Analysis: The End Of Summer Complacency

Decent Essays
The End of Summer Complacency
The end of summer has seemingly brought a fresh wave of sobriety to global financial markets. The catalyst was Fed Chair Yellen’s speech at the Federal Reserve Bank of Kansas City’s annual conference on monetary policy in Jackson Hole. She stated that the case for a higher federal funds rate had recently strengthened. This hot topic of conversation subsequently shifted to one of how many hikes are potentially likely in 2016, as well as their timing. Chair Yellen’s intention was to put into play the 20-21 September Federal Open Market Committee (FOMC) meeting as an opportunity to raise the federal funds target. Meanwhile, Fed Governor Lael Brainard, arguably the most dovish member of the Board of Governors, cautioned
…show more content…
In order to eradicate these threats, the FOMC needs to drive the unemployment rate below the natural level to ensure the onset of overheating in the economy. The current unemployment rate is 4.9% and stands just above the FOMC’s estimate of the natural rate of 4.8%. The current expansion is 7 years old, and, historically, the FOMC has attached higher policy weights to lagging economic data, such as wage and price inflation, at this mature stage of the business cycle. This stance is, therefore, consistent with the traditional view that only bad outcomes occur once the unemployment rate breaches its natural level to the downside. The reason is that monetary policy is unable to fine tune the unemployment rate due to lags in the transmission mechanism. If overheating is triggered by an overly-accommodative stance, then policy settings cannot, therefore, be tweaked to guarantee its quick eradication. Hawkish members of the FOMC would consequently argue that policy conduct should be viewed over the longer-term in terms of achieving its dual mandate. By contrast, the FOMC doves, notably Governor Brainard, are somewhat more short-term focussed by arguing that the costs of overheating are smaller, largely due to a much lower natural rate of unemployment than deemed by other members, thereby implying a much higher degree of near-term economic slack. …show more content…
The next FOMC meeting will potentially reveal if Chair Yellen still embraces the view that monetary policy risks are asymmetric, where the costs of overheating are lower than prematurely raising the policy rate.
Paying interest on bank reserves is now backfiring due to the significant flattening of government yield curves, thereby increasing the incentive for banks to hoard cash at the expense of more capital-intensive credit creation.
Central banks continue to experiment with unproven and unconventional measures, including corporate bond buying by the BoE and the prospect of deeper negative interest rates invoked by the BOJ.
The Great Currency War has not fully played out, and there is a good chance that risk aversion could increase in Q4 as central banks struggle to prolong the efficacy of their unconventional

Related Documents

  • Decent Essays

    Thus people choose either invest in something that will returns more to balance inflation, or they purchase some fixed assets to store their wealth. However, when people know that money will worth more in the future, the risk-averse people will consider to save the money rather than invest or consume something. Therefore, the national output will fall due to the investment and consumption falls (Y = C + I + G + NX). Another way to explain the nation output falls can be illustrated by AD-AS mode. The deflation leads a negative shock in aggregate demand, therefore the AD curve shifts to the left, both of the price level and real national output falls.…

    • 1183 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    When the reserve requirement increases, it allows banks to hold more money to cover up the costs of withdrawals, thus limiting inflation because consumers will borrow less and decrease spending. Lastly, the government can sell bonds to decrease the money supply. The government sells bonds when there is inflation to limit the flow of money in the economy. With bonds, the government repays the person who has bought the bond with interest in the future. Minimum wage contributes to increasing inflation.…

    • 1320 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    They even make sure that the government will increase or decrease interest taxes, to prevent the economy to borrow money from the banks. In spite of the government is using fiscal policy to cut out income taxes and improve prosperity in the country, it eventually leading the rise of inflation when the government is borrowing too much from the Federal banks and the United States is in the deficit budget. As a result, the people turns to the monetary policy as a way to fix inflation. The Federal Reserve Bank is managing the economy by controlling the interest rates of the markets. The only way to lower inflation is by increasing interest rates to fix the economy.…

    • 1476 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Libor

    • 757 Words
    • 4 Pages

    During the recession, rates spiked over concerns that short term lending to distressed financial institutions would backfire. The latest move though has less to do with financial institutions and more to do with new regulatory changes on U.S. money market funds that went into effect in mid-October. The reform requires funds to move from a $1 fixed net asset value (NAV) to a floating NAV along with adopting liquidity fees and redemption gates. These measures have been put in place to safeguard against a repeat of the crisis, which was met with massive outflows and one prominent money market fund “breaking the buck”, dipping below a $1…

    • 757 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    This could, therefore, make achieving the 2% target more difficult, particularly if they became unhinged. Furthermore, it appears that Chair Yellen believes that, given the limited availability of conventional policy tools, any attempts to re-anchor inflationary expectations back into line with its target could be difficult and would consequently be construed as a policy failure. This helps to explain why she is now prepared to accept overheating risks, because, once again, she is also concerned about her legacy. She does not want to be perennially associated as presiding over a permanent downward shift in inflationary expectations that prevented the Fed from escaping the clutches of zero percent interest rates. The behaviour of inflationary expectations could seemingly have major implications for US monetary policy.…

    • 1818 Words
    • 7 Pages
    Decent Essays
  • Decent Essays

    Therefore, the private sector will have negative outcomes, and the private sector will borrow less money. With the private sector borrowing less money and less money circulating in the economy, the unemployment rate goes up, aggregate demand decreases, and a recession may occur. The items listed before all slow down economic growth. This is another con of national debt because it affects the private sector, job security, and economic growth in bad ways. A negative of the national debt is taxes may rise in the future to produce higher revenues for the government…

    • 728 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    Monetary Policy

    • 1329 Words
    • 6 Pages

    macroeconomic policy philosophy. According to Delong, the philosophy for pre-2007 monetary policy in the U.S. was to set interest rates in a countercyclical fashion according to the Taylor principle, which specifies the ratio of interest rate change in response to various economic conditions, with a few available exceptions. Even at near 0%, the Fed was willing to engage in open markets operations and quantitative easing, but “helicopter money” and excessive stimulus were not acceptable. The outlook on fiscal policy was to use it only as an automatic stabilizer and for long term fiscal balance. Fiscal authorities were viewed as too slow and incompetent, and monetary policy was seen as powerful enough.…

    • 1329 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Labours will not be willing to accept lower wages and this will cause involuntary unemployment to persist longer. Say’s law was also challenged .although he acknowledge that revenue from production creates an income, it does not happen instantaneously. Example when householders have more they spend more and when they have less they would spend less. He recommended that government can have a vital role to mitigating the aptitude and time the economy takes to adjust during recessions and inflations. He prescribes they do so using their tool as fiscal and monetary…

    • 1308 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    It discusses the intentions and unintended consequences of the act. A main discussion point is Treasury recapitalizing banks under the too big to fail doctrine, which was a broad and inconsistent bill that Pozen argues should be limited to financial institutions extending lines of credit that are entrenched in the financial system. This means to stop giving capital infusions to financial institutions that have recently converted to banks as well as insurance companies. Additionally, the Stimulus Act of 2009 did some counterproductive things by unlinking pay for performance and allowing banks to redeem preferred stock early and without paying a premium. This identified the banks that were weak and needed the capital versus healthy banks that did…

    • 2020 Words
    • 9 Pages
    Decent Essays
  • Decent Essays

    “An example would be the Federal Reserve’s intervention in the early 1980’s… This hike resulted in a recession, but did keep spiraling inflation in check” (Monetary). Fiscal spending is based on government spending. The government will use changes in taxes and increase spending to influence the economy. When the economy enters a recession the government…

    • 1347 Words
    • 6 Pages
    Decent Essays