jerome h powell : trends in fixed - income markets testimony by mr jerome h powell, member of the board of governors of the federal reserve system, before the subcommittee on securities, insurance, and investment, and subcommittee on economic policy, committee on banking, housing, and urban affairs, us senate, washington dc, 14 april 2016. * * * chairmen crapo and heller, ranking members warner and warren, other subcommittee members, i would like to thank you for inviting me to testify today on trends in fixed - income markets. because these markets perform important functions in our economy, it is imperative that we understand the significant changes they are currently undergoing. as i will discuss, a number of factors have been driving these changes. some market participants have expressed concerns about low liquidity across fixed - income markets, although many recent studies have found it difficult to identify such a broad reduction. it may be that liquidity has deteriorated only in certain market segments. it may also be that, even if liquidity is adequate in normal conditions, it has become more fragile, or prone to disappearing under stress. the sharp swing in treasury prices that took place on october 15, 2014, led the federal reserve board, in conjunction with the treasury department, the commodity futures trading commission, the federal reserve bank of new york, and the securities and exchange commission, to create a joint staff report and to host a conference on the structure of treasury markets at the federal reserve bank of new york ( frbny ) in october 2015. 1 the staff of the four agencies and the frbny compiled transactions data across both treasury cash and futures markets and analyzed the factors that could have caused the rapid rise and subsequent reversal in treasury prices in such a short span of time. this analysis did not find a single factor that caused the sharp swing in prices. as had already occurred in equity markets, advances in computing and communications technologies have allowed proprietary trading firms ( ptfs, also often called high - frequency trading firms ) to capture a majority of the interdealer market in treasuries. as a consequence of these changes, trading in treasury markets now moves at extreme speed. it may be that these changes have also led to greater liquidity risk, or sudden declines in liquidity. researchers at the frbny have shown that spikes in volatility and sudden declines in liquidity have become more frequent in both treasury and equity markets. 2 there is also evidence that liquidity shifts more rapidly and hence is less predictable

in such way, the global economy has moved somewhat deeper into a deceleration phase, with the effects of the european debt problem combined with unique factors various countries and regions have been involved in – namely, a great challenge of balance - sheet adjustments in advanced countries and that of searching for a sustainable growth path in emerging economies. as mentioned earlier, with the u. s. economy continuing to recover moderately and policy effects gradually surfacing in the chinese economy, the global economy is likely to get out of a deceleration phase, but the exit has been deferred. ii. current state and challenges of japan ’ s economy let me move on to japan ’ s economy. as i have just explained, overseas economies have moved somewhat deeper into a deceleration phase. as a result, exports and industrial production have been relatively weak. the month - on - month rate of change in real exports has been negative for four consecutive months since may due to a weakness in exports to europe and china, and, against such a backdrop, industrial production declined again in july relative to the april - june quarter, following a decline in the april - june quarter relative to the previous one. on the other hand, domestic demand has been resilient mainly supported by reconstruction - related demand. public investment has been clearly increasing and business fixed investment has been on a moderate increasing trend with an improvement in corporate profits. private consumption has been resilient with improving employment and housing investment has generally been picking up. however, there have recently been somewhat weak indicators in private consumption. while that is partly due to a weather factor, a sluggish pace of growth in overtime wages mainly in the manufacturing industry due to weak production and a decline in summer bonuses might have contributed to constraining consumption from the income side. while an application for receiving subsidies for eco - friendly cars ended at the end of last week, last minute demand was not observed. that was partly because efforts by car sellers after ending of the application, including a rebate in place of the subsidies and the release of popular fuel - efficient new - models, had been anticipated, but it perhaps should be interpreted as a sign that pre - consumption of future demand has reached its limit. as for business fixed investment, while it is likely to continue increasing as a trend, attention should be paid to whether there are any effects of a global deterioration in business sentiment. while domestic demand as a whole is likely to maintain its firmness, it might be difficult to