samchain/econo-pairs-v1 huggingface dataset:
Brian P Sack: Managing the Federal Reserve’s balance sheet Remarks by Mr Brian P Sack, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, at the 2010 Chartered Financial Analyst (CFA) Institute Fixed Income Management Conference, Newport Beach, California, 4 October 2010. *  *  *  It is a pleasure to be here today to discuss the management of the Federal Reserve’s balance sheet. The Federal Reserve currently holds more than $ trillion of securities in its portfolio, making it a key participant in U.S. fixed-income markets. Moreover, the portfolio is managed in a manner that differs from any other market participant, as the Federal Open Market Committee (FOMC) has adjusted the size and composition of the portfolio with the intention of achieving its monetary policy objectives of full employment and price stability. Thus, it is important for market participants to understand the balance sheet decisions of the FOMC and the implementation of those decisions to fully assess the implications for fixedincome markets. The evolution of the balance sheet going forward will depend on how the economic outlook unfolds. The current forecasts of FOMC members show the economy moving in the right direction, with a sustained recovery in GDP, a gradual reduction in the unemployment rate over time, and an increase in inflation towards the level that FOMC members see as desirable over the intermediate term. However, the anticipated recovery is relatively tepid and thus delivers only slow progress toward meeting the Federal Reserve’s dual mandate.

The market response to the reinvestment decision at the August FOMC meeting seemed largely in line with the estimated effects from the earlier round of asset purchases, once we account for the size of the surprise and the anticipatory pricing that occurred ahead of its announcement. And the increased expectations for balance sheet expansion in response to the September FOMC statement also generated a sizable market response. To be sure, I think it is fair to say that this is an imperfect policy tool. Even under the estimates noted earlier, the Federal Reserve had to increase its securities holdings considerably to induce the estimated 50 basis point response of longer-term rates. In addition, there is a large degree of uncertainty surrounding the estimates of these effects, given our limited experience with this instrument. Lastly, it is reasonable to assume that the effects of balance sheet expansion would diminish at some point, especially if yields were to  6  The duration of our Treasury purchases are modestly higher than the duration of the MBS that are being produced in the market. 7  See “The Outlook, Policy Choices and Our Mandate,” October 1, 2010. 4  BIS Review 128/2010  move to extremely low levels. Nevertheless, the tool appears to be working, and it is not clear that we have yet reached a point of diminishing effects. Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken.
3/7  BIS central bankers' speeches  From our market contacts we also hear that investors are increasingly using exchange-traded fund (ETF) shares to gain exposure to less-liquid markets. ETFs have been growing extremely fast thanks to their comparably low cost and high liquidity. ETFs are traded at higher frequencies and are sometimes more liquid than the underlying instruments. But can we be sure that liquidity in ETFs, in particular in bond ETFs, would remain stable if a sudden repricing in the markets occurred? This is a concern in particular for bond ETFs – a small but rapidly expanding market – which has not yet been tested in a larger distress event. Alongside liquidity risks, the ETF sector is also subject to counterparty risks because of connections to banks through ownership links and derivatives. Again, the fast-growing ETF segment deserves further attention from a risk and policy perspective. It goes without saying that leverage plays a critical role in any potential stress scenario as it forces companies to deleverage, generating potential spillovers to asset markets. Our analysis also shows that leverage increases the procyclical behaviour of investors and asset managers, even if they are not excessively leveraged. In any case, it is quite comforting that leverage in the European investment fund sector seems to be low, on average. Average leverage multipliers reach only up to 1.3 across different fund types.

In such circumstances, the Bank intervenes to moderate short term volatility of the exchange rate but not to change the direction dictated by the fundamentals. On the other hand, an improvement in the terms of trade provides an opportunity for the Bank of Zambia to build reserves as it smoothens the rate of appreciation. Finally, Mr President, I wish to congratulate you on the contribution made by manufacturing sector to the GDP growth in 2009. The performance of the sector was favourable, recording a real growth of 2.5% compared with 1.8% in 2008. I am confident that as the economic fundamentals continue to improve, banks are expected to increase lending to the private sector at reduced rates. We therefore expect the sector’s contribution to growth in 2010 to increase. In order to assist the country’s diversification process away from copper, I wish to implore you to seek ways of enhancing productivity in your various sectors as a means improving competiveness of your products for exports. Mr. President, one way by which your members can contribute to increased GDP is through participation in the Multi-Facility Economic Zones (MFEZs) for which the Government has approved establishment of three. You may wish to note that the construction of the Chambishi MFEZ on the Copperbelt has reached an advanced stage while work on the Lusaka South MFEZ is underway. Several enterprises with significant investments are already being established at the Chambishi MFEZ. There is also a proposal for the establishment of the Lumwana MFEZ in North-western province.
6  BIS Review 31/2008  Chart 1: Current account balances in the first wave of financial globalisation  Chart 2: Number of sovereign wealth funds since the 1950s  Per cent of own GDP United Kingdom Germany 15 Western Europe France 10  Number of SWFs 30 25  5 0  20  -5 15  -10 -15  10  -20 Canada Australia Argentina  -25 'New World' countries  5  -30 -35  1870  1877  1884  1891  1898  1905  1912  Source: Taylor, A (2002), “A century of current account dynamics”, Journal of International Money and Finance, pp 725-748. 0 1950s 1960s  1970s 1980s  1990s 2000s  Source: Morgan Stanley, Deutsche Bank  Global map 1: Current account positions (% of own GDP) in 1997  Source: IMF, World Economic Outlook, 2007  BIS Review 31/2008  7  Global map 2: Current account positions (% of own GDP) in 2007  Source: IMF, World Economic Outlook, 2007  Chart 3: Global holdings of fx reserves (excluding gold), 1995-2007 $  China Japan Russia Other Asia (a) Other EMEs Developed countries (b)  7 6 5 4 3 2 1 0  1995  1997  1999  2001  2003  2005  2007  Source: International Financial Statistics. (a) Excluding China and Japan. (b) Excluding Japan.

In particular, interest rates on safe assets fell since the build up in foreign assets were invested mainly in government bonds. 14 That both discouraged saving and boosted asset prices. In order to maintain their traditional returns, the private sector sought higher yielding strategies and were too ready to  11  IMF (2007) ‘Exchange rates and the adjustment of external imbalances’ IMF WEO April, Chapter 3. 12  Bernanke, B (2007) "Global Imbalances: Recent Developments and Prospects", speech delivered for the Bundesbank Lecture, Berlin, and Bernanke, B (2005) "The Global Savings Glut and the U.S. Current Account Deficit", speech delivered for the Sandridge Lecture at the Virginia Association of Economists. 13  A fall in desired investment (investment ‘strike’) in some countries also contributed to the decline in global real interest rates. For example, investment-GDP ratios fell sharply in the Newly Industrialised Countries in the wake of the east Asian crisis a decade ago. 14  For example FE Warnock and VC Warnock (2006) (‘International Capital Flows and US interest rates’, NBER Working Paper, 12560) estimate that foreign official flows reduced US 10-year Treasury nominal yields by about 100 basis points lower than otherwise in the year to June 2005. BIS Review 31/2008  5  believe that these could be attained through new products without running bigger risks. We are now dealing with the consequences of that mistake.
The good news however is that despite this and other serious challenges, the country was able to maintain macroeconomic stability at a reasonable level. The balance of payments recorded a surplus; the exchange rate, which in the years 2001 to 2004 had depreciated by approximately 5.9 per cent per annum, depreciated by only 5.2 per cent during 2006; a comfortable level of reserves was maintained; Government revenue and fiscal deficit targets were achieved as planned; the outstanding Government debt to GDP ratio declined; investor confidence remained high; a remarkable increase was seen in foreign direct investments (FDI) and for the first time, the yearly FDI exceeded US dollars 500 million; foreign portfolio inflows into the Stock Market increased substantially; the share indices recorded its highest ever levels; the government was able to mobilise around US dollars 1.2 billion in loans and grants from bilateral and multilateral donors and commercial sources. But we have to admit that not everything was rosy. There were a few down-sides and draw-backs too. Inflation began to rise since April due to higher than expected monetary expansion, some revisions to administered prices and escalating vegetable prices. In response, a tight monetary policy stance was adopted to curtail high growth in monetary and credit aggregates and it is likely that such measures would lead to the moderation of the rising inflationary pressures, and reflect a downward trend from April 2007 onwards.

However – with the spirit of regional financial cooperation for development of Asia as a whole in mine – countries with more advanced financial systems may decide to offer these guarantees for a limited period of time. Proposals for development and integration: enhancing market infrastructure Currency arrangements Issuing bonds under a basket of Asian currencies may achieve a slightly lower cost of funding, given that the currency risk of a basket is lower than the sum of the risk of the underlying currencies. This lower risk should be reflected in a lower cost off capital for borrowers. With regards to liquidity, if bonds in the region were to be issued in a basket of currencies that could be traded in many Asian bond markets, liquidity of such a bond should be better than that of any individual bond. In this regard, deep and liquid bond markets should also reduce transaction costs, making the regional market more attractive than issuing locally. Such a basket of currencies may enhance the natural hedging ability of market participants in each country in the region. Given the importance of intra-regional trade, exporters cold better match the currency exposures of their assets with their liabilities. Cooperative actions needed to facilitate growth of regional bond markets The use of these mechanisms to promote development of bond products must not detract countries from taking serious steps to developing their bond markets.
Lastly and perhaps of most value to SMEs, is the insights that SMEs would gain from a better understanding of their financial deficiencies which lead to rejections of financing applications by financial institutions. This can be deduced from the analysis provided through the Bureau ratings and reports. The credit reports would also serve as a convenient tool for SMEs to carry out a self-evaluation to identify areas that need improvement and initiate adequate remedial actions to increase their competitiveness. SMEs are thereby empowered to improve their own profile, with correspondingly enhanced prospects for the SME sector as a whole. As I mentioned earlier, it is also encouraging to see a considerable turnout by financial institutions at this seminar. This underscores the sustained and growing attention by financial institutions in the SME sector that is critical to provide the enabling environment for the SME sector to thrive. Bank Negara has seen a paradigm change in the way in which financial institutions approach the business of SME financing. Banks have, and continue to invest significantly, in supporting SME financing niches, and the organisational changes that we have seen have been pervasive in many banks. These banks have acquired tremendous insights on effective strategies for successful interfaces with SME customers. In some banks, completely new business cultures for their SME segments have evolved as a result which bodes well for the SME industry.

These impulses, as always, are administered under the conditions of an expected inflation performance close to the threepercent target of the Bank of Albania, and stabilized expectations of economic agents for it. The key interest rate cut by 0.5 percentage point by the Bank of Albania at end-October aimed at strengthening the domestic demand and reviving the lending activity. Its effect on the economy is not fully reflected yet, due to the short period of time and the time lags in transmitting the monetary policy. However, its pass-through to the money market, which constitutes the first link in the transmission chain, is a premise for its reflection to credit cost in a second round. In the meantime, our liquidity injecting operations have been successful in guaranteeing the backup of economy with funds, mainly short-term ones. Allow me to make a more detailed description of the economic and monetary developments during this period. *** At global level, the economic activity has been supported by improved overall economic climate, impacting on the improvement of the global economic activity, reduction of risk premiums and stability of global financial markets. However, the global economy and the European one continue to reflect economic vulnerabilities, which are transmitted to low inflationary pressures. This situation conditions also the pursuit of a stimulating monetary and fiscal policy by keeping interest rates at the historical low and by high liquidity injections. Back to the domestic economy, we should state that the new economic data were insufficient during October.
And that is part of what is occurring today, with Japan, Germany and China running excess surpluses relative to fundamentals; and the US and the UK running excess deficits (Chart 2). And although the euroarea excess surplus is relatively modest relative to its GDP, in absolute terms it is at least as important as 6  those of Japan or China (Chart 3). So while the distortions are few in number, those that exist are large in scale and systemic in importance. 4  Canadian deficits averaged 8% of GDP in the thirty years before World War I. ‘Canada in a multi-polar world’, speech by Mark Carney, 16 May 2011, available at http://www.bankofcanada.ca/2011/05/canada-in-a-multi-polar-world. 5 See Lisack, N., Sajedi, R. and Thwaites, G. ‘Demographic trends and the real interest rate’, Bank of England Staff Working Paper forthcoming. 6 Small economies hosting large financial centres like Singapore and Switzerland are special cases for which it is difficult to estimate ‘norms’. 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  Chart 2: Actual current account balances and IMF estimates of fundamental balances  Sources: IMF July 2016 External Sector Report, WEO April 2017 and Bank calculations. Notes: The data point for the 2016 current account for the UK has been adjusted; see notes to Chart 1 for more details. Chart 3: Excess current account balances  Sources: IMF July 2016 External Sector Report and WEO April 2017.

Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting as best it can the necessary adjustments in the economy. ------------------------------------I would like to spend the rest of my time on another balance, or rather other imbalances, whose resolution will be an important determinant of our future prosperity. II. The Challenge of Global Imbalances With many concerned that global trade is taking local jobs, protectionist sentiments are once again rising across the advanced world. Excessive trade and current account imbalances are now politically as well as economically unsustainable. Perhaps because imbalances ultimately reflect savings and investment choices within a country, they are often described as morality tales with the virtues of Swabian housewives contrasted with the vices of the Anglo Saxon rakes. In fact, trade imbalances are natural features of an open system and can be warranted by differences in demographics, levels of development and expected paths for income. 3  3  Savings and investment imbalances will shift with changes in relative prices, including changes in prices of final goods and services, changes in nominal exchange rates, changes in relative production costs (including unit labour costs), and changes in the costs of trade. Lags and frictions will mean that different components will shift at varying speeds. This, in turn, can result in large adjustment costs not present in economic models, which can make a laissez faire approach risky.
It would be bound to fail due to our poor understanding of the process of short-term exchange rate determination. Given this state of ignorance, ongoing Forex dicussions inevitably suffer from a lack of analytical and systematic rigour. Reasons given for exchange rate movements remind us of a self-service shop offering all kinds of goodies that always fit the need of the moment: ice cream when the sun burns and hot coffee when it gets cold. The shopping list includes: -  trade imbalances  -  cyclical leads and lags  -  asset price bubbles  -  events and announcements in politics  -  a broad range of differentials, preferably in interest rates, productivity and inflation  and all this both effective and expected. One chooses the story that best fits a specific situation in the hope that something is better than nothing. This opportunistic selection, reinforced by communicative herding, gives the Forex discussion the character of a sequence of scenes with different key subjects that influence expectations to a varying extent, thus also possibly causing exchange rate distortions. Exchange rate developments between the USD and the euro in the past two years once again are a good example in this respect. I am not cynical, but humble. Day-to-day or month-to-month exchange rate movements seem to be a marvellously complex process, a highly unstable interaction of facts and expectations. The globalisation of capital markets has, if anything, added to this complexity by amplifying the impact of expectations.

There are similarities between today’s financial turmoil and the Swedish bank crisis The current financial turmoil and the Swedish bank crisis actually have a number of common denominators. Harvard professor Kenneth Rogoff together with Carmen Reinhart of Maryland University has pointed to a number of similarities between the US mortgage turmoil and a number of earlier financial crises, including the Swedish bank crisis at the beginning of the 1990s. Some common denominators for the period prior to the outbreak of the crisis include a rapid increase in property and share prices, the fact that the current account deficit was large and growing and that economic growth had declined from an earlier high level. One important difference is that the exchange rate regime has not played a prominent role in the US case. Too low risk premiums and abstruse risks But it is also possible to find more specific parallels to the Swedish bank crisis. In both cases lending has increased rapidly at the same time as the banks have underestimated and therefore not taken sufficient payment for the credit risks. In Sweden this was linked to the banks – after decades of credit regulation – lacking a developed strategy for managing and pricing credit risk. When deregulation came in the mid-1980s they were quite simply unused to loan losses. But such tendencies could also be seen prior to the recent market turmoil. For a long time, risk premiums for credit risk-related securities were remarkably low. The uncertainty has led to an increase.
This stems in particular from their internal transformations, which rely in large part on the development of open-platform IT systems and on greater use of IT outsourcing, especially via the cloud. The public health crisis has significantly amplified this exposure: the widespread use of remote working has been accompanied by a massive roll-out of new collaboration tools and new software. This (sometimes hasty) deployment of third-party software and new methods of labour organisation has amplified the overall vulnerability of the sector. The need for vigilance is being even further heightened by the fact that cyberattacks are evolving constantly and becoming increasingly sophisticated. On a technical level, this phenomenon can in part be explained by the diffusion of “turnkey” hacking tools and a general increase in computer skills. On an economic level, the huge financial rewards to be gained from attacks is leading to a surge in the number of potential hackers. This dual trend has taken cyber-risk into a whole new dimension: at the company level, it represents a major operational risk, while at the level of the financial system, it has now become a systemic risk. B) Digital innovation in the financial sector offers new opportunities for efficiency gains, but also carries risks. These innovations, especially the use of DLT, have the potential to enhance the functioning of market infrastructures and payment systems, notably by speeding up transactions, reducing the number of intermediaries and lowering costs.

This is a major issue given the trend towards the digitalisation of financial markets and payments, and the emergence of new, non-bank players in financial intermediation. At the Banque de France, we are convinced of the benefits of taking an experimental approach to a CBDC: we are currently in the process of finalising our programme of experiments on an interbank or “wholesale” CBDC, to test whether and how it could improve the performance, speed, transparency and security of transactions between major financial players, especially for cross-border payments. In parallel, the Banque de France is closely involved in the investigation phase for the retail digital euro, for use by the general public in everyday payments, and which the Eurosystem decided to launch in July. To conclude, I would like to share with you this observation: to meet the challenge of transforming the financial sector digitally towards greater efficiency and stability, we feel it is vital to ensure that public and private initiatives complement each other and are properly coordinated, in order to support the innovation ecosystem and safeguard the stability of the financial system. It is in this spirit that we intend to continue developing our own initiatives. Thank you for your attention. 3/4  BIS central bankers' speeches  4/4  BIS central bankers' speeches