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The ECB’s balance sheet continues to contract

At the press conference following the European Central Bank’s (ECB) meeting of the Governing Council on April 3, 2014, ECB President Mario Draghi commented on the state of the European economy and the scope of possible policy responses: He said that, in light of an “overall subdued outlook for inflation” and the “broad-based weakness of the economy,” the Governing Council “is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” In today’s meeting, the ECB reaffirmed the possibility of using unconventional instruments, if necessary, to achieve its mandate.

Understandably, European financial markets have been speculating that the ECB will soon begin purchasing assets. This policy action, commonly known as quantitative easing (QE), would increase the size of the ECB’s balance sheet, though not necessarily in the same manner as QE has increased the size of the Fed’s balance sheet. As Draghi noted, the purpose of implementing a QE-style monetary program would be to accelerate the pace of real GDP growth, which remains sluggish, and raise inflation, which remains about 1.5 percentage points below its 2% target rate. The chart, which shows the asset side of the ECB’s balance sheet, illustrates why some European economic analysts expect the ECB to soon put in place a QE program. Unlike the Fed’s balance sheet, which continues to increase, the ECB’s balance sheet—as measured by the asset side—has been contracting for almost two years. Since July 2012, the ECB’s balance sheet has declined from a little less than 3.2 trillion euros to about 2.2 trillion euros. Many economists have found this decline a little puzzling, given that the ECB’s balance sheet was contracting as Europe fell into a recession (see this presentation by St. Louis Fed President Bullard). Whether this policy will succeed as intended is another matter: U.S. economists continue to debate the effectiveness of the Fed’s QE programs.

How this graph was created: In FRED, enter “ECB Assets” in the search box. The data are in levels (no transformation).

Suggested by Kevin Kliesen

View on FRED, series used in this post: ECBASSETS

Distance to inflation target

In a recent St. Louis Fed On the Economy blog post, I plotted the distance from the inflation target for 9 advanced economies in January 2014. Instead of looking at a cross-section of countries, we could look at the time series for the United States or any other economy for which we know the target and have a time series in FRED. Several countries set their inflation target at or close to 2% as measured by the year-on-year growth of the consumer price index (a Laspeyres index). However, the U.S. Federal Reserve uses the personal consumption expenditures price index (a Fisher Ideal quantity index). To understand the difference between the two, see this BLS paper: “An Examination of the Difference Between the CPI and the PCE Deflator.”

For a recent take on the advantages of using one measure over the other, see St. Louis Fed President Jim Bullard’s article in the Regional Economist, “CPI vs. PCE Inflation: Choosing a Standard Measure.”

In the graph, I plot the difference between the actual inflation rate (measured in either CPI or PCE) and the inflation target in the United States as discussed in the “Statement on Longer-Run Goals and Monetary Policy Strategy.”

This target is typically considered a medium-run objective, so it is normal to observe short-lived deviations from the target. However, inflation in the United States has been below target for quite some time, and it is an open question when it will return closer to the 2% target (close to the zero line in the graph).

How this graph was created: First, load the two series. Then for each series, select “Percent change from year ago” as the unit of measure and use the “Create your own data transformation feature” and enter the formula “a-2.” Finally, in the graph settings, select type “Area.”

Suggested by Silvio Contessi.

View on FRED, series used in this post: CPIAUCSL, PCEPI

The vanishing negative saving rate

One data series that’s been subject to frequent revision, and in the past frequent inclusion in the news, is the personal saving rate. In October 2007, our Liber8 publication (a newsletter for librarians) included an explanation of the negative U.S. saving rate.* To make a long story short, that article and others from that time noted that it generally isn’t wise to spend more than your income. However, if you look at the current saving rate, you see the graph never goes below zero. It even seems to stay above 2%. What’s up with that? Well, revisions to the data.

Below is a graph of changes in the data, comparing the current data with the data available in September 2007.

How this graph was created: Personal saving rate data were most recently released on March 28, 2014. To see previous releases, select the ALFRED link, which is to the left of the graph. Edit data series 1 by changing the “as-of date” to August 31, 2007. Then change the graph from a bar graph to a line graph.

Suggested by Katrina Stierholz

* In our defense, there were other Fed publications that wrote about the negative saving rate as well.

View on FRED, series used in this post: PSAVERT


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