samchain/econo-pairs-v1 huggingface dataset:
5 By law, IOR is available only to depository institutions.6 Absent frictions, IOR should provide a floor on interest rates, since competition between banks that can acquire funds in the wholesale market at rates below IOR and earn the spread should bring these rates very close to that paid on reserves. In practice, a number of frictions have led money market rates to trade moderately below IOR. ON RRP, which is offered to a broad selection of counterparties that includes money market funds, is intended to intensify competition in money markets and enhance the transmission of IOR into other overnight money market rates. It also has proved useful as a shock absorber. I will get back to that in a moment. The transmission of monetary policy relies on competition within, and integration across, money markets. The FOMC’s policy target is the federal funds rate, which is a measure of what banks pay to take out unsecured overnight loans from other banks and from government-sponsored entities. However, the Federal Reserve does not transact in the federal funds market, and therefore cannot directly impact the federal funds rate.7 Instead, it relies on a predictable relationship between rates in the markets in which it does operate, and rates on federal funds borrowings.

See Potter, “Money Markets and Monetary Policy Normalization,” April 15, 2015, and Frost, Logan, Martin, McCabe, Natalucci and Remache, “Overnight RRP Operations as a Monetary Policy 10 / 13  BIS central bankers' speeches  Tool: Some Design Considerations,” February 19, 2015. 6 Designated financial market utilities may be paid interest on balances maintained at the Federal Reserve as  well, as provided for in the Dodd-Frank Act and Regulation HH. The payment of interest to these entities does not appear to have had a measurable impact on money markets to date. 7 Recall that federal funds loans are unsecured. Like the vast majority of central banks, the Federal Reserve  conducts its open market operations in the secured market. 8 Although households and firms do not directly transact in the federal funds market, the effective federal funds  rate is used as a reference rate in the setting of a variety of private sector contracts, including in interest rate futures and swaps. Many bank loans are priced to The Wall Street Journal’s Prime Rate, which since the mid1990s has been set by convention to 300 basis points above the FOMC’s target rate or range. 9 See Dudley, “The Importance of Financial Conditions in the Conduct of Monetary Policy,” March 30, 2017.
We also work closely with some of the organisations sharing the stage with me today, aiming to get the best result and to minimise the burden on industry. We work extensively with Pay.UK who are working to deliver change across the retail payment schemes through their New Payments Architecture Programme. Together, we are tackling issues such as whether we could build a shared Public Key Infrastructure (PKI) for UK payments. And of course payments globally continue to change apace, so we thrive on our engagement with other central banks on key topics such as standards harmonisation, where our close collaboration is a crucial part of how we can collectively transform the payments landscape. Working together provides the opportunity to learn, share insights and collaborate on common challenges. Conclusion  Just as payment systems are at the heart of the economy, industry engagement must remain at the heart of the Programme. User input enables us to create the platform and capability that industry needs to innovate: the building blocks to transform the payments landscape. But as we mobilise delivery at the Bank, we need industry to mobilise too. We are on track against our plan and we need firms to develop theirs – so the payments industry is ready to transition safely to the new service and maximise the opportunities for innovation and transformation promised. We are developing a strategy to work closely with Direct Participants to provide information, monitor key milestone completion, undertake testing and seek assurance that they are each ready to implement changes.

RTGS Renewal Crucially, to deliver these priorities, and to facilitate innovation, we need strong, resilient foundations. That is why the Bank is undertaking an ambitious and exciting Programme to renew RTGS. For those not familiar with RTGS, it is a critical piece of national infrastructure and the backbone of UK payments. Our vision is to develop an RTGS service which is fit for the future, increasing resilience and access, and offering wider interoperability, improved user functionality and strengthened end-to-end risk management of the UK’s High-Value Payment System. This is a challenging but necessary Programme which is a key priority not just for the Bank but for the UK payments industry as a whole. The way payments are made has changed dramatically in recent years, reflecting changes in the demands of households and companies, changes in technology, and an evolving regulatory landscape. We need to respond to this and, in collaboration with the industry, develop the next generation of RTGS that delivers a world-leading payments service. Innovation can only thrive when firms and end users are confident they are operating in a safe and secure environment. So at the heart of the Programme is the desire to make the new service materially stronger and more resilient to an increasingly complex and sophisticated environment. Our current system has, and meets, targets of 99.95% availability. This must continue regardless of the shocks, whether traditional BCP or cyber.
Rather, building upon the theme of your prior panel discussion, the risk that dominates from my parochial view is the escalating and evolving cyber threat to our financial and payment systems, representing the challenge of our generation. The orientation that I want to pursue, reflecting this audience, is not what we are doing within the Federal Reserve to harden our critical infrastructure. While that is a manic and consuming preoccupation it is not my focus today. Instead, I want to concentrate on endpoint security vulnerabilities to the payments system, in which partnership with the institutions in this room represents an indispensable element of success. Historically, market infrastructures have operated on the presumption that endpoint security is 1/4  BIS central bankers' speeches  principally the responsibility of the endpoint, and infrastructure security is principally the responsibility of the operator. In the United States, the legal framework for wholesale funds transfers codifies that presumption, with each actor assigned responsibility for that part of security most within its control. Yet, in the present environment endpoint security breaches can have serious implications for public confidence in the integrity of the network as a whole, even in circumstances when the operator’s infrastructure, applications, and security perimeter have not been compromised. A series of recent high profile events have underscored dramatically this endpoint security risk, a theme that has also captured the attention of global policy makers.

In other words, perhaps uniquely in the constellation of the Federal Reserve System, my colleagues and I work for you. My standing before you represents a visceral reminder of our accountability to depository institutions, independent of size, which rely upon our services to send and receive time critical payments; to maintain and permit the transfer of Fedwire eligible securities; and to provide cash services to support the needs of consumers and commercial establishments. It is with this orientation that I offer these remarks today, which reflect my own views and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System. The theme of today’s conference, appropriately, has been “Navigating Future Risks for Community Banks”. Allow me to elaborate upon the single risk that dominates from my vantage, regrettably not a “future risk” but an all too present one, and to highlight some of the measures that we are taking in response. The risk to which I refer is not a function of regulatory pressure, or capital demands, or an evolving economy, or compliance challenges, or the proliferation of new technologies, or an unprecedented season of payments innovation, or the challenging competitive landscape. All of these may represent very real risks, and no doubt occupy your consciousness, to borrow the lyrics of a prior generation, “eight days a week”.
Annual spending from the Fund is subject to a spending rule, whereby the government commits to limit spending. Over time spending should not exceed the estimated expected real return on the Fund’s investments, set at 4 per cent per year. This implies that the Fund is expected to become a permanent savings account. 4. At the outset, there was already an investment management operation in the Bank, for the foreign reserves. But when it became clear in 1997 that the Pension Fund would be growing fast, we decided to set up a separate management unit, now called Norges Bank Investment Management (NBIM). Our challenge was to build a business organisation within a traditional civil service culture. The new unit recruited investment professionals from outside the Bank as well as people from the existing reserve management operations. NBIM was explicitly defined as a business unit, which should be different from the rest of the central bank in many respects. To avoid any suspicion that NBIM would benefit from proprietary central bank information, the new unit was placed completely outside the decision-making processes in the monetary policy and financial stability area, with no access to confidential information. The fact that the Pension Fund does not invest in Norwegian markets is also important to avoid conflicts of interest: There is no direct link to our monetary policy operations. 5.

We believe that the search for excess return has had a strong disciplinary effect on the organisation with a view to controlling both market and operational risk, and to ensure that all inside and outside suppliers do exactly what they are paid to do. 7. We have tried to build an organisation where the focus is on investment returns. In order to keep that focus we have tried to implement three basic principles: •  Accountability for decisions is clearly defined  •  There is transparency, nothing can be hidden away  •  The professional standards required for employees are very high  8. For investment decisions these principles mean that every decision is made by one individual and that the remuneration paid to him or her depends on the profitability of the decisions. We have defined a large number of independent profit centers, each with a clearly defined mandate. A compliance function checks that no one operates outside the mandate. For external managers we apply the same principle: Hiring an external manager is an investment decision, and someone inside NBIM is held responsible for it. 9. The salary system is different from the rest of the central bank. The main objectives are to focus attention on performance, and to give distinct signals to people who do not perform according to expectations. Salaries have two components, a basic salary and a performance-based component.
On all new measures, there has always been a lot of prior discussion, after which we have always managed to make a decision. The debate is not only about whether we should do it at all but also about when we should do it. Some believe that should have started buying bonds months ago, others think that we should do it maybe later or that we should do it straightaway. There are not two opposing camps; it is much more complex than that. And many of us have held certain views but have changed their minds over time, wondering whether quantitative easing was the only way to maintain price stability. Whatever we do, it  2  BIS central bankers’ speeches  must be a common Eurosystem programme, in which all national central banks take part, with clear rules and coordinated by the Governing Council. No one should be excluded, no one should be allowed to purchase more than others. We have had negative inflation figures last week. Isn’t that an argument to start now? C.N. This is not about negative inflation figures at a point in time, but rather about the risk of having either negative of very low inflation for a too long period of time. Expectations could then change, resulting in less consumption and less investment. The credibility of the ability of the ECB to keep price stability must not be jeopardised. Should the ECB limit its purchases to highly-rated bonds? C.N. It is too early to answer your question.

It is with the Bundesbank that we have developed most of the projects for the euro area, with which we organise conferences, and with which we cooperate in the international field. This cooperation is beneficial for both of us. Is it sad to leave at a time when central banks have become such important players? C.N. It is not good that we are seen as the only game in town. We cannot replace governments, simply because they are not seen to be acting quickly enough. We have created in the euro area many new institutions and new rules. They must now be used. It is up to the parliaments and governments to decide the reforms to be made, but they have to take their responsibilities. Mr Noyer, thank you for this interview. 4  BIS central bankers’ speeches
The fact that monetary policy decisions are often taken by a committee is a complicating circumstance in this context. 15 See for instance Alsterlind et al. (2015) for a more detailed description. 16 See, for instance, Weale and Wiedalek (2016) and De Rezende (2017). 17 See the article “The Riksbank’s strategy for a gradual normalisation of monetary policy” in Sveriges Riksbank (2017b). 8 [24]  also tries to affect credit risk-free interest rates, via the premium channel, although these are interest rates with both short and long maturities. 18 Despite the measure being termed “unconventional”, one can say that this type of monetary policy intervention followed a standard way of thinking in that one limits oneself to trying to have an effect on risk-free interest rates, the “ground plate” for interest rate setting in the economy. The idea is, as when adjusting the repo rate, that the effects will spread to other, higher risk interest rates. However, it is of course also possible, although the Riksbank has not yet done so, to buy other financial assets than government bonds. The Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan, for instance, have also purchased different types of commercial securities, including mortgage bonds and corporate bonds. Unlike purchases of government securities, this often entails a direct intervention in higher-risk assets.

Neither is it possible for anyone to say how soon after 2021 a downturn may occur. It could come soon after, or some years later. 4 Now 0.5–0.75 per cent is not a particularly high level for the repo rate, if one looks at it from an historical point of view. But on the other hand, history may not be as informative in this case as there has been a downward trend in global real interest rates in recent decades, as I just pointed out. It is therefore difficult to know what is currently a neutral, “normal” level for the repo rate. What one can say with some certainty is that it is much lower than it was 10–15 years ago. But even taking this into account, a repo rate of 0.5–0.75 per cent does not appear particularly high if an economic downturn were to occur in early 2021. How much is the interest rate usually cut in economic downturns? In Sweden, it is not so easy to have a clear idea of this as we have had a floating exchange rate and an inflation target for just over 25 years, and that is not long enough to have experienced so many economic cycles. It is only when the exchange rate floats that one can use the policy rate to counteract economic downturns – when the exchange rate is fixed the policy rate is in principle locked on defending the chosen exchange rate.
To meet commitments like these in the current low interest rate environment, some firms have an incentive to reach for yield by investing in excessively risky assets. Furthermore, with the costs of borrowing at historically low levels, other investors might simply decide that this is a good time to cheaply amplify the risk and return in their portfolios by taking on more leverage. One could reach the conclusion that historically low and stable interest rates pose a threat to financial stability. This creates a seeming paradox for policymakers. On the one hand, the existing large shortfalls in aggregate demand call for highly accommodative monetary policies and historically low interest rates. On the other hand, such policies have the potential to raise the likelihood of financial instability in the future. So, the questions that I’m often asked regarding these matters are as follows: Do the regulators and the Fed have adequate safeguards in place to mitigate this potential financial risk? If not, should the FOMC step away from what we thought was the best monetary policy with respect to our dual mandate? Should we discard our nonconventional tools and raise the fed funds rate in order to reduce the possibility of undesirable financial imbalances in the future? I don’t believe that such monetary policy adjustment is the right approach. I think the inference that persistently low interest rates pose a danger to financial stability is based on a narrow view of the economy.

These are startling facts and should certainly get your attention! As prudent policymakers, we would be remiss if we failed to carefully assess potential risks that might arise from these unusual and extraordinary policies. As the FOMC’s communications indicate, the Committee has fully reviewed the potential costs of its policies and it reassesses them regularly. I think that the benefits of our policy choices continue to far outweigh the potential risks. However, we must repeatedly think long and hard about two risks that are mentioned often – namely, that our expanded balance sheet and the prolonged period of low rates raise 1) the risk of higher inflation; and 2) the risk of financial instability. What can go wrong? Do we have the appropriate infrastructure and tools to adequately assess and manage these risks? To address these questions, we must evaluate these risks within the context of the goals of monetary policy and the current state of the economy and financial markets. Inflation risks Let me start with the risk of high inflation. As far back as mid-2009, Fed critics warned that our near-zero policy rate and trillions of dollars in asset purchases risk generating very high inflation. On several occasions, to underscore this risk, I have been presented with a gift of a Zimbabwe 100 trillion dollar note. As someone who is subject to a 20 U.S. dollar limit on gifts, I can assure you it is within the guidelines to accept one of these notes.
The Board of Directors believes that we have apparently not yet tightened monetary conditions to the extent needed to bring inflation back to the target next year. Therefore, we hold open the prospect of a further key rate increase at the upcoming meetings. Nonetheless, the situation might change. At the next meeting, we will consider how our today’s and earlier decisions, given the time lags, influence monetary conditions, among other factors. We will take into account that, even with the key rate unchanged, monetary conditions might toughen if inflation and inflation expectations go down. At our core meeting in February, we will adjust the range of the key rate forecast and the medium-term forecast in general. 3/4  BIS central bankers' speeches  Thank you for attention. 4/4  BIS central bankers' speeches

For that part of the economy producing internationally tradable, not just traded, goods and services, output is falling while consumer spending is buoyant. As a result, there is a "tale of two cities" in which some industries are experiencing the worst of times, with declining manufacturing output, and others the best of times, with the latest retail sales figures showing an increase in the volume of sales over the past twelve months of 6.4%. Such imbalances are not uncommon. Indeed, I first used the phrase "tale of two cities" in early 1995 to describe the contrast between strong demand for manufacturing output and weak retail sales, the opposite of the position today. Since then the economic see-saw has lurched from external to domestic demand, partly as a result of the continuing weakness of the euro which has led to a large and persistent rise in the sterling effective exchange rate. The scale of the imbalances at home can be seen in figures for domestic and external demand. Whereas aggregate demand and output have risen at a fairly steady rate of around 2¾% over the past five years, domestic demand, supported by rapid money and credit growth, has risen much more rapidly than net external demand. Indeed, private final domestic demand grew at an average rate of nearly 5% over this period, and its growth was in excess of 4% a year in four of the last five years. This imbalance between domestic demand and output has resulted in a rising trade deficit.