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US: back to the seventies? 5/12/2021
In the debate on economic policy in the US, some commentators warn we may be returning to the seventies. It was a period of major shocks – the move to floating exchange rates, two oil crises –, high and accelerating inflation and an increased role for government.
Which insights from the ‘great inflation’ of the 1970s? 5/10/2021
The ‘great inflation’ of the 1970s had many causes. The policy objective of full employment had already led to high inflation by the end of the 1960s. Two oil shocks and the depreciation of the dollar caused additional increases. The key factor was monetary policy, which was not adapted to the circumstances. It reflected the view that the Fed did not have a mandate to tolerate the sizeable increase in unemployment that might have ensued from the aggressive tightening needed to bring inflation under control. In addition, inflation was considered to be a cost-push phenomenon that could be addressed with wage and price controls. Today’s situation is very different. The Federal Reserve is an independent central bank and inflation expectations are well-anchored. However, letting the economy run hot is reminiscent of the 1960s. Should inflation be above target for too long, the Federal Reserve will need to have the courage to tighten policy sufficiently despite the potential cost to the economy.
US indicators: An accelerated pulse 5/10/2021
The vaccine keeps its promises, so does Joe Biden. With USD 400 bn in stimulus checks nearly in pockets and partial immunity achieved against Covid 19, Americans are on the move to spend again. After a record-breaking month of March, private consumption surged by more than 10% (seasonally adjusted annual rate, saar) in the first quarter. GDP rose 6.4% (saar) and will continue to accelerate in the weeks and months ahead.
The Biden infrastructure plan 5/4/2021
In the United States, there has been a series of “once-in-a-generation” recovery plans that have little in common. Unlike the USD 1.9 trillion “American Rescue Plan” adopted in March, the nearly USD 2.3 trillion “American Jobs Plan” proposed by President Biden is geared towards the long term and aims to be fully financed through taxes. Designed to defend America’s strategic interests, the plan’s philosophy is similar to the American Recovery and Reinvestment Act of 2009. Yet the Biden administration is not foregoing a multilateral framework: its plan is also intended to serve as a vehicle for international fiscal harmonisation. 
A rosy Beige Book 4/19/2021
It is a true pleasure to read the April 2021 edition of the Beige Book, which the Federal Reserve Board (Fed) publishes eight times a year on current economic conditions in the US. Without exception, all twelve districts covered by Fed surveys reported an improvement in the business climate, with the wealthiest and most productive regions of the northeast, like Philadelphia, bordering on euphoria.
As the epidemic wanes, the economy soars 4/9/2021
The US economy has taken off. Bolstered by the easing of the Covid-19 pandemic as much as by unprecedented fiscal support, GDP will soar by at least 6% in 2021, surpassing the pre-crisis level of 2019. Inflation will accelerate and temporarily overshoot the Federal Reserve’s 2% target. Nonetheless, the central bank will not deviate from its accommodating stance. The Fed’s top priority is  employment, which continues to bear the scars of the crisis and has a long way to go before making up for all of the lost ground. As a result, monetary conditions will remain accommodating, both for the economy and the markets, even at the risk of encouraging some excessive behaviour.
US banks: reactivation of the Fed’s Reverse Repo facility, a factor in reducing balance sheets 4/7/2021
On 17 March, the US Federal Reserve (Fed) raised the ceiling on transactions under its Reverse Repo Program (RRP). Each eligible counterparty* can now take, on each trading day, up to USD 80 billion in Treasuries held by the Fed on repo, from a limit of USD30 billion previously. Introduced in the autumn of 2013, one year before the ending of QE3 (the Fed’s third quantitative easing programme) and two years before the beginning of the post-crisis monetary tightening, this facility saw high levels of participation by money market funds (with interest rates of between 0.01% and 0.07% up to the end of 2015) and helped establish a floor for short-term market interest rates. Against a background of abundant central bank liquidity, the programme has the effect of reducing downward pressure on short-term rates by encouraging money market funds and GSEs to “lend“ part of their cash to the Fed rather than on markets (repo, Fed Funds) where demand has dried up. Although the reactivated RRP has not so far seen much uptake (the interest rate paid is zero), it could allow, over the coming weeks, a slimming down of bank balance sheets. The penalty that certain banks are preparing to introduce on deposits from institutional clients, in a bid to reduce their balance sheets, could push this cash towards money market funds and from there, via the reactivation of the RRP, to the Fed**. * 24 primary dealers, 16 banks, 15 Government-Sponsored Enterprises and 91 money market funds. ** In 2015 JP Morgan introduced a penalty on deposits that resulted in an outflow of around USD200 billion in non-operating deposits from its balance sheet and helped reduce the regulatory equity surcharge arising from its position as a global systemically important bank (G-SIB).
Does the American Rescue Plan go too far? 3/23/2021
Totalling USD 1.9 trillion or 9 percent of GDP, the American Rescue Plan ranks among the largest stimulus packages ever launched in the United States. The plan aims to overcome the Covid-19 pandemic, but does not stop there. The new supportive measures, combined with those approved in December 2020, could rapidly bring the US economy under pressure; Inflation is not the biggest threat, even though it is expected to rise above 2%. The surge in prices is likely to be short lived since global competition and the accelerating digital revolution are bound to have a moderating effect. Among the possible harmful effects is the risk of fuelling speculative behaviours in certain market segments (tech stocks, high-yield bonds…).  
Trying to read the mind of the Federal Reserve 3/22/2021
The new economic projections of the FOMC members reflect a big but temporary boost to growth from the fiscal stimulus and the normalisation of economic activity as the adult population is vaccinated. They expect a limited, temporary increase of inflation. Four participants now expect that the circumstances would warrant an increase in the federal funds rate next year. Seven expect this to be the case in 2023. Fed chairman Powell was quick to point out that the projections are not a committee forecast and that the data do not justify a change in policy. This message clearly anchors short-term interest rates, whereas longer-term bond yields fluctuate on the waves of ease or unease about where the federal funds rate could be several years into the future.
Improvement confirmed 3/15/2021
With deaths from Covid-19 having exceeded the startling level of 500,000 in the US, other cheerier statistics have driven the markets forward;  The acceleration in the vaccination campaign, which has already administered 100 million doses, and the associated fall in the number of new cases, to close to their lowest level since the pandemic began, have, day by day, built hope that the crisis is nearing its end...

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