there appears to be enough Treasury holding in the 1-5 years range for the program to go on. Table 1 below shows the Federal Reserve’s holding for end of September 2011 and middle of June 2012. However, I would need more data to break out the 1-5 years to see how many 3 years or less Treasuries are remaining as of now.

Table 1. Federal Reserve’s Treasury Holding by Maturity (in millions of dollars)

	Total	<15 days	16-90 days	91 days - 1 year	1-5 years	5-10 years	> 10 years
9/28/2011	1,664,655	15,909	22,877	129,112	714,534	583,690	198,533
6/20/2012	1,663,577	13,148	19,881	21,354	532,988	745,173	331,032
Difference	(1,078)	(2,761)	(2,996)	(107,758)	(181,546)	161,483	132,499

The table shows that from the end of September 2011 to now, the Federal Reserve’s Treasury holding has fallen in the short end. Note that the numbers for each row are holding of securities with remaining maturity as of that date. Those securities that are now 91 days to 1 years from maturity would have been 1 years to 1.75 years from maturity at September of last year. Also, the drop in the 91 days to 5 years is similar in magnitude in the rise in the 5-30 years – that is a goal of the maturity extension program to keep the reserve stable.

The stated goal of the FOMC actions is:

“This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.”

The constant maturity yield curve from the Treasury website between the day before the FOMC announcement to June 26 shows some moderate fall in yield for much of the yield curve.

 

Presumably Because of the FOMC Announcement….

From the FOMC statement today:

In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

And the resulting change in the yield curve today (data from US Treasury Department, see previous post for more information) below. The 5-year yield constant maturity yield derived from on-the-run securities dropped quite a bit – but there is also a $35 billion auction today (see auction results announcement).

Technical Limits of Quantitative Easing (QE)

An article by Stephanie Flanders commented (here) on the technical limits of QE for the United Kingdom. For smaller economies with lesser amount of government debt outstanding, QE is limited by the amount of debts that is available to be purchased. Bank of England (BoE) and the Monetary Policy Committee, because of various restrictions they have placed on themselves for what they will purchase, commented that “the current rate of purchases - at around £20bn a month - is close to the limit of what is possible, without seriously distorting the market.”

To get around the technical limit, the BoE can of course expand the type of securities they purchase, and the government can also issue more debt. For better or for worse, the Federal Reserve is in no danger of running out of securities to purchase.

As of December 31, 2011, the total amount of outstanding debt in marketable treasury securities is $9.917 trillion. (Source: Monthly statement of the public debt of the United States) As of December 28, 2011, the Federal Reserve is *only* currently holding about $1.671 trillion of Treasury securities outright. (Source: H.4.1 Factors Affecting Reserve Balance)

Reference: A flat economy (cont’d) [BBC News].

John William’s Estimated QE2 Effects from the Literature

I have been meaning to make a visual aid to some numbers John Williams referenced in his September 23, 2001 speech. It subsequently was written up in the FRBSF Economic Letter (Table 1).

The figure below is his calculation of what various papers in the QE literature would estimate the QE2 effects to be (a large-scale asset purchase of $600 billion). The strength (or perhaps weakness) of these studies is that they are done using different methods and different data. That they are mostly all positive is encouraging. This is the rationale for policy maker’s belief that QE has been effective.

From the economic letter:

… summarizes a number of these studies. In order to facilitate comparison, the estimated effects in each analysis have been renormalized to correspond to the estimated effect on longer-term bond yields of a $600 billion LSAP operation. That, of course, was the size of the Federal Reserve’s asset purchase program completed earlier this year.

…

Almost all of these estimates involve author’s calculations to renormalize the effect to a $600 billion U.S. LSAP.

Now, I have no idea what “longer-term bond yields” is exactly, nor is it clear to me how the normalization is done. The figure below also omitted the Bernanke-Reinhart-Sack (2004) estimate from the Japanese event study – since it has implied effect of 400 basis points with 370 basis points error bands.

The footnote in the table lists the source of the data:

Papers from the figure: Modigliani-Sutch (1966, Sections 3-4), Bernanke-Reinhart-Sack (2004, Table 7, Figure 6, and author’s calculations), Greenwood-Vayanos (2008, Table 2), Krishnamurthy-Vissing-Jorgensen (2011, Section 4), Gagnon et al. (2011, Tables 1-2), D’Amico-King (2010, Figure 3), Hamilton-Wu (2011, Figure 11), Hancock-Passmore (2011, Table 5), Swanson (2011, Table 3), Chung et al. (Figure 10), Joyce et al. (2011, Figure 9), Neely (2011, Table 2). 

 

Reference: “Unconventional Monetary Policy:Lessons from the Past Three Years," FRBSF Economic Letter 2011-31 [Federal Reserve Bank of San Francisco]

JEC Hearing: “The Economic Outlook” with Federal Reserve Chairman Ben Bernanke

Chairman Bernanke is quoted as saying that the "Maturity Extension Program” of $400 billion (Operation Twist 2.0) is expected to have

1. an effect of 20 basis points on the long term interest rate, and
2. equivalent to about a 50 basis points cut in the Federal Funds rate.

When people talks about long term interest rate – it is always unclear to me what they mean specifically – what type of rate (Treasury rate, corporate bond rate, mortgage rate) and what time to maturity (10yr, 20yr, 30yr?)

When I talk about long-term rate in this context, I usually have the 10yr Treasury rate in mind. But it is rarely clear to me what others mean when they talk about "long term interest rate,” and I wish people will be more precise.

This fuzziness in communication reminds me something John Williams addressed in a speech on September 23, 2011, to the Swiss national Bank Research Conference. He was referring to forward guidance as a policy tool and how it might be hampered by communication to and understanding of the public.

A second caveat to the power of forward guidance is that the public may have different expectations of the future course of the economy and monetary policy than the central bank.  The expectations channel is crucial for the effectiveness of optimal forward guidance policy.  If the public has an imperfect understanding of the central bank’s intended policy path, then forward guidance may not work as well as advertised. Therefore, a key challenge for forward guidance is communicating the intended policy path to the public.  Complicating this communication challenge further, optimal forward guidance is inherently state-contingent and depends on
myriad factors and risk assessments.  These are inherently difficult to convey to the public. Moreover, the public and the media tend to gloss over such nuances and take away simple sound bites.

Reference: “The Economic Outlook” with Federal Reserve Chairman Ben Bernanke [US Congress Joint Economic Committee], Unconventional Monetary Policy:  Lessons from the Past Three Years [Federal Reserve Bank of San Francisco]

September FOMC and Operation Twist 2.0

Description of Operation Twist 2.0 from the September FOMC:

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

 

Over the week, the yield curve has indeed been twisted. The FOMC statement is released on September 21. I plot the yield curve for the 19th (Monday) and the 23rd (Friday). The data is the US Department of the Treasury’s constant maturity yields.

The possibility of an operation twist has been on the news for quite a while. So if you believe in efficient markets and announcement effects reflecting most of the impact from the policy, then the above chart is perhaps an understatement. If I look at the yield curve from the August FOMC to the Friday after the September FOMC, the effect is potentially greater. However, here the issue is the flight to quality effects due to the European situation over the past month. So the graph below might instead be an overstatement of the effects. Looking at only the 10yr yield, the range is from 13 basis points (top graph) to 36 basis points (bottom graph).

Going back to my August 16 entry titled “Announcement Effects of FOMC, August 2011,” the yields at the short end (I look at 6mo and 2yr yields below) remained depressed. I.e., potentially, the effect of the policy to guide the future path of interest rate continues to hold the rates down. (Though again, this can also be due to flight to quality as the result of the Europe/Greece situation.) What I find a bit surprise is the fall in the 2yr and 6mo yields started back in August 1 and not August 9. August 1 is the date of the unscheduled FOMC meeting held to discuss the government budget situation. (See the August 9 FOMC Minutes for details.)

Reference: Daily Treasury Yield Curve Rates [US Department of the Treasury],
     FOMC Minutes, August 9, 2011 [Board of Governors of the Federal Reserve System].

The Fed for iPad

The Federal Reserve now has an iPad app (here). Unfortunately, I do not have an iPad and so I cannot access this and see how it works – whether it has push notification (say when the Fed releases a statement) or if it would have the ability to read the speeches to you (even better if it has videos of the speeches).

It would be even more awesome if it also allows Federal Reserve data to be graphed and manipulated – say let a user look at what the Fed funds rate has been at various times with a flick of the finger. Or, plot side-by-side graph of the Fed funds rate with its estimated yield curves. Or, let user examine what its balance sheet looks like over the course of the financial crisis. This is very much a personal wish list. But if realized, it would go quite a way on the path to better communication. I was talking to another economics graduate student some days ago, and he thought the Federal Reserve issues Treasury securities. (It does not.) This anecdote underscores the lack of general knowledge about the Federal Reserve.

Since I do not have an iPad. I have to make do with stone age technology – tracking Federal Reserve news from its RSS feeds on Google Reader. The four RSS feeds I follow are:

http://www.newyorkfed.org/rss/feeds/3.xml

http://www.federalreserve.gov/feeds/speeches_and_testimony.xml

http://www.federalreserve.gov/feeds/press_monetary.xml

http://www.federalreserve.gov/feeds/feds.xml

Announcement Effects of FOMC, August 2011

The latest FOMC statement on August 9 announced the following:

The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The statement reduces the chance of an increase in federal funds rate to nearly zero until mid-2013. Note that the statement does not constraint the committee from raising rates should rates of resource utilization increase or outlook for inflation becomes increasingly likely. However, barring any significant changes, it does eliminate talks of inflation in the current environment by some in the committee.

The figure below shows the yield curve from the US Treasury Department shows the yield curve between the day before the FOMC announcement and August 16. The 30yr yield has recovered from the drop last week. However, much of the yield curve is still depressed from last week, and I would expect the short end (correspond to until mid-2013 or a little less than 2 years as of now) to stay depress for some time.

The quick recovery of the 30yr yield also highlights the difficulty in interpreting effects of policy on long Treasury yields. Was the drop last week an overreaction? Were there events from last week to this week that lead to the increase in yield, independent of the effect on yields from the FOMC statement last week?  Depending on one or the other, the FOMC action can be interpreted either as having no persistent effects on the long rate or as having persistent effects. The longer the maturity, the more things can influence its movements.

Reference: Daily Treasury Yield Curve Rates [US Department of the Treasury]

Bernanke to Hold Press Briefing Starting on April 27

It will be interesting to see the kind of additional information Chairman Bernanke will provide in these press briefings – how scripted and the extent which questions by the press will be allowed. 

In 2011, the Chairman's press briefings will be held at 2:15 p.m. following FOMC decisions scheduled on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve's website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings.

Source: Press Release [Board of Governors of the Federal Reserve System]

Financial Crisis and Role of Monetary Policy

Here is a [link] to the testimony to the Financial services Committee by Dr. Josh Bivens that summarizes the current financial crisis and the role of monetary policy. The language is clear and concise, though the view is in favor of the Federal Reserve.

The testimony seems to favor debt monetization due to the current economic environment. However, politically, I wonder whether it is ever feasible.

“If, for example, Congress acted to provide a new, significant round of effective fiscal support to the economy, the Fed could act to enhance the effectiveness of this support as well as keeping it from adding to the national debt held by the public by simply buying the new debt issues and holding them on its balance sheet.”

“This action should ameliorate the concerns of those worried that more fiscal support to the economy would lead to high debt burdens for the U.S. government in the future – if the Fed owns the newly-created debt that that provides fiscal support, interest on this debt would be paid to the Fed and recycled back to the U.S. Treasury. This is not a strategy that can be continued when the economy is near full-employment – it would surely lead to inflation. But there is no danger of that happening today, with vast numbers of unused resources available to match new production to new money creation.”

Source: “Can Monetary Policy Really Create Jobs?” [Financial Services Committee]