Federal Reserve Economic Data

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The Fed’s “tapering”: a nonevent?

Posted on May 12, 2014

In the weeks leading up to the June 18-19, 2013, FOMC meeting, financial markets were fixated on the possibility that the FOMC would soon begin to slow the pace of its large-scale asset purchase program—which at that point was $85 billion per month. In his press conference following this meeting, Chairman Bernanke said that “the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” By the time the FOMC finally voted to slow the pace of its asset purchases at the conclusion of its December 17-18 meeting, the 10-year Treasury yield had risen from 1.66 percent on May 2 to 2.85 percent on December 18. The period of rising interest rates before the FOMC began to officially slow the pace of its asset purchases is sometimes referred to as the “taper tantrum.” This development led some analysts to conclude that financial markets would not react well when the real tapering got underway. Well, it hasn’t quite worked out that way.

This graph plots the St. Louis Fed’s Financial Stress Index (STLFSI) since Oct. 1, 2009. In the STLFSI, values above zero are defined as periods of above-average levels of financial market stress and values below zero are defined as periods of below-average levels of stress. Zero is considered average. The STLFSI rose sharply (became less negative) from the week ending May 17 to the week ending July 5. However, since early July it has steadily drifted lower. Moreover, since the December 2013 meeting, when the FOMC first voted to reduce the pace of its asset purchases by $10 billion per month, the STLFSI has fallen even further. Indeed, for the week ending April 25, 2014, the STLFSI was at its lowest level since mid-March 2013. All of this suggests that the Fed’s decision to steadily slow the pace of its asset purchases—currently $45 billion per month after the conclusion of the April 29-30 FOMC meeting—is having little adverse effect on financial markets.

An alternative, though perhaps complimentary view, is that the markets see what the Fed sees: A steadily improving economy and a continued low and stable inflation outlook.

How this graph was created: In FRED, enter “St. Louis Fed Financial Stress Index” in the search box. The data are in levels (no transformation). The beginning period was adjusted to show data since Oct. 1, 2009.

Suggested by Kevin Kliesen.

View on FRED, series used in this post: STLFSI

The ECB’s balance sheet continues to contract

Posted on May 8, 2014

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.

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

Posted on May 5, 2014

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


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