samchain/econo-pairs-v1 huggingface dataset:
Otherwise, it will threaten people’s well-being. Last year, we cut the key rate — at the outbreak of the pandemic, inflation was low in Russia, and the key rate helped us support lending and demand. As we all know, companies tend to welcome a policy of low interest rates, which makes borrowings cheaper and thus helps them develop their business. Conversely, it reduces households’ demand for deposits. If this is also coupled with inflation, households’ real incomes decline and savings depreciate. Figuratively speaking, we can say that monetary policy is like seasonal clothing: we wear jackets when it is cold and hang up our dresses in the wardrobe until the next warm season. The same is true for monetary policy: it significantly influences the situation in the economy and current 3/5  BIS central bankers' speeches  developments and helps promote stability, just like adequate clothing keeps us warm without being too hot. Accordingly, now is the right moment to raise the key rate in response to the changed environment and higher inflation. We had been keeping the key rate at a low level for quite a long period in order to make sure we do not clip the wings of the recovering economy. However, now we have no doubt that our decisions have not hindered growth. The economy has bounced back to its pre-crisis level, even surpassing it in many industries, and continues to expand.

Completing the topic of mitigating the aftermath of the pandemic, I would like to say that during the pandemic period we have been implementing measures to help reduce the impact of inevitable restrictions and support households and companies, without disrupting fundamental interconnections in the market and compromising stability. The latter is critical for the financial sector and essential for people and businesses using services provided by the financial sector. Currently, the financial system is functioning normally, is resilient and able to cover the needs of the growing economy. The slump of early 2020 was followed by a rather rapid recovery. This surge was coupled with a global rise in commodity prices and faster inflation both in Russia and worldwide. Demand has already restored, which is evident from all indicators. Contrastingly, production will need more time. This is due to disruptions in production chains that have not been fully restored yet. There are shortages of some components and materials and workers in certain professions. As the borders are closed, it is impossible to engage non-residents as much as before the pandemic. For instance, this problem is severe in construction, services to a certain extent, and agriculture. All these factors are pushing up prices. Taking into account the nature of inflation, namely the steady growth of prices across a broad range of products observed in recent months, it is clear that we may not just wait until this period ends. The Central Bank needs to use available instruments to bring inflation back to the target.
Not only can one expect that a particular economy meeting the five criteria is clearly eligible to belong to a currency area composed of other economies with the same fiscal, monetary and financial features but one can also expect that the business cycles in these economies are likely to be largely synchronized. Convergence from the very beginning of the single currency is a necessary condition to create an optimum currency area. But convergence is not only necessary at the moment of the selection of member economies. It is also necessary afterwards in what we could call the permanent regime of the euro. And then the stability and growth pact is of the essence. It calls for each country to remain in a sound position as regards its fiscal behaviour. There is a paradox enshrined in the stability and growth pact: implementing the Maastricht Treaty provisions, including sanctions vis-à-vis past behaviour, it places more power BIS Review 63/1997  -8-  in the hands of the „centre“, which is in that case the Council, say Brussels, vis-à-vis member states than is the case, for example, for the US government vis-à-vis Texas or California. The absence of a significant federal budget and the absence of a federal government have driven the Europeans to embark upon a direct coordination of their national fiscal postures, through direct peer pressures and decisions within the Council of Ministers.

Mr. Trichet discusses Franco-German monetary cooperation and monetary union Speech by the Governor of the Bank of France, M. Jean-Claude Trichet, on the occasion of the fiftieth anniversary of the Land central bank of Rheinland-Palatinate and the Saarland in Mainz on 2/6/97. It is a great honour to speak in Mainz today and to celebrate the fiftieth anniversary of the Land central bank of Rheinland-Palatinate and the Saarland. Everybody knows that Mainz played a decisive role in spreading culture and ideas in Europe, in particular thanks to the invention of printing by Gutenberg. And the celebration of the fiftieth anniversary of your institution gives me the opportunity to underline once again the prominent role played by the Bundesbank for the stability, credibility and prosperity of the German economy. As you know, the Banque de France deeply supports this culture of stability, which sets the basis for monetary cooperation between France and Germany, the basis for European monetary union. The celebration of an anniversary is a good opportunity to draw lessons from the past and to foresee the future. That is why I have decided today to speak about Franco-German monetary cooperation during the last fifty years and the prospects for monetary union. In this respect, the creation of the single currency on January 1st, 1999 is a major event for our respective countries. Far from being a breaking off with the past, the creation of monetary union is the logical crowning of Franco-German monetary cooperation.
It is important to remember that the interest rate forecast is a conditional forecast and not a promise. The interest rate path has been revised frequently, and sometimes fairly substantially – as during the financial crisis and in the wake of the oil price fall in 2014. Nor are market 2/7  BIS central bankers' speeches  expectations of future interest rates necessarily aligned with Norges Bank’s interest rate path. On the contrary, the two curves have often diverged to some extent, particularly at somewhat longer horizons. Norges Bank’s analyses nonetheless indicate that we are successful in steering market expectations in the desired direction (Brubakk et al (2017)), for example by publishing the interest rate path. The analyses also find that central bank and market revisions of interest rate paths in the periods between monetary policy meetings are strongly correlated. This suggests that market participants have a good understanding of the central bank’s response pattern and of how monetary policy will react to new information about economic developments. Need for alternative reference rates Chart: From key rate to money market rate … Market expectations of future interest rates are reflected in the Norwegian monetary market rate – three-month Nibor. This rate can be decomposed into the average expected key policy rate over the next three months and a risk premium, usually referred to as the money market premium. Over time, three-month Nibor has tracked the key policy rate.

The fall in oil prices in 2014 led to a further reduction in the key policy rate in Norway. Chart: Gradual normalisation of monetary policy Last week, Norges Bank raised the key policy rate for the first time in seven years. If the economy evolves as currently envisaged, last week’s decision will be the beginning of a gradual normalisation of the interest rate level. This is good news. It means that the Norwegian economy is performing well. The effects of the fall in oil prices in 2014 have unwound. The economy has shown solid growth in recent years and the labour market has been improving. The upturn in trading partners’ economies, higher oil prices and low interest rates have lifted growth in Norway. The outlook for the Norwegian economy implies that the key policy rate will be raised in the years ahead. Capacity utilisation is close to a normal level. Underlying inflation is close to the 2% inflation target. The key policy rate is being raised to prevent pressures in the economy from intensifying and triggering a surge in prices and wages. Raising the rate also reduces the risk of a renewed rapid rise in property prices and debt. High price and wage inflation and a further buildup of financial imbalances would increase the risk of a sharp economic downturn further out. There are a number of factors to suggest that the key policy rate should be raised at a gradual and cautious pace. An environment of low global interest rates limits the room for manoeuvre.
This could suggest that the increase in funding rates for these entities reflect bargaining dynamics, rather than increased demand or aggregate reserve scarcity. 11  other tools such as term operations, as necessary for appropriate monetary control, based on policymakers' assessments of the efficacy and costs of their tools.” 25 Earlier this year, rates paid on the bulk of federal funds trading had ticked up, although they remained within the FOMC’s target range. The uptick in the federal funds rates raised a question as to whether the effective federal funds rate might print above the FOMC’s target range, absent a change in our operational settings. 26 To address the rise in the overnight rate within the range, a technical adjustment to the IOR rate was made at the June FOMC meeting: the IOR rate was raised by 20 basis points while the FOMC raised the target range by 25 basis points. Following that change, all rates paid on federal funds borrowings, as well as in other money markets, rose by about 20 basis points. This made it less likely that the EFFR would be above the target range. At the September FOMC meeting, the IOR rate and target range were each increased by 25 basis points, maintaining the five-basis-point spread between the IOR rate and the top of the target range, as shown earlier in Figure 4.

24  Flexibility When Needed: The Technical Adjustment When overnight rates—including rates on federal funds transactions—edge higher, what tools does the Federal Reserve have to ensure that they generally remain within the target range when reserves are abundant? The federal funds target range is an important feature of the FOMC’s public communications, and maintaining control of the federal funds rate and other money market rates is therefore taken quite seriously. Public confidence in our ability to maintain rates within the target range is important for ensuring that expectations for the FOMC’s future policy stance are properly incorporated into the term structure of interest rates, and thereby appropriately affect financial conditions and the broader economy. At the March 2015 joint FOMC Board meeting, it was decided that in a situation of abundant reserves, the Federal Reserve intends to “adjust the IOER rate and the parameters of the ON RRP facility, and use  23 Recent market intelligence supports the notion that increased awareness among some banks of the LCR benefit to borrowing federal funds from FHLBs, even at rates at or slightly above IOR, has contributed to the upward pressure in federal funds rates. For further discussion of the impact of LCR treatment on money markets, see Potter, “Confidence in the Implementation of U.S. Monetary Policy Normalization,” August 4, 2018. 24 While trading volumes among smaller domestic banks have been largely steady since the beginning of normalization, their borrowing rates have increased since March with the rise in the broader constellation of money market rates.
Minor variations in the total level of reserves supplied could move equilibrium market rates up or down as individual depository institutions with a deficiency of reserves had to find and trade with depository institutions with a surplus of reserves. This system functioned with a relatively low level of reserve balances. 3 The Desk was able to reliably achieve the FOMC’s 1  The Board of Governors is also responsible for the supervision and regulation of banks and systemically important financial institutions, payments systems and infrastructure, and overall oversight of the Federal Reserve System. It may also authorize Federal Reserve Banks to extend credit to other entities under emergency lending authority. 2  The FOMC’s Authorization for Domestic Open Market Operations and Authorization for Foreign Currency Operations outline the activities that the selected Bank is eligible to undertake. The domestic policy directive and foreign currency directive specifically instruct the Desk to execute such operations in furtherance of a particular operating objective defined by the FOMC. 3  In the five years prior to the crisis, total reserve balances averaged $ billion and excess reserves – balances in excess of those required to satisfy reserve balance requirements – averaged about $ billion. 2  BIS central bankers’ speeches  policy directive under this implementation framework. The effective federal funds rate – the average rate prevailing in the brokered federal funds market each day – routinely hit the FOMC’s target rate, generating a high degree of confidence among market participants in the Desk’s ability to implement policy.

I will then discuss the implications of these changes for the Federal Reserve’s balance sheet and for the eventual “normalization” of monetary policy when the Federal Open Market Committee (FOMC) believes it is appropriate to remove the extraordinary levels of monetary policy accommodation that it has provided. Finally, I will discuss some of the considerations that must be taken into account in normalizing monetary policy. As always, these are my views and do not necessarily reflect those of the New York Fed or the Federal Reserve System. The desk’s role in implementing monetary policy The Federal Reserve (the Fed) has a somewhat more complex organizational and governance structure than most other central banks around the world, so before discussing recent developments in the implementation of monetary policy, I’d like to take a moment to describe roles and responsibilities within the Federal Reserve System and where the Desk fits in. The statutory basis for U.S. monetary policy is found in the Federal Reserve Act, which was enacted just over 100 years ago.
However, unemployment is still too high - the increase in production of almost 15% since the end of the 1980s has not been sufficient to bring the labour market into balance. The employment ratio has increased, however, from 72 to 74% during the past year and employment is expected to increase greatly during the coming years. It is expected that open employment will fall to 3.7% in 2002. However, the beginning of this decade looks very promising. Almost the entire 1990s were marked by the problems in the wake of the high inflation economy of the 1980s and the overheating that ended that decade. Loan-financed consumption, excess investment, among other things, in properties, which took place in tandem with the increasing asset and property prices, had led to large financial and real imbalances being built up. When the bubble burst and the krona fell, there was a great need among households, businesses and banks to review their balance sheets and reduce their debt. As we know, this led to a great reduction in demand and increasing unemployment, which in turn caused major problems in public finances. The costs of the bank crisis aggravated the central government budget problem at the same time. Monetary policy, focused on stable prices, has played an important role for creating balance in the Swedish economy. This favourable development would not have been possible, however, without a responsible fiscal policy.

In the second place, the development of asset prices can lead to financial imbalances accumulating so as to threaten the stability of the financial sector and the Riksbank has a special responsibility here. Asset prices stimulate household consumption and business investment and it is probably here that asset prices are most significant for inflation target policy. Rising share prices, for instance, increase household wealth inter alia and are an indication that the economy is expected to grow strongly. Household consumption decisions are to a great extent based on expected incomes and wealth. At the same time, investment decisions by businesses are based on expectations of increased production. If households and businesses base their consumption and investment decisions on the expectations reflected in asset prices, demand will probably increase more rapidly than the actual growth of the economy. This creates an inflationary pressure in the domestic market. If the international investors also expect that productivity and the return will increase more quickly in Sweden than in the surrounding world, the exchange rate can, however, strengthen and also dampen inflation. Asset prices are also important for the assessment of stability in the financial system. It is important for instance to assess the risk for debt among businesses and households, which can be the result of rising asset prices, creating risks for suspensions of payments and ultimately for bank crises. What characterises a financial imbalance? Rising asset prices can thus contribute to financial imbalances being created in the economy.
By this point, the Registry had introduced inspection teams to undertake on-site supervisory work. One target of this more invasive approach was the New Cross Building Society, which was closed down in 1983 following a detailed investigation of its business that uncovered non-compliance with key provisions of the Building Societies Act. The Registry concluded that if the present management and existing policies continued, there was a distinct risk of a crisis in this rapidly growing society and that it would then not be able to repay retail depositors in full. 30  BSA Building Societies Yearbook 1998-99  10  All speeches are available online at www.bankofengland.co.uk/speeches  10  A weakness of the legislation as it stood then was that the only hard power available to the Registry was to force the closure of a building society. In most instances, the threat of such action was sufficient to achieve the Registry’s aims – but in the case of New Cross, the most radical option had to be pursued. The Building Societies Act 1986 aimed to improve this and handed enhanced powers to the newly-formed Building Societies Commission (BSC), which was tasked with enforcing tougher prudential requirements in respect of capital, liquidity, systems of control and governance – and all on a statutory footing (you will note here the parallels with developments in banking supervision).

If we have a world made up of one very large country and several very small countries, with full cross-border financial integration (in the 1  For a more expanded version of what follows, see my published work, in particular Gudmundsson (2008) and Gudmundsson (2016). 2  economic sense of these terms rather than the legal one), and assume that relative risk premia are constant, then long-term interest rates in the small countries will be pegged to long-term rates in the large one. This, of course, is an “unrealistic” theoretical simplification. But it gives us a reference point to start to think about these issues, and it indicates the direction we might be heading in as global financial integration progresses. In this type of world, the small countries could still have independent monetary policy of a sort, provided that they have a flexible exchange rate regime. They could pick their own inflation targets and set their own short-term rates that would affect economic activity in the short run and inflation in the long run. In this case, monetary policy works mostly through the exchange rate channel. If exchange rates are “well behaved” and the financial sector is sufficiently regulated and supervised, then a floating exchange rate and “keeping your own house in order” is sufficient for independent monetary policy and financial stability. The problem is, however, that exchange rates are sometimes far from being smooth reflections of underlying fundamentals.
Several times over that period, it appeared that growth was breaking out on the upside and forecasts were raised, but each time such hopes were disappointed. We are again at a similar junction. Over the past two quarters, the pace of economic growth has picked up. In particular, real GDP rose at a  1  Agria Sbordone, Thomas Klitgaard, Jonathan McCarthy and Joseph Tracy assisted in preparing this speech. BIS central bankers’ speeches  1  3.5 percent annual rate last quarter, and is widely expected to grow at around a 2½ to 3 percent annual rate through the end of 2015. This time, however, I believe that we are less likely to be disappointed. That is because several of the various “headwinds” that have impeded U.S. economic activity in recent years have subsided. This allows the improving underlying fundamentals to exert themselves more forcefully. For example, fiscal restraint, which had a significant impact on economic growth last year, has abated, and is likely to disappear altogether next year. Credit availability has also improved, reflecting healthier bank balance sheets and improving job and income prospects for potential borrowers. In addition, the excess supply of housing that built up during the boom of the previous decade has been worked off. This lessening of headwinds has allowed supportive financial market conditions spurred, in part, by very accommodative monetary policy to shine through. As a result, I expect that both consumption and business investment spending will strengthen over the next few quarters.

All of this remains very much a work in progress. But, these efforts should help us to avoid repeating the mistakes of the recent past, and enable us to take a more proactive stance toward mitigating potential future vulnerabilities. Of course, we at the Fed are not alone here. Since the recent financial crisis, central banks worldwide have been engaged in a broad rethinking of how to better fulfill their mandates. Let me close with a final thought. The largest problems that countries create for others often emanate from getting policy wrong domestically. Recession or instability at home is often quickly exported. Equally important, growth and stability abroad makes all our jobs easier. This means that there are externalities in the work we do, so that more effective fulfillment of our domestic mandates helps to bring us collectively to a better place. Ensuring global growth and stability is and will remain our joint and common endeavor. Thank you for your kind attention. 6  BIS central bankers’ speeches