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January 16, 2019
I didn't coin the title of this blog post. It was the label on a chart of the Federal Reserve's balance sheet that appeared in an issue of The Wall Street Journal last week. I've led with this phrase because it does seem to capture some of the sentiment around what has become the elephant in the monetary policy room: Is the rundown in the size of the Fed's balance sheet causing an unanticipated, and unwarranted, tightening of monetary policy conditions? I think the answer to that question is "no." Let me explain why.
In June 2017, the Federal Open Market Committee (FOMC) determined that it was appropriate to begin the process of reducing the size of the Fed's balance sheet, which had more than quadrupled as a result of efforts to combat the financial crisis and support the subsequent recovery from a very deep recession.
As I noted in a speech last November, I see the Committee's strategy for shrinking the balance sheet as having two essential elements.
- First, the normalization process is designed to be gradual. It was phased in over the course of about a year and a half and is now subject to monthly caps so the run-down is not too rapid.
- Second, the normalization process is designed to be as predictable as possible. The schedule of security retirements was announced in advance so that uncertainty about the pace of normalization can be minimized. (In other words, "quantitative tightening" is decidedly not on the QT.) As a result, the normalization process also reduces complexity. Balance-sheet reduction has moved into the background so that ongoing policy adjustments can focus solely on the traditional interest-rate channel.
In his recent remarks at the annual meeting of the American Economic Association, Chairman Jerome Powell was very clear that the fairly mechanical balance-sheet strategy adopted by the FOMC thus far should not be interpreted as inflexibility in the conduct of monetary policy or an unwillingness to recognize that balance-sheet reduction is in fact monetary policy tightening.
I will speak for myself. Balance-sheet policy is an element of the monetary policy mix. The decision to adopt a relatively deterministic approach to balance-sheet reduction is not a decision to ignore the possibility that it has led or might lead to a somewhat more restrictive stance of monetary policy. It is a decision to make whatever adjustments are necessary through the Fed's primary interest-rate tools to the greatest extent possible.
I maintain that there is still wisdom in this approach. The effects of our interest-rate tools are much more familiar to both policymakers and markets than balance-sheet tools are. That, to my mind, makes them the superior instrument for reaching and maintaining our dual goals of stable inflation and maximum employment. It is my belief that reducing the number of moving pieces makes monetary policy more transparent and predictable, which enhances the Committee's capacity for a smooth transition toward those goals.
It should now be clear that nothing is written in stone. Whether the FOMC uses active interest-rate policy with passive balance-sheet policy or uses both instruments actively, policy decisions will ultimately be driven by the facts on the ground as best Committee members can judge, and by assessments of risks that surround those judgments.
In my own judgment, it is far from clear that the ongoing reduction in the balance sheet is having an outsized impact on the stance of monetary policy. I think it is widely accepted that one of the ways balance-sheet policies work is by affecting the term premia associated with holding longer-term securities. (There are many good discussions about balance-sheet mechanisms, including this one by Edison Yu, which can be found in the first quarter 2016 edition of the Philadelphia Fed's Economic Insights, or this article by Jane Ihrig, Elizabeth Klee, Canlin Li, Min Wei, and Joe Kachovec in the March 2018 issue of the International Journal of Central Banking.)
Lots of things can push term premia up and down. But one of the factors is the presumed willingness of the central bank to purchase long-term securities in scale—or not. The idea that running down the balance sheet tightens monetary policy is that, in so doing, the FOMC is removing a crucial measure of support to the bond market. This makes longer-term securities riskier by transferring more duration risk back to the market, which raises term premia and, all else equal, pushes rates higher.
Although estimating term premia is as much art as science, I don't think the evidence supports the argument that these premia have been materially rising as a result of our normalization process. The New York Fed publishes one well-known real-time estimate of the term premia associated with 10-year Treasury securities. But isolating and quantifying the effect of balance-sheet changes on term premia is challenging. It is possible that a number of factors, such as the continued high demand for U.S. Treasuries by financial institutions and a low inflation risk premium, might have dampened the independent effect of balance sheet run-off. But if the term premia channel is a critical piece of what makes balance-sheet policy work, I'm hard pressed to see much evidence of financial tightening via rising term premia in the data so far.
Lest anyone think I am overly influenced by one particular theory, I will emphasize that I am not taking anything for granted. In addition to my monitoring of developments on Main Street, I will be watching financial conditions and term premia as I assess the outlook for the economy. My view is that a patient approach to monetary policy adjustments in the coming year is fully warranted in light of the uncertainties about the state of the economy, about what level of policy rates is consistent with a neutral stance, and about the overall impact of balance-sheet normalization. This patience is one of the characteristics of what I mean by data dependence.
January 11, 2019
Are Employers Focusing More on Staff Retention?
Many people are quitting their current job. According to data from the Job Openings, Layoffs, and Turnover Survey (JOLTS) from the U.S. Bureau of Labor Statistics, workers are voluntarily leaving their current workplace (for reasons other than retirement or internal company transfers) at rates not seen since the late 1990s.
A high rate of quits is consistent with a tightening labor market. In such a market, the promise of more pay elsewhere lures an increasing share of workers away from their current employer. The potential benefit of changing jobs is also evident in the Atlanta Fed's Wage Growth Tracker, which typically exhibits a positive differential between the median wage growth of people changing jobs versus those who don't.
However, this Wage Growth Tracker pattern has changed in recent months. Since mid-2018, the median wage growth of job stayers has risen sharply and is at the highest level since 2008. As the following chart shows, the gap between the wage growth of job switchers and stayers has narrowed.
Is it possible that this new pattern is just noise and will disappear in coming months? After all, the wage growth for job stayers has spiked before. But taken at face value, it suggests that the cost of losing staff (recruiting cost, cost of training new employees, productivity loss from having a less experienced workforce, etc.) might be forcing some employers to boost current employees' pay in an effort to retain staff. Interestingly, the pattern is most evident among prime-age workers in relatively high-skill professional occupations.
Firms are always focused on staff retention and employ various strategies to reduce turnover in key positions. One of those strategies—larger pay increases—might now be taking a more prominent role.
We will closely monitor the Tracker for further evidence on this emerging trend. However, that might be later rather than sooner because the source data is provided by the U.S. Census Bureau, which has cut most services because of the current lapse in congressional funding. But when information becomes available, we'll be ready to parse it—so stay tuned!
December 04, 2018
Defining Job Switchers in the Wage Growth Tracker
Among the questions we receive about the Atlanta Fed's Wage Growth Tracker, one of the most frequent is about the construction of the job switcher and job stayer series. These series are derived from data in the Current Population Survey (CPS) and are intended to show how median wage growth differs for those who change their job from last year versus those who are in the same job. However, the monthly CPS does not actually ask if the person has the same job as a year ago.
So how to proceed? The CPS does contain information about the person's industry and occupation that we aggregate into consistent categories that can be compared to the person's industry/occupation reported a year earlier. If someone is in a different occupation or industry category, then we can reasonably infer that the person has changed jobs. To illustrate, for 2017, 18.8 percent of people in the Wage Growth Tracker data are in a different industry category than they were in 2016, and 28.6 percent are in a different occupation category. Of those who remain in the same industry, 23.9 percent changed occupation group, and of those in the same occupation group, 13.5 percent are in a different industry. However, this information doesn't allow us to identify all job switchers because being in the same industry and occupation group as a year earlier does not preclude having changed jobs.
Fortunately, the CPS also has questions based on who a person said their employer was in the prior month. It asks if that person still works there and if the employee's activities and job duties are the same as last month. If someone answers either of these questions in the negative, then it is likely that person is also in a different job than a year earlier. In 2017, 1.5 percent of people in the Wage Growth Tracker data said they have a different employer than in the prior month, and 0.9 percent report having different job responsibilities at the same employer.
Unfortunately, the dynamic structure of the CPS means that the responses to these "same employer/activity" questions can only potentially be matched with an individual's response in the prior two months, and not a year earlier. Moreover, some responses to those questions are blank, even for people whom we identify as being employed in the prior month. For those individuals, we simply don't know if they are in the same job as a month earlier. Of the non-null responses, the vast majority do not change job duties or employer from one month to the next. So if we assume the blank responses are randomly distributed among the employed population, it's reasonable to also treat the blanks as job stayers.
Previously, we had treated the blank "same employer/activity" observations as job switchers, but that approach almost certainly misclassified some actual job stayers as job switchers. Instead, we now define a job switcher as someone in the Wage Growth Tracker data who is in a different occupation or industry group than a year earlier, or someone who says no to either of the "same employer/activity" questions in the current or prior two months. We label everyone else a job stayer.
Does the definition matter for median wage growth? The following chart shows the annual time series of the difference between the median wage growth of job switchers and job stayers based on both the old and new definitions.
As you can see, the results are not qualitatively different. Job switchers have higher median wage growth during strong labor market conditions and lower growth during bad times. Not surprisingly, the gap in median wage growth is generally lower (more negative) using the old definition.
The next chart shows the annual time series of the share of job switchers in the Wage Growth Tracker data based on the new and old definitions. A caveat: we have been unable to construct occupation and industry groupings for 2003 that are completely consistent with the groupings used in 2002. This results in an erroneous spike in measured job switching for 2003.
Notice that the share of job switchers under the new definition peaked prior to the last two recessions, declined during the recessions, and then recovered. That share is now at a cyclical high. A discrete jump in the number of blank responses recorded for the "same employer/activity" questions in the CPS starting in 2009 masked this cyclicality under the old definition.
In about a week from now, the next update of the Wage Growth Tracker data will implement the new and improved definition of job switchers—I hope you'll check it out, and I'll be writing about it here as well.
November 29, 2018
Cryptocurrency and Central Bank E-Money
The Atlanta Fed recently hosted a workshop, "Financial Stability Implications of New Technology," which was cosponsored by the Center for the Economic Analysis of Risk at Georgia State University. This macroblog post discusses the workshop's panel on cryptocurrency and central bank e-money. A companion Notes from the Vault post provides some highlights from the rest of the workshop.
The panel began with Douglas Elliot, a partner at Oliver Wyman, discussing some of the public policy issues associated with cryptoassets. Drawing on a recent paper he cowrote, Elliot observed that there are "at least four substantial market segments" that provide long-term support for cryptoassets:
- libertarians and techno-anarchists who, for ideological reasons, want a currency without a government;
- people who deeply distrust their government's economic management;
- seekers of anonymity, who don't want their names associated with transactions and investments; and
- technical users who find cryptoassets useful for some blockchain applications.
Besides these groups are the speculators and investors who hope to benefit from price appreciation of these assets.
Given the strong interest of these four groups, Elliot argues that cryptoassets are here to stay, but he also asserts that these assets raise public policy issues that regulation should address. Some issues, such as anti–money laundering, are being addressed, but all would benefit from a coordinated global approach. However, he observes that of the four long-term support groups, only the technical users are likely to favor such regulations.
Another paper, by University of Chicago professor Gina C. Pieters, analyzed the extent to which the cryptocurrency market is global using purchases of cryptocurrency by state-issued currencies. She finds that more than 90 percent of all cryptocurrency transactions occur using one of three currencies: the U.S. dollar, the South Korean won, and the Japanese yen. She further finds that the dominance of these three currencies cannot be explained by economic size, financial openness, or internet access. Pieters also observed that transactions involving bitcoin, the largest cryptocurrency by market value, do not necessarily represent a country's cryptomarket share.
Warren Weber, former Minneapolis Fed economist and a visiting scholar at the Atlanta Fed, discussed so-called "stable coins," one type of cryptocurrency. The value of many cryptocurrencies has fluctuated widely in recent years, with the price of one bitcoin soaring from under $6,000 to more than $19,000 and then plunging to just over $6,000—all within the period from October 2017 to October 2018. This extreme price volatility creates a significant impediment to Elliot's technical users who would like some method of buying blockchain services with a currency controlled by a blockchain. In an attempt to meet this demand, a number of "stable coins" have been issued or are under development.
Drawing on a preliminary paper, Weber discussed three types of stable coins. One type backs all of the currency it issues with holdings of a state-issued currency, such as the U.S. dollar. A potential weakness of these coins is that they incur operational costs that require payment. Weber observed that interest earnings might cover part of these expenses if the stable coin issuer holds the dollars in an interest-bearing asset. Additionally, charging redemption fees might offset some or all of the expense.
The other two alternatives involve the creation of cryptofinancial entities or crypto "central banks." Both of these approaches seek to adjust the quantity of the cryptocurrency outstanding to stabilize its price in another currency. However, Weber observed that both of these approaches are subject to the problem that the cryptocurrency could take on many values depending upon people's expectations. If people come to expect that a coin will lose its value, neither of these approaches can prevent the coin from becoming worthless.
The question of whether existing central banks should issue e-money was the topic of a presentation by Francisco Rivadeneyra of the Bank of Canada. Summarizing the results of his paper, Rivadeneyra observed that central banks could provide e-money that looks like a token or a more traditional account. The potential for central banks to offer widely available account-based services has long existed. However, after considering the tradeoffs, central banks have elected not to provide these accounts, and recent technological developments have not changed this calculus. However, new technologies may have changed the tradeoff for token-based systems. Many issues will need to be addressed first, though.
- Quantitative Frightening?
- Are Employers Focusing More on Staff Retention?
- Defining Job Switchers in the Wage Growth Tracker
- Cryptocurrency and Central Bank E-Money
- Polarization through the Prism of the Wage Growth Tracker (Take Two)
- Polarization through the Prism of the Wage Growth Tracker
- On Maximizing Employment, a Case for Caution
- Demographically Adjusting the Wage Growth Tracker
- What Does the Current Slope of the Yield Curve Tell Us?
- Does Loyalty Pay Off?
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