samchain/econo-pairs-v1 huggingface dataset:
First, I’ll provide an in-a-nutshell summary of the structure of the Federal Reserve’s balance sheet. Then, I will discuss why it is important that the decline in the balance sheet be gradual and predictable, and explain how the FOMC’s plan provides this gradualism and predictability. I will then talk briefly about how the Federal Reserve is ensuring it is operationally prepared for unexpected developments. And then I’ll conclude on a slightly different note: I’ll offer my thoughts on why financial markets seem to have reacted much more calmly to balance sheet news this year than they did during the 2013 “taper tantrum” period. As always, these views are mine alone and do not necessarily reflect those of the New York Fed or the Federal Reserve System. The Fed’s balance sheet, in a nutshell Let’s begin by reviewing, at a high level, where the Fed’s balance sheet is today, and where it is likely to go in the coming years. Although many things about monetary policy are very complex, the basic structure of the balance sheet is actually fairly simple, as is the program of balance sheet normalization. Panel 1 shows a summary of the Fed’s assets and liabilities, as they are today. Substantially all of the $ trillion of assets consist of Treasuries and agency MBS. 3 On the other side of the balance sheet, the Federal Reserve has three main categories of liabilities: $ trillion of bank reserves and other deposits, $ trillion of paper currency, and about $ billion of reverse repos.

As shown in Panel 10, market participants assign about one chance in four to such a scenario unfolding, so communications about how the FOMC might respond to such an outcome in the future might have the effect of bolstering confidence even today. 12 / 15  BIS central bankers' speeches  Returning to Panel 9, it is notable how much uncertainty there is about the size of the balance sheet, even in the no-zero-lower-bound scenario shown on the left. This likely reflects a few factors: MBS repayments remain uncertain up to the cap; future demand for currency, bank reserves, and non-reserve liabilities is hard to know precisely; and the FOMC has not yet decided on a longer-run framework for the implementation of policy. As a result, it seems appropriate to me that there should be an appreciable amount of uncertainty, which should decline over time as these matters become clearer so long as normalization continues uninterrupted. Conclusion Let me conclude now by reiterating the message of confidence with which I began my remarks. I am confident that the FOMC’s gradual and predictable plan to normalize the balance sheet will reduce the balance sheet’s size at an appropriate pace, that it will promote good market functioning, that it will not disrupt the mortgage market or Treasury debt issuance, and, importantly, that it will mitigate the risk of sharp or outsized asset price reactions.
Conversely, others see the distributed ledger as an opportunity for the central bank to expand its role, via a “central bank digital currency” available  15  If maturity transformation is a necessary feature of a market economy, you’d probably expect to find the private sector creating an alternative supply of liquid assets of its own, to help replace lost deposits. This would mitigate the impact on lending but it would also undermine any prudential benefits of a part-nationalised deposit-taking system (e.g. Goodhart and Jensen (2015)). 16  Other than cash, the easiest way for individuals to shift exposure away from commercial banks and towards the safer public-sector balance sheet is to put money into National Savings and Investment certificates (NS&I). Flows into NS&I picked up markedly during the crisis (NS&I (2009)). 17  The difference between loans and deposits – the so-called “funding gap” – has shrunk dramatically in recent years. Overall, the significant regulatory reforms since the crisis – in particular ring-fencing, the insistence on more equity and other loss-absorbing forms of funding and, on the assets side, higher holdings of liquid instruments – will have lowered materially the degree of maturity transformation within the banking system (see, for example, Lowe (2015)). BIS central bankers’ speeches  7  to a much wider group of counterparties. If it were a close substitute for bank deposits, a CBDC would represent a shift towards a “narrower” banking system.

I thank you. 2  BIS Review 15/2009
BIS central bankers’ speeches  5  This gone-concern LAC could be senior unsecured bonds or subordinated bonds.7 Bonds issued outside the issuing firm’s home jurisdiction are going to need to include legally robust clauses under which holders unequivocally accept that the home Resolution Authority can apply the bailin tool (and other resolution tools) to their investment. If that cannot be achieved, gone concern LAC is going to have to be issued from each firm’s country of domicile. There should not be cross-default clauses in other liabilities, including elsewhere in the group that could be triggered by bailing in these bonds.8 Beyond the terms of bond issues, the authorities are going to need to decide how much loss-absorbing capacity SIFIs need to have in issue. In Europe, the draft resolution directive provides a framework for that. But a global discussion is needed. My own provisional view is that the minimum for bonded debt might need to be equivalent to the sum of the firm’s regulatory equity requirement plus a margin (X) less any surplus equity. That would mean that bailin could be used to cover losses beyond a firm’s required equity base up to an amount X and then to recapitalise back to the ab initio equity standard.

For a MPE strategy, the successful implementation will require effective coordination of the different resolution actions undertaken by home and host authorities. Each key host authority needs to be open about its plans. The home authority needs to reciprocate, ensuring a joined-up, collaborative approach with no surprises. For both SPE and MPE resolutions, the FSB has stipulated that firm-specific cooperation agreements (COAGs) must be agreed amongst home and host authorities. The FDIC/Bank of England joint paper last year is by no means the only example of intensified co-operation preparing the way for those COAGs. Over recent months there has been marked convergence in how the world’s key authorities plan to approach resolution. This will become more apparent as more jurisdictions, including crucially the member states of the EU, legislate the KAs into their local statutory regimes.14 Preferred paths, and fall backs My exposition of how the resolution work programme will be taken forward has made it clear that, as I at least envisage it, for each SIFI there will be a preferred path. There are two points to make about this. First, I favour the term ‘preferred path’ over ‘presumptive path’ because I am concerned that too many people – perhaps particularly amongst asset managers – slip into thinking, and even demanding, that a ‘presumptive’ path should offer certainty, with no room for the RA to exercise any discretion in the public interest. I think that that is unrealistic.
Given these interactions – and with monetary and financial stability two sides of the same coin – why have two separate committees? Indeed some have suggested we need one committee, to manage trade-offs[15]. If there are material trade-offs between objectives then there’s a good case for making joint decisions about them. Decisions made based on one in isolation would not account for ‘spillovers’ to the other, leading to less effective policy overall. But there are other views. For example, the ‘modified Jackson Hole Consensus’ (reflecting a rather scenic annual conference held in the US) holds that a separate financial stability policymaker – with an independent set of tools – should be responsible for financial stability, allowing monetary policy to focus on price stability[16]. In my view, this approach works well because although monetary policy and financial stability interact in complex ways, they are in the end complementary. This means there typically aren’t  Page 5  major trade-offs between the two – both policymakers will be pushing in the same direction. I think this is borne out by our practical experience. If the case for a single committee is not that strong given potential trade-offs typically involved, there are two practical reasons why it is desirable to have two separate committees: accountability and expertise. With independence comes a need to ensure that bodies like the MPC and FPC are held accountable for their performance. This is much easier when their objectives are clearly defined. Two separate committees makes this easier.

A survey in 2011 asked about the meaning of the words “inflation” and “GDP”, the two central concepts in macroeconomics. Only 16% of the public could clearly define inflation, while only 10% could define GDP. Other surveys have reached similar conclusions, sometimes with slightly higher fractions. 3  4  This unfamiliarity with economic concepts extends to a lack of understanding of these concepts in practice. For example, the Bank of England regularly surveys the general public to gauge their views on inflation. When given a small number of options, less than a quarter of the public typically identify the correct range within which the current inflation rate lies. More than 40% simply say that they do not know. 5  If we turn from economics to finance, the picture is no better. In a recent survey, the UK’s Financial Conduct Authority (FCA) found that almost half the public believed they had “low knowledge” of financial matters. 6  7  Some surveys put the fraction of the public who are financially capable at only around 60%. Fully two-thirds 8  of the public say they are confused when making decisions about money. And the UK consistently performs poorly in international league tables of financial literacy. 9  This understanding deficit appears to extend to economic and financial policy. For example, fewer than one in ten people know that the interest rate in the UK is set by the Bank’s Monetary Policy Committee (MPC). Only around a quarter understand “quantitative easing” and fewer still “forward guidance”.
Timothy F Geithner: US monetary policy in the global financial environment Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Japan Society Corporate Luncheon, New York City, 9 March 2006. I would like to thank Margaret McConnell of the Bank’s Research and Statistics Group for valuable contributions to this speech. *  *  *  We are in the midst of another wave of global economic and financial integration. This movement toward greater openness and the associated rise in capital mobility offers the prospect of substantial economic gains for the U.S. and the global economy. Stronger real and financial linkages across nations have the potential to significantly raise the prospects for long-run world growth. The ensuing development of the market sector in emerging market and developing economies offers probably the most powerful means available for raising income growth and living standards in a very large share of the world’s population. These changes, and the complementary advances in technology, offer the prospect of more productive and stable real economies. The increase in the ties between national financial systems, the greater sophistication of financial markets and financial market instruments and the increase in capital flows across borders, allow risks to be shared more broadly and capital to flow to where the returns are highest, also contributing to stronger and more stable future economic growth. This process of integration has, of course, a range of implications for policymakers.

We are not sure, however, that the answer lies in making the framework less sensitive to risk, perhaps by smoothing over bad news in some form, for example by ignoring or delaying recognition of rating changes. This would involve the same dangers that I recall from the days of hidden reserves in UK banks, when the knowledge that unwelcome events could be hidden from view led occasionally to a lack of rigorous risk assessment in business decisions. In fact, part of the underlying problem of procyclicality is that risks are not recognised early enough, in time to allow lenders to exert a more gradual and beneficial discipline on borrowers. The capital framework - and, equally important, bank provisioning policies - need therefore to be as forward looking and dynamic as possible. Since ratings - whether external or internal - are influential in provisioning and will in the future be influential in capital, they in turn have to be more forward looking. This is why in the sovereign context we place particular emphasis on the importance of countries adhering to international transparency standards. No rating can be reliable without adequate information on the economic and financial situation of the country. The Basel paper does of course propose that compliance with the IMF’s Special Data Dissemination Standard is a pre-condition of a lower risk weight.
Demographic developments will, inter alia, make it particularly challenging to achieve and maintain sustainable fiscal balances in the period ahead. As regards product markets, a number of studies have shown that the potential gains from creating truly integrated and competitive European markets could be very large. On the one hand this would require further progress with regulatory reforms at the national level in order to intensify domestic competition. On the other hand it needs the full EU-wide integration of markets. Regarding the latter much progress has been achieved in integrating EU goods markets, largely driven by the completion of the Single Market. The integration of services markets however has been more limited due to a large number of obstacles, whether legal, cultural or inherent to the nature of some segments of the service sector. Specific areas for further reform efforts include: •  The full implementation and enforcement of the existing Internal Market legislation. The extension of the Single Market to areas, which were so far not or only partially covered, for example many service sectors. Furthermore, the integration and reform of a number of network industries (e.g. energy, transport and postal sectors) needs to be continued. •  Ensuring effective competition within and across Member States. This requires a continuous review of the powers of regulatory and competition authorities at both Member State and Community level. •  The legislative and regulatory framework of the European economies should be reviewed at all levels of government in order to create a more business-friendly environment.

After a thorough assessment of all the trade-offs, the MPC judged that policy normalization was warranted as the balance of risk has changed: the recovery is intact and resilient, financial stability remains sound overall, but inflation risk has increased. 1. The recovery is intact and resilient a. Economic recovery gaining traction supported by a strong recovery of tourism and domestic demand given improved labor market, household income and economic activities. Although Q2 GDP headline is lower than expected, we reaffirm the growth trajectory and economic recovery underpinned by strong domestic demand growth. Consumption has recovered well with not just pent-up demand but supported by real improvements in income. Recovery of the tourism sector is key to ensuring a smooth and sustained income recovery as the sector accounts for 12% of GDP and employs over 20% of total employment. • GDP growth = 1.5% in 21, ~3% in 22, ~4% in 23; 2.3%/2.5% for Q1/Q2 this year • Consumption growth = 3.5%/6.9% for Q1/Q2 this year vs. 3.3% pre-covid • Non-farm income grew 10.4%/13.5% in Q1/Q2. Farm income grew 10.7%/16.4% in Q1/Q2  2  • Unemployment/underemployment = 0.5 mill/2.4 mill (Q2/22) vs. 0.4 mill/2.5 mill pre-covid (Q4/19) • Tourist numbers = 3.2 mill YTD, 8.5/21 mill for 22/23 vs. 40 mill pre-covid b.
So indeed the whole stress test was more severe also because of other shocks that were considered in the adverse scenario. Just as an example, in what regards the shock in interest rates that the exercise assumes, we had an increase of the yields of sovereign bonds, which in the first year on average was 152, and the second year another 112, and in the third year also 112. You have then the distribution by country in this slide, and what is above the zero is the shock that we imposed in the scenario, an aggravation of the yields of sovereign bonds. And then below zero you have what happened since last year. And what happened? It was, as you know, exactly the opposite that the yields dropped a lot and so the prices of sovereign bonds increased on average by 12%. So this is just another indication of the severity of the exercise in confrontation with what has happened in reality since last year. Finally just to give you an idea about the drivers that command the impact of the stress test itself alone, of course the first three rows in this table show the increase in revenues, which is normal during the three years, and then the costs that were affecting the profit and loss accounts of the banks, and finally the impact on capital.

8  François Villeroy de Galhau, Letter to the President of the Republic, « How France and Europe will defeat inflation », April 2023.
For its part, the Banco de España, in keeping with its remit, considers that this review must not succumb to the temptation of indiscriminately stepping up the level of regulation of the sector. The initiatives along these lines have to be thought out in depth and have to be justified by the existence of a market failure the resolution of which, through public intervention, gives rise to greater benefits than costs. Lastly, in regard to the direct powers of the Banco de España, I would remind you of something that often seems to be overlooked: the institution I represent is part of the Eurosystem. In view of that fact it will continue working to ensure that monetary policy implementation is compatible with holding inflation within the bounds set by the central bank and, at the same time, will help guarantee that adequate liquidity is provided so that money markets function properly. The social partners also have an important task: to co-operate so that, while the inevitable adjustment is taking place in the residential construction sector and in related activities, the rest of the economy, i.e. industry and services, becomes more dynamic. And for this to happen a moderation in private sector margins and in unit labour costs through wage moderation and/or productivity increases is fundamental. It should be quite clear for all that if the inevitable rise in unemployment in construction is not offset by greater dynamism in the rest of the private sector of the economy, employment may perform more negatively than expected.

Further, in the last few years Spanish institutions have shown notable skill in managing operating costs, becoming some of the most efficient players in the world. In the current circumstances, progress along these lines is even more necessary. Third, and very importantly, some of the international markets on which Spanish institutions have raised financing in recent years have narrowed substantially. In this respect, the lack of discrimination seen in the last few months is surprising, as the markets have similarly penalised products whose features, in terms of level of complexity and risk, are substantially different. This is the case, for example, of Spanish securitisations which, on account of their simplicity, the high quality of the securitised collateral and the low level of bad debts recorded, bear no relation to the more complex structured products used by banks in other countries. A particularly striking case is mortgage covered bonds, whose credit quality is very high and easily measurable. This quality resides in their legal characteristics, since they are backed by the whole of the issuer's mortgage portfolio and their minimum level of overcollateralisation is 25%. However, financial market participants have not taken these arguments into consideration. In fact, banks have to keep explaining to the market the differences in their issues. An effective way of doing so is to start issuing medium-term securities again. And, as mentioned above, congratulations are in order because this is the path successfully taken by some banks in recent months.
Ten years ago – on 1 January 1999 – it was introduced in the then 11 countries of the euro area. Ten years is a short time in history. But it represents a good opportunity to talk about successes and challenges – the subject of my address tonight. I wish to consider this theme by asking three questions: 1. How successful is the euro? 2. What is the euro’s role in the current financial market turbulence? 3. What challenges lie ahead for the single currency? I intend to refer to a series of current issues relating to the global financial market turbulence and economic developments in the euro area. The first question: How successful is the euro? The euro is a stable currency and is an important contribution to the completion of the Europe’s single market. That’s why it is a success. After all, it helps to secure prosperity in the participating states. Stability of the euro Let me first of all consider the theme of stability. Before the euro was set up there were reservations about the stability of the future single currency, including in Germany. The first ten years have shown that these fears were unfounded. The euro is just as stable as its most stable predecessors, which were merged into it. That applies of course also to the Deutsche Mark. “The euro will be as strong as the Mark”, it was said. That promise has been kept.

•  The euro has boosted direct investment within the euro area. Mergers between companies in the euro area have risen noticeably. •  The euro has also led to a marked increase in cross-border security investments within the euro area. This is only one example of the contribution made by the single currency to the integration of the financial markets in Europe. It’s not over yet. The ECB and the Eurosystem strongly support a further integration of Europe’s financial markets. These developments show that the euro is an important catalyst for the completion of the single European market. The logic of “one market, one currency” was a substantial impetus for monetary integration in Europe. It has proved to be correct. The euro, monetary policy and employment Priority for price stability, which is a necessary precondition for sustainable growth and employment, in the euro area did not come by any means at the expense of employment. This is reflected in a number again: between the introduction of the euro in 1999 and 2008, the number of persons employed in the euro area increased by more than 16 million. In the years before, from 1990 to 1998, the increase in persons employed was less than 6 million. These new jobs in the euro area were not created by the euro. There is no direct relationship because the change in employment is affected by many factors. But it is a confirmation that a monetary policy oriented towards price stability is fully compatible with job creation.