Euro-zone debt crisis

This article begins with a review of the design of the heat recovery steam generator (HRSG), its flow paths, components, and subsystems. HRSG operation including startup, combined cycle plant startup, filling and flushing, and removing the HRSG from service were also reviewed.

But local households are restricted in their ability to do global diversification. To maintain a desired exchange rate, the central bank during the devaluation of the domestic money, sells its foreign money in the reserves and buys back the domestic money.

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Pegging the magic moment is not easy, but our calculations suggest that world growth will generally be modest for about 12 more months.

How many insiders just made a fortune from this movement? From memory there were a lot of lenders, particularly in rural areas running around setting up loans in Swiss Francs. I think there were a number of court cases on this, the lenders I think were found to have downplayed the vulnerability of the loans to exchange rate movement.

However they whinged their tits off in the media and managed to blame the banks. Ops normal for the agrarian socialists. Westpac wrote a lot of loans in foreign currency in the 80s and was sued when it all went pear-shaped. This rate then fell to. Me, I was fine. I never thought that cross was interesting and you needed large capital to support a big position to make it interesting. And… never ever trust the Swiss. I find it hard to understand the rationale behind the break of the peg by the SNB.

When they first instituted the peg the SNB said they had done so because the Swiss was too strong and killing the Swiss economy. Now they break the peg, incur a loss on their foreign holding and will have to add lots of permanent liquidity QE in order to weaken the currency, or at least try to. But more importantly their credibility is forever shot. Things went absolutely nuts when the SNB removed the peg.

Some people expected it to happen but they had no idea when. A number of brokers and banks have lost a ton of money. High point was 1. Question is who drove it to there and why? It was pegged 1. One assumes it would be worth just under parity, which is close to where it stabilised. They made the disaster much worse. Capital is starting to flow out of many Euro countries to other preferred destinations, note the increase in the US dollar and the new highs in the Dax, its these capital flows that will drive the dollar higher and the euro lower.

Oh yes, and the Swiss franc will rise, did you note the increase in -ve rates by the Swiss as well? Most banks involved esp WBC given subsequent case and yes, many farmers, taking advantage of the low relative Swiss interest rates and stable currency. The SNB told the market 3 years ago they were pegging to the Euro because the strong Swiss was killing their economy.

They will have to do lots of QE themselves if they want an operating economy. There would not have been any translation losses if they continued the peg.

So now they have a translation loss and will have to QE. How is that a gain for them? Is capital flowing out. How do you know? The broad EU stock has done okay of late and the EU bond market is also doing fine. You have no evidence to make that assertion. Note the dollar, its going to fly, partic note the dax. What changed is the Euro is sitting circa 1. Pegging the Franc to the Euro was QE, it cost them. However input costs will now be significantly lower, not to mention food. I think the flight of capital in Europe has been real for some time.

The weakening Euro is the evidence, capital is flowing out and the Euro is going to get a lot weaker yet, capital is not just about return its about preservation.

The weakening Euro is not evidence at all there is capital flight. And Historically the Euro is very close to where it was floated. QE is a very specific course of action whereas a peg is not. They certainly did have to print more francs, but the reason was because people wanted francs at the peg. There was no direct policy by the SNB to print more Francs. Swiss tradeable exports are fucked and they also have deflation to worry about — particularly the bad sort where income drops but debt has to be repaid nominally.

Liquidity is fine in Europe. Credit is far too tight and monetary policy in view of the current deflationary forces is far too tight. Europe also is suffering from the bad deflation. JC, the dollar is the reserve currency, it will be the last to fall, if any currencies fall. The weakening Euro is evidence of capital flight, for example, I dont know, how about the Swiss Central Bank not buying anymore, how about the rise in the dollar, capital is about preservation as much as return.

They certainly did have to print more francs , but the reason was because people wanted francs at the peg. You are talking shit, they printed, they printed big, they printed to reduce the value of the Franc.

Did you want a pretty bound document with QE written on cover page? John Fernald, Robert E. Stock, and Mark W. Watson February 12, Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth.

The slowing trend reflects two factors: Both of these powerful adverse forces were in place before the recession and, thus, were not the result of the financial crisis or policy changes since The expansion is proceeding at a good pace, unemployment is low, and inflation is finally headed in the right direction.

The data show no signs of an economy going into overdrive. This suggests that further gradual increases in interest rates are likely in , assuming the data continue to come in largely as expected. When lenders experience unexpected losses, the supply of credit to borrowers can be disrupted.

Researchers and policymakers have long sought estimates of how the availability of loans changes following a shock. The sudden oil price decline in offers an opportunity to observe precisely how affected lenders altered their portfolios. Banks that were involved with oil and gas producers cut back on some types of lending—consistent with traditional views of bank behavior. However, they expanded other types of lending and asset holdings with a bias towards less risky securities.

Current valuation ratios for U. The cyclically adjusted price-to-earnings ratio reached its third highest level on record recently, and the ratio of household net worth to disposable income, which includes a broad set of household assets, stands at a record high. Such extreme values of these ratios have historically been followed by reversions toward their long-run averages. However, other current factors, such as low interest rates, caution against bearish forecasts.

The economy is in a good place. Unemployment is low and confidence is high. The challenges to address are good ones: The years ahead will require a balanced approach, guided by the data. Dissecting the underlying price data by spending category reveals that low inflation largely reflects prices that are relatively insensitive to overall economic conditions. Notably, modest increases in health-care prices, which have been held down by mandated cuts to the growth of Medicare payments, have helped moderate overall inflation.

Further slow growth in health-care prices is likely to remain a drag on inflation. When the Federal Reserve raises short-term interest rates, the rates on longer-term Treasuries are generally expected to rise. However, even though the Fed has raised short-term interest rates three times since December and started reducing its asset holdings, Treasury yields have dropped instead.

History suggests that extreme run-ups in the cyclically adjusted price-earnings ratio are a signal that the stock market may be overvalued. A simple regression model using a small set of macroeconomic explanatory variables can account for most of the run-up in the CAPE ratio since , offering some justification for its current elevated level.

The model predicts a modest decline in the ratio over the next decade. All else being equal, such a decline would imply lower stock returns relative to those in recent years when the ratio was rising.

Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies.

When products disappear from the market with no substitutes from the same manufacturer, they may have been replaced by cheaper or better products from a different manufacturer. Official measurements typically approximate price changes from such creative destruction using price changes for products that were not replaced.

This can lead to overstating inflation and, in turn, understating economic growth. A recent estimate suggests that around 0. The bias has not increased over time, however, so it does not explain the slowdown in productivity growth. Although the labor market has steadily strengthened, wage growth has remained slow in recent years.

This raises the question of whether the wage Phillips curve—the traditional relationship between labor market slack and wage growth—has weakened. Estimating a causal link from slack to wage growth using national data is difficult. However, using city-level data over the past 25 years shows that the cross-city relationship has weakened since the Great Recession. Explanations consistent with this timing suggest that the Phillips curve may return to a steeper curve in the future.

The Federal Reserve is moving towards more normal monetary policy, which means rising interest rates. But factors including the real natural rate of interest, a slower sustainable pace of growth, and inflation all point to a new normal where interest rates are lower than in the s and early s.

Louis on October 5. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors.

When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U. Interest rates have been trending down for more than two decades. One possible explanation is the dramatic worldwide demographic transition, with people living longer and population growth rates declining.

This demographic transition in the United States—particularly the steady increase in life expectancy—put significant downward pressure on interest rates between and Because demographic movements tend to be long-lasting, their ongoing effects could keep interest rates near the lower bound longer.

This has the potential to limit the scope for central banks to respond to future recessionary shocks. More than half a century since the Civil Rights Act became law, U.

Analysis using microdata on earnings shows that black men and women earn persistently lower wages compared with their white counterparts and that these gaps cannot be fully explained by differences in age, education, job type, or location. Especially troubling is the growing unexplained portion of the divergence in earnings for blacks relative to whites. During the recession and recovery, hiring has been slower than might be expected considering the large numbers of vacant jobs and unemployed individuals.

This raises some concern about structural changes in the process of matching job seekers with employers. However, the standard measures account for only the unemployed and not those who are out of the labor force. Including other non-employed groups in the measured pool of job seekers while adjusting for different job finding rates among these groups shows that the decline in matching efficiency is similar to earlier declines.

Because Americans buy and sell oil and petroleum products in the global market, global demand prospects influence the profitability of U. Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.

The natural rate of unemployment, or u-star, is used by economists and policymakers to help assess the overall state of the labor market. However, the natural rate is not directly observable and must be estimated. A new statistical approach estimates the natural rate over the past years. Results suggest the natural rate has been remarkably stable over history, hovering between 4. Recent readings on the unemployment rate have been running slightly below the natural rate estimate.

As the economy has transitioned from recovery to expansion, the role of monetary policy has shifted to sustaining the expansion by gradually moving conventional and unconventional policy back to normal. But monetary policy is reaching its limit for stimulating growth, calling for private and public sector investments and policies to step up and take the lead. Interest rates are inherently difficult to predict, and the simple random walk benchmark has proven hard to beat.

But macroeconomics can help, because the long-run trend in interest rates is driven by the trend in inflation and the equilibrium real interest rate. When forecasting rates several years into the future, substantial gains are possible by predicting that the gap between current interest rates and this long-run trend will close with increasing forecast horizon. This evidence suggests that accounting for macroeconomic trends is important for understanding, modeling, and forecasting interest rates.

The pace of business start-ups in the United States has declined over the past few decades. Economic theory suggests that business creation depends on the available workforce, and data analysis supports this strong link. By contrast, the relationship between start-ups and labor productivity is less well-defined, in part because entrepreneurs face initial costs that rise with productivity, specifically their own lost income from alternative employment.

Overall, policies that incorporate improving labor availability may help to boost new business growth. Demographic factors like slowing population and labor force growth, along with a global productivity slowdown, are fundamentally redefining achievable economic growth.

These global shifts suggest the disappointing growth in recent years is a harbinger of the future. While the causes of the growth slump are well defined, the consequences will be shaped by choices that policymakers are grappling with around the globe.

Interest rates in the United States have diverged from the rates of other countries over the past few years. Some commentators have voiced concerns that, as a result, exchange rates might be more sensitive to unanticipated changes in U. However, an examination of market-based measures of policy expectations finds no convincing evidence that the U. Interest rates during the current economic recovery have been unusually low.

Some have argued that yields have been pushed down by declines in longer-run expectations of the normal inflation-adjusted short-term interest rate—that is, by a drop in the so-called equilibrium or natural rate of interest. New evidence from financial markets shows that a decline in this rate has indeed contributed about 2 percentage points to the general downward trend in yields over the past two decades. Consistent with this idea, short-term movements in the natural rate of interest, or r-star, are negatively correlated with an index of macroeconomic uncertainty.

This relationship may be relevant for assessing monetary policy. An estimated policy rule that incorporates both r-star and the uncertainty index can largely reproduce the path of the federal funds rate since , except during periods when policy was constrained by the zero lower bound. These adjustments affect the overall credit supply but can also lead to the reallocation of credit and capital. Under certain conditions, reserve requirements can be a useful additional policy instrument for improving resource allocations and also for macroeconomic stabilization in China.

Consumer attitudes about buying and selling homes can inform us about future housing and mortgage markets. The HPSI shows promise both as a stand-alone indicator and as a supplement for evaluating and forecasting housing and mortgage markets. Analysis reveals the index accurately projected strong home sales in and and a weaker outlook toward the end of , following the sharp rise in mortgage interest rates.

Now is the right time to ask whether the monetary policy framework and strategy that worked well in the past are well suited to address the challenges ahead. A flexible price-level targeting framework has the important traits of adaptability, accessibility, and accountability.

It also offers significant advantages over inflation targeting for meeting price stability and employment goals. Insurance companies write policies to cover potential risks far into the future. Because the life of these contracts can extend well beyond the year maturities for the longest U. A new study describes how the long-term interest rates required to evaluate such long-lived liabilities can be extrapolated from shorter-maturity bond yields using a standard yield curve model.

These extrapolations are a useful tool since they have very small errors relative to the yield curve variation typically considered for risk management.

This projection of a persistent economic loss is based on the expected reversal of earlier gains from trade with other EU members and reduced cross-border labor flows. Newspaper articles and editorials about the economy do more than just report on official data releases.

They also often convey how the journalist and those interviewed feel about the economy. Researchers have recently developed ways to extract data on sentiment from news articles using text analysis and machine learning techniques. These measures of news sentiment track current economic conditions quite well.

In fact, they often do a better job than standard consumer sentiment surveys at forecasting future economic conditions. If inflation increases rapidly, how do we know that higher interest rates will bring prices under control?

Economics relies primarily on observational data to answer such questions, while medical research uses randomized controlled trials to evaluate treatments. Applying that method to economics, the long history of international finance turns out to be an excellent laboratory to conduct monetary experiments.

These experiments suggest that interest rates have sizable effects on the economy. The elevated number of non-employed people who are out of the labor force has raised some concerns about how well the headline unemployment rate measures available labor. An alternative measure of labor utilization, the Non-Employment Index, accounts for all non-employed individuals, distinguishing between groups like short-term versus long-term unemployed, discouraged workers, retirees, and disabled individuals, and adjusting for how likely each is to transition to employment.

Current data show the index is very close to its value in —06, the period near the peak of the previous economic expansion. After applying a new method to adjust for demographic changes in the labor force, the current unemployment rate is still 0. This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.

Population aging and the consequent increased financial burden on the U. Social Security system is driving new proposals for program reform. One major reform goal is to create stronger incentives for older individuals to stay in the workforce longer. However, hiring discrimination against older workers creates demand-side barriers that limit the effectiveness of these supply-side reforms.

Evidence from a field experiment designed to test for hiring discrimination indicates that age discrimination makes it harder for older individuals, especially women, to get hired into new jobs.

The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U. Second, is the natural rate likely to remain low in the future? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.

Slowing growth in U. However, mismeasurement also occurred before the slowdown and, on balance, there is no evidence that it has worsened. Some innovations—such as free Internet services—have grown increasingly important, but they mainly affect leisure time. Moreover, the non-market benefits do not appear large enough to offset the effects of the business-sector slowdown.

In the Treasury market, the most recently issued security typically trades at a higher price than more seasoned but otherwise comparable securities.

This phenomenon opens the question of whether a similar premium exists for all Treasury bonds. Examining yield spreads between pairs of inflation-protected securities, known as TIPS, that have identical maturities but different issue dates suggests that this is not the case: There is no on-the-run premium in the TIPS market at this time.

Given the progress made on these goals and signs of continued solid momentum, it makes sense to gradually move interest rates toward more normal levels. The rate of business turnover has declined since the late s, which some argue has hampered growth in innovation and productivity. This sounds like a plausible contributor to lackluster economic growth, but the connection between business turnover and productivity is more subtle.

First, while business turnover has steadily declined over the past 35 years, aggregate productivity growth has not. Second, even when business starts were at historical highs, existing firms lost very little market share to new firms. This suggests that older firms are just as innovative as newcomers.

To foster transparency and accountability in monetary policy, the Federal Open Market Committee publishes a statement immediately following every FOMC meeting, followed by the full minutes of the meeting three weeks later. Evidence suggests the release of the minutes can have a sizable impact on Treasury bond yields.

The impacts are largest when the tone of the minutes differs from the tone of the statement. This presumably leads markets to change their expectations of future monetary policy. Despite recent increases, long-term interest rates remain close to their historical lows.

A variety of structural factors, notably slower productivity growth and a surplus of global saving, likely have lowered expectations of steady-state interest rates and pushed down long-term yields through the expectations component. In addition, accommodative monetary policy in the United States and abroad appears to have lowered the term premium on long-term bonds. The prices of special securities known as TIPS can give some insight into how investors view the outlook for future inflation.

New research uses a novel term structure model of nominal and real yields to estimate how much the liquidity premium embedded in the prices of these securities have varied over time. Accounting for variation in the premiums notably increases estimates of the inflation expectations underlying market-based measures of inflation compensation, particularly during the most recent financial crisis. Job mobility in the United States has been slowing for almost two decades.

The most prominent measure of mobility is direct transitions from one job to another. This measure has declined substantially among young workers ages 16 to 24 since the late s, which helps explain the majority of the overall decline in job-to-job transition rates. However, for workers ages 25 and older, the labor market is essentially as dynamic today as it was 20 years ago. At the end of , many forecasters, including some Fed policymakers, projected four hikes in the federal funds rate in Instead, there have been no increases so far this year.

While this shift in Fed policy has puzzled some observers, such a course correction is not unusual from a historical perspective. In addition, given recent changes in economic conditions, the reduced federal funds rate path this year is completely consistent with past Fed behavior.

Estimates that account for population aging and potential labor force participation trends suggest that trend growth ranges between about 50, and , jobs per month. Actual job growth has been well above this pace, implying that it can slow substantially in the future without undermining labor market health. The increase in U. Estimates suggest that households outside this group have suffered significant losses from foregone consumption, measured relative to a scenario that holds inequality constant.

A substantial mitigating factor for the losses has been the dramatic rise in government redistributive transfers, which have doubled as a share of U. Estimates suggest the new normal for U. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks.

And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality. Understanding how rain, snow, and cold weather affect the economy is important for interpreting economic data.

A new study uses county-level data to measure the effect of unseasonable weather on monthly U. The resulting estimates quantify how the atypical weather this year explains some of the unexpected fluctuations in hiring at the national level. During the recovery from the Great Recession, real interest rates on government securities have stayed low, but real returns on capital have rebounded.

Although this divergence is puzzling in light of standard economic theory, it can be explained by credit market imperfections that raise the cost of capital and depress aggregate investment. The unusually slow credit market recovery is likely to have contributed to the diverging paths of the risk-free rate and returns on capital. It may have also contributed to a slow recovery in investment and output. The collapse of an asset price bubble usually creates a great deal of economic disruption.

But bubbles are hard to anticipate and costly to deflate. As a result, policymakers struggle to determine how they should respond, if at all. Evaluating the economic costs of past equity and real estate bubbles—with particular attention to how much credit grew during boom phases—can provide valuable insights for this debate. A recent study finds that equity bubbles are relatively benign.

More danger comes from housing bubbles in which credit grows rapidly. In response to the global financial crisis, the Federal Reserve relied more heavily on communication to shape expectations. Policymakers also deliver speeches to further clarify their views. Using textual analysis to quantify the content of those speeches reveals a somewhat diverse set of views among policymakers.

Regardless of the broad range of views, there is a positive relationship between the content of the centermost speech and the median projection for the policy rate. Current estimates suggest that this rate is near zero, but it is expected to rise gradually in the years ahead as real GDP returns to its long-run potential. Despite the very real struggles that some parts of the country, including Alaska, are facing, the broader national economy is in good shape: Under these conditions, it makes sense for the Fed to gradually move interest rates toward more normal levels.

Central banks and governments around the world must be able to adapt policy to changing economic circumstances. The time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural real rate of interest.

While price level or nominal GDP targeting by monetary authorities are options, fiscal and other policies must also take on some of the burden to help sustain economic growth and stability.

Following reports in that the Federal Reserve would likely begin to raise the short-term policy interest rate—after seven years of near-zero levels—net capital outflows from emerging economies intensified. Many of these countries also experienced large currency depreciations. After the onset of the global financial crisis, the Federal Reserve had to rely on other tools—including communication—to work around the constraints of being unable to lower the federal funds rate below zero.

One way to assess how effective these communications were is by estimating how interest rates on bonds with different maturities reacted to Fed communications before and after the zero-bound period. A measure based on news reports of Fed communications suggests that this tool gave the Fed some ability to affect long-term yields through its communications. Some recent research has suggested that macroeconomic variables, such as output and inflation, can improve interest rate forecasts. However, the evidence for this puzzling result is based on unreliable statistical tests.

A new simple method more reliably assesses which variables are useful for forecasting. The results from this method suggest that some of the published evidence on the predictive power of macroeconomic variables may be spurious, supporting the more traditional view that current interest rates contain all the relevant information for predicting future interest rates.

Some closely watched measures of inflation expectations have been in gradual decline over the past five years. Over the same time, oil prices have fallen dramatically. Although the movements in energy prices are normally considered temporary, they appear to have played a large role in pushing down some longer-term forecasts for consumer price index inflation from professional forecasters. Analysis shows the drop in energy prices can explain about three-fourths of the decline in these professional inflation forecasts over the past five years.

China has recently considered reforming its regulation of initial public offerings in equity markets. Current policy allows more IPOs in rising markets but restricts new issues in falling markets, possibly to avoid pushing down values of existing stocks.

As such, cyclical restrictions on IPOs do not appear to have stabilized Chinese markets, so policy reforms may improve market efficiency without increasing volatility. The muted housing recovery in recent years can be traced in part to slower household formation among young adults. Analysis suggests that the boom and bust in housing has been a key factor. Recent weakness in household formation relative to population growth among young adults represents a reversal of the unusual strength during the boom years.

The net effect has left shares of current young adults heading households at levels similar to those in the mids before the housing boom. Under these conditions, monetary policy is going back to the basics. Sparking faster growth in the future through innovation and more rapid productivity gains will require investments to build human capital, which is outside the realm of monetary policy.

A steady downward trend in health-care services price inflation over the past decade has been a major factor holding down core inflation. Much of this downward trend reflects lower payments from public insurance programs. Looking ahead, current legislative guidelines imply considerable restraint on future public insurance payment growth. Therefore, overall health-care services price inflation is unlikely to rebound and appears likely to continue to be a drag on inflation.

Banks can access data on loan characteristics to precisely estimate individual default risk. So, is it better to aggregate the data before or after applying the model? Research suggests a middle-of-the-road approach that applies models to data aggregated at an intermediate level can produce accurate and stable results.

The plunge in oil prices since the middle of has not translated into a dramatic boost for consumer spending, which has continued to grow moderately. This has been particularly surprising since the sharp drop should free up income for households to use toward other purchases.

Lessons from an empirical model of learning suggest that the weak response may reflect that consumers initially viewed cheaper oil as a temporary condition. If oil prices remain low, consumer perceptions could change, which would boost spending. Market participants typically update their views on future policy actions based on incoming economic data. From to , market expectations of interest rates over the near term exhibited little data dependence. In the past year or so, market-based measures of data dependence have risen considerably, although they are still below earlier norms.

This suggests that investors are increasingly viewing monetary policy actions as data dependent. Persistently low price inflation, falling energy prices, and a strengthening dollar have helped push down market-based measures of long-term inflation compensation over the past two years.

The decline in inflation compensation could reflect a lower appetite for risk among investors or decreased market liquidity. A third alternative supported by recent research suggests that the decline reflects lower long-term inflation expectations among investors.

Projections indicate the underlying expectations will revert back to typical long-run levels only slowly. Domestic bond markets allow governments to inflate away their debt obligations. However, they also may create a group of bond holders with the influence and desire to demand lower stable inflation.

These competing interests suggest the net impact of creating a local currency bond market on inflation is ambiguous. Recent research finds that the creation of such markets in countries with an inflation target does reduce inflation: Countries with bond markets experience inflation approximately 3 percentage points lower than those without. The economic benefits of sharing a currency like the euro continue to be debated.

In theory, countries that use the same currency face lower trade costs and exchange rate risk and are able to compare prices across borders more easily. These advantages should help increase trade among the economies involved.

New estimates suggest that this has been the case in Europe, though perhaps to a lesser degree than previously thought. Investors have a hard time accounting for uncertainty when calculating how much risk they are willing to bear. They can use economic models to project future earnings, but many models are misspecified along important dimensions.

One method investors appear to use to protect against particularly damaging errors in their model is by projecting worst-case scenarios. The responses to such pessimistic predictions provide insights that can explain many of the puzzles about asset prices. While most labor market indicators point to an economy near full employment, a notable exception is the sluggish rise of wages. However, this slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labor market.

In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs. Together these two changes have held down measures of wage growth.

But none is absolutely fail-safe. The idea that policymakers should follow only one approach without deviation is ill-advised. Headline news can give false impressions of what motivates monetary policymakers. While international developments and financial market volatility are closely monitored, what matters for policy is how those things affect jobs and inflation.

The best course remains a gradual pace of policy rate increases. In the wake of the financial crisis, the Federal Reserve dropped the federal funds rate to near zero to bolster the U. Recent research suggests that the constraint preventing this rate from being even lower has kept the economy from reaching its full potential. Have various imbalances and rigidities accumulated to make the economy frailer and more susceptible to a recessionary shock? Recent history suggests the answer is no.

Instead, a long recovery appears no more likely to end than a short one. Like Peter Pan, recoveries appear to never grow old. The percentage of people active in the labor force has dropped substantially over the past 15 years. Part of this decline appears to be the result of secular factors like the aging of the workforce.

However, the participation rate among people in their prime working years—ages 25 to 54—has also fallen. Recent research suggests this decline among prime-age workers can be attributed in large part to lower participation from among the higher-income half of U. The Federal Reserve has started the process of raising interest rates, in line with ongoing improvement in U.

The path for subsequent interest rate increases, however, is likely to be shallow compared with past tightening cycles. This reflects in part growing evidence that the new normal for interest rates is lower than in the past. Setting a higher minimum wage seems like a natural way to help lift families out of poverty.

However, minimum wages target individual workers with low wages, rather than families with low incomes. As a result, a large share of the higher income from minimum wages flows to higher-income families. Other policies that directly address low family income, such as the earned income tax credit, are more effective at reducing poverty.

The minimum wage has gained momentum among policymakers as a way to alleviate rising wage and income inequality. Much of the debate over this policy centers on whether raising the minimum wage causes job loss, as well as the potential magnitude of those losses. Recent research shows conflicting evidence on both sides of the issue. In general, the evidence suggests that it is appropriate to weigh the cost of potential job losses from a higher minimum wage against the benefits of wage increases for other workers.

The labor market is nearing maximum employment. With real progress toward these goals, the conversation has turned to normalizing policy. Accordingly, service sector growth is unlikely to offset the adverse implications of a slowing China for global trade.

After peaking in , the median U. Since then, house prices have rebounded strongly and are nearly back to the pre-recession peak. However, conditions in the latest boom appear far less precarious than those in the previous episode. The current run-up exhibits a less-pronounced increase in the house price-to-rent ratio and an outright decline in the household mortgage debt-to-income ratio—a pattern that is not suggestive of a credit-fueled bubble.

Labor costs constitute a substantial share of business expenses, and it is natural to expect wages to be an important determinant of prices. However, research suggests that wages do not contain much useful information for forecasting price inflation that is not available from other indicators.

Therefore, one should not infer too much from recent wage data regarding the future path of inflation. Short-term interest rates in the United States have been very low since the financial crisis.

Projections of the natural rate of interest indicate that a gradual return of short-term interest rates to normal over the next five years is consistent with promoting maximum employment and stable inflation. Uncertainty about the natural rate that is most consistent with an economy at its full potential suggests that the pace of normalization may be even more gradual than implied by these projections.

The recent Federal Open Market Committee decision to hold off on raising interest rates reflected conflicting signals, with favorable U. If developments stay on track, the process of monetary policy normalization is likely to start later this year. A substantial decline in market-based measures of inflation expectations has raised concerns about low future inflation.

An important question to address is whether these measures contain information that can improve upon alternative forecasting methods. This analysis finds that market-based inflation forecasts generally are no more accurate than surveys of professional forecasters or simple forecast rules. This suggests that financial markets can provide little additional useful forward-looking information about inflation. A new proposal by the Basel Committee on Banking Supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios.

Analysis shows the proposed scenarios are extremely unlikely to occur. While they may be appropriate for setting bank capital guidelines, they are much less relevant for everyday risk management. Instead, using a modeling framework with a plausible range of interest rate scenarios would be more relevant to help banks manage their interest rate risk.

Central banks debate whether using monetary policy to foster financial stability through house prices is advisable. Although a rise in interest rates tends to lower house prices, it may come at a significant cost through reduced economic output and inflation. This implies a very costly tradeoff when macroeconomic and financial stability goals are in conflict. Much recent discussion has suggested that the official real GDP data are inadequately adjusted for recurring seasonal fluctuations.

A similar pattern of insufficient seasonal adjustment also affects the published data for a key measure of price inflation. Still, such residual seasonality in the published output and inflation statistics is unlikely to mislead Federal Reserve policymakers or adversely affect the setting of monetary policy.

Since , however, growth has become more dependent on investment and overall growth has slowed. Policymakers disagree over whether central banks should use interest rates to curb leverage and asset price booms. Higher interest rates make mortgages more expensive and could prevent borrowers from bidding up house prices to create a boom. However, rough calculations show that the size of rate increase needed to do so might also boost unemployment and push down inflation.

Thus, using this type of policy tool may cause the central bank to deviate significantly from its goals of full employment and price stability. But this sustained undershooting does not yet signal a statistically significant departure from the target once the volatility of the month mean inflation rate is taken into account. Furthermore, the empirical Phillips curve relationship that links inflation to the size of production or employment gaps has been roughly stable since the early s. Hence, continued improvements in production and employment relative to their long-run trends would be expected to put upward pressure on inflation.

Risks from abroad are unlikely to overturn strong U. Still, the exact timing of an initial interest rate increase will depend on convincing evidence that inflation is heading back toward target. A simple monetary policy rule illustrates how the reductions in these forecasts can imply a lower projected path for the policy rate.

Policymakers often consider temporarily redistributing income from rich to poor households to stimulate the economy. This is based in part on the idea that poor households spend a larger share of their income than rich ones do. However, ample evidence suggests that the difference in spending between these groups is significantly smaller than commonly assumed. A second assumption is that redistribution through policy is more efficient than through capital markets.

Whether this is true is important to consider when proposing this type of stimulus policy. The Swiss National Bank expanded bank reserves as part of its unconventional monetary policy during the European sovereign debt crisis. The unprecedented expansion involved short-term rather than long-term asset purchases. This approach provides novel insights into how central bank balance sheet expansions affect interest rates.

In particular, it illustrates how an expansion of reserves can lower long-term yields through a reserve-induced portfolio balance effect that is independent of the assets purchased.

The incidence of involuntary part-time work surged during the Great Recession and has stayed unusually high during the recovery. This may reflect more labor market slack than is captured by the unemployment rate alone. Analysis across states and over time indicates that a substantial part of the increase is related to the business cycle.

However, structural factors such as changes in industry composition, population demographics, and labor costs have also contributed. This suggests that involuntary part-time work may remain significantly above its pre-recession level as the labor market continues to recover. Events of the past decade have refocused attention on the potential contributions of monetary policy and macroprudential approaches to fostering financial stability.

However, monetary policy is poorly suited for dealing with financial stability concerns. Instead, given the scarcity of explicit macroprudential tools in the United States, microprudential regulations and supervision are used to achieve macroprudential goals.

A likely gradual removal of highly accommodative monetary policy could begin at any upcoming FOMC meeting. However, the exact timing will be driven by the incoming data. The official estimate of real GDP growth for the first three months of was shockingly weak. However, such estimates in the past appear to have understated first-quarter growth fairly consistently, even though they are adjusted to try to account for seasonal patterns.

Applying a second round of seasonal adjustment corrects this residual seasonality. After this correction, aggregate output grew much faster in the first quarter than reported. The dilemma of central bank independence has been around a long time.

Past attempts to solve it through an operational mandate such as the gold standard have proven ineffective. The alternative approach of achieving economic goals through reliance on a fixed policy rule also poses practical challenges. A more promising path is to enhance accountability and transparency within an existing goal mandate framework. Inflation targeting is often considered the most appropriate monetary policy framework for central banks seeking price stability.

Advanced economies experienced higher economic growth immediately following the transition to inflation targeting. However, developing economies experienced only modest gains that were close to their trend growth. One explanation is that transitioning to a low-inflation regime can be more costly for less stable countries that have higher inflation expectations and less credible policies.

The health-care reform in Massachusetts relied heavily on the private insurance market. This increase began immediately before the reform became law, suggesting that insurers raised payments in anticipation of the change. Overall, evidence suggests that the Massachusetts health-care reform shifted dollars away from insurers and towards providers and consumers. However, such market-based expectations can be hard to interpret because changes in risk and liquidity premiums also affect asset prices.

In practice, policymakers should be cautious in relying on the expectations information in market prices. Based on surveys of professional forecasters, expectations for price inflation 5 to 10 years ahead have edged down over the past few years.

This decline seems to be primarily driven by revised expectations from forecasters who overestimated inflation in the aftermath of the Great Recession. Every month, millions of workers search for new jobs although they already have one. About one-tenth of these searchers switch employers in the following month. However, most of the job switchers in the United States never reported having looked for a job. This implies that, rather than those workers finding jobs, the jobs actually found them.

To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. Place-based policies such as enterprise zones offer economic incentives to firms to create jobs in economically challenged areas.

Evidence on the effectiveness of enterprise zones is mixed. There is no clear indication that they successfully create jobs. However, positive effects are evident for other policies, including discretionary subsidies that target specific firms, infrastructure spending that targets specific areas, and investment in higher education and university research. State and local governments frequently offer tax incentives to attract businesses to locate in their area.

Proponents view these incentives as a valuable tool to encourage economic development. Critics, on the other hand, argue either that incentives have little effect on business location decisions—and hence are wasteful giveaways—or that their benefits come at the expense of reduced economic activity in other areas.

A key element in this debate is distinguishing what is best from a local versus a national perspective. Animal spirits are often suggested as a cause of business cycles, but they are very difficult to define.

The interaction of these two can lead to significant business cycle fluctuations in response to spikes in volatility. This finding gives researchers an alternative to irrational behavior as an explanation for why swings in consumer sentiment appear to drive the business cycle. Information technology fueled a surge in U.

However, this rapid pace proved to be temporary, as productivity growth slowed before the Great Recession. Furthermore, looking through the effects of the economic downturn on productivity, the reduced pace of productivity gains has continued and suggests that average future output growth will likely be relatively slow.

Since , Federal Open Market Committee participants have been persistently too optimistic about future U. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.

The earnings gap between people with a college degree and those with no education beyond high school has been growing since the late s.

Since , however, the gap has grown more for those who have earned a post-graduate degree as well. The divergence between workers with college degrees and those with graduate degrees may be one manifestation of rising labor market polarization, which benefits those earning the highest and the lowest wages relatively more than those in the middle of the wage distribution.

Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts.

This pattern is evident nationwide and explains the variation in wage growth across industries. Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.

The retirement of the baby boomers is expected to severely cut U. However, the strong relationship between demographics and equity values in this country do not hold true in other industrial countries.

This suggests that global aging is unlikely to create additional headwinds for U. Financial incentives from state governments are part of a growing trend of policies designed to spur innovation clusters in specific regions. Likewise, the number of biotech jobs overall has grown in states that offered incentives, although they have had little impact on salaries.

Incentives have also spilled over to generate sizable effects in local service sectors. Since the Great Recession, standard ways of measuring the labor market have given mixed signals about the strength of the U. This has increased the uncertainty around how to interpret job market conditions, which has made calibrating monetary policy to achieve full employment more challenging.

Ultimately, policymakers need to make judgments about how much these conflicting indicators reflect cyclical weakness in the job market versus structural factors that would be less easily remedied with monetary policy. An accurate measure of economic slack is key to properly calibrate monetary policy.

Two traditional gauges of slack have become harder to interpret since the Great Recession: As a consequence, conventional policy rules based on these measures of slack generate wide-ranging policy rate recommendations. This variability highlights one of the challenges policymakers currently face. Although inflation is currently low, some commentators fear that continued highly accommodative monetary policy may lead to a surge in inflation. However, projections that account for the different policy tools used by the Federal Reserve suggest that inflation will remain low in the near future.

Moreover, the relative odds of low inflation outweigh those of high inflation, which is the opposite of historical projections. An important factor continuing to hold down inflation is the persistent effects of the financial crisis. Over the past two years, both monetary and fiscal policy projections have been based on the view that declines in the long-run potential growth rate of the economy will in turn push down interest rates.

In contrast, examination of private-sector professional forecasts and historical data provides little evidence of such a linkage. This suggests a greater risk that future interest rates may be higher than expected. The housing sector has been one of the weakest links in the economic recovery, and the latest data continue to show only modest improvement. One obstacle to a pickup in housing demand has been tight mortgage credit standards.

Indeed, loan standards for borrowers with lower credit scores have shown few signs of easing.





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