Treasury

How the Fed Managed the Treasury Yield Curve in the 1940s

Published by Anonymous (not verified) on Mon, 06/04/2020 - 9:00pm in

Kenneth D. Garbade

https://libertystreeteconomics.newyorkfed.org/2020/04/how-the-fed-managed-the-treasury-yield-curve-in-the-1940s.html

The coronavirus pandemic has prompted the Federal Reserve to pledge to purchase Treasury securities and agency mortgage-backed securities in the amount needed to support the smooth market functioning and effective transmission of monetary policy to the economy. But some market participants have questioned whether something more might not be required, including possibly some form of direct yield curve control. In the first half of the 1940s the Federal Open Market Committee (FOMC) sought to manage the level and shape of the Treasury yield curve. In this post, we examine what can be learned from the FOMC’s efforts of seventy-five years ago.

Lessons in Yield Management

The FOMC’s efforts offer two lessons in yield curve management:

1. The shape of the yield curve cannot be fixed independently of the volatility of interest rates and debt management policies.

During World War II the FOMC sought to maintain a fixed, positively sloped curve. The policy left long-term bonds with the risk characteristics of short-term debt but a yield more than 200 basis points higher. At the same time, the Treasury pursued a policy of issuing across the curve, from 13-week bills to 25-year bonds. Faced with investor preferences for the higher yielding, but hardly riskier, bonds, the System Open Market Account had to absorb a substantial quantity of bills. A flatter curve and/or a less rigid interest rate policy might have required less aggressive interventions.

2. Large-scale open market operations may be required in the course of refixing, from time to time, the shape of the yield curve.

After 1946, Federal Reserve officials pursued a program of gradual relaxation of the wartime regime, beginning with the elimination of the fixed rate for 13-week bills, continuing with incremental increases in the ceiling rate on 1-year securities, and then moving further out the curve, with the ultimate goal of a free market for all Treasury debt. Following the elimination of the fixed bill rate in 1947, investors began to move their portfolios into shorter-term debt. The result was a massive shift in the composition of the Open Market Account as the Account bought bonds and sold bills to accommodate the changing maturity preferences of private investors.

The Coming of War

World War II began on Friday, September 1, 1939. By mid-1940, Germany had defeated Poland, France, and Belgium, and a British expeditionary force had been forced to withdraw from the continent. In a speech on October 30, President Roosevelt promised Britain “every assistance short of war” and Britain soon began placing orders for large quantities of planes, artillery, tanks, and other heavy weapons, even though it lacked the financial resources to pay. Congress signaled that it would finance whatever Britain required when it passed the Lend-Lease Act in March 1941.

Emanuel Goldenweiser, director of the Division of Research and Statistics at the Federal Reserve Board, recommended to the FOMC in June 1941 that “a definite rate be established for long-term Treasury offerings, with the understanding that it is the policy of the Government not to advance this rate during the emergency.” He suggested 2½ percent and argued that “when the public is assured that the rate will not rise, prospective investors will realize that there is nothing to gain by waiting, and a flow into Government securities of funds that have been and will become available for investment may be confidently expected.” Three months later, Goldenweiser recommended a congruent monetary policy, “a policy under which a pattern of interest rates would be agreed upon from time to time and the System would be pledged to support that pattern for a definite period.”

Financing American Participation in World War II

Active U.S. participation in World War II followed the bombing of Pearl Harbor in December 1941 and ended with the surrender of Germany in April 1945 and Japan four months later. From year-end 1941 to year-end 1945, Treasury indebtedness increased from $58 billion to $276 billion. Marketable debt accounted for 72 percent of the increase; war savings bonds and special issues to government trust funds accounted for the balance. The increase in marketable debt included $15 billion of bills, $38 billion of short-term certificates, $17 billion of notes, and $87 billion of conventional bonds.

By mid-1942 the Treasury yield curve was fixed for the duration of the war, anchored at the front end with a ⅜ percent bill rate and at the long end with a 2½ percent long-bond rate. Intermediate yields included ⅞ percent on 1-year issues, 2 percent on 10-year issues, and 2¼ percent on 16-year issues.

Experience with the Fixed Pattern of Rates

Fixing the level of Treasury yields endogenized the size of the System Open Market Account: the Fed had to buy whatever private investors did not want to hold at the fixed rates. As a result, the size of the Account increased from $2.25 billion at the end of 1941 to $24.26 billion at the end of 1945.

Fixing the pattern of Treasury yields endogenized the maturity distribution of publicly held debt. In each market sector, the Fed had to buy whatever private investors did not want to hold and, up to the limits of its holdings, had to sell whatever private investors wanted to buy beyond what the Treasury was issuing.

Investors quickly came to appreciate that they faced a positively sloped yield curve in a market where yields were at or near their ceiling levels. An investor could move out the curve to pick up coupon income without taking on more risk and then ride the position down the curve, adding to total return. This strategy of “playing the pattern of rates” led investors to prefer bonds to bills. Their preferences, coupled with the Treasury’s decision to issue in all maturity sectors, forced the Open Market Account to buy unwanted bills and to sell the more attractive bonds. By late 1945 the Account held 75 percent of outstanding bills, but—in spite of heavy bond issuance by the Treasury—fewer bonds than it had held in late 1941.

The essential problem was that the positive slope of the curve was inconsistent with the negligible volatility of rates and the Treasury’s issuance program. In early 1949, Allan Sproul, the president of the Federal Reserve Bank of New York, concluded that “in a supported market in which all obligations might be regarded as demand obligations, a horizontal rate structure would theoretically be required.”

Regaining Control

Following the cessation of hostilities in August 1945, the overarching objective of Federal Reserve officials was regaining control of open market operations. A “cold turkey” approach, abruptly terminating support for the fixed pattern of rates, was never seriously considered. Instead, officials pursued a more measured approach, first terminating the ⅜ percent fixed bill rate, then gradually lifting the caps on yields on coupon-bearing securities, starting with 1-year instruments.

The FOMC terminated the ⅜ percent bill rate on July 3, 1947. Bill yields increased to 66 basis points in July, 75 basis points in August, and 95 basis points by the end of the year. Investors had little incentive to buy 1-year securities at ⅞ percent when bill yields were rising so dramatically and the Treasury was forced to reprice its fall 1-year offerings to 1 percent, and its December offering to 1⅛ percent.

Rising bill rates triggered a reversal of the preference for bonds over bills. In the face of steady selling, bond yields rose from 2.22 percent in June 1947 to 2.39 percent in December and then to 2.45 percent a month later. The Fed sought to cushion the reversal by buying bonds and selling (or running off) bills. In the second half of 1947, the Open Market Account bought $2 billion of bonds while selling or running off $3 billion of bills. In 1948, the Account bought an additional $8 billion of bonds and reduced its bill position by $6 billion.

In late November 1950, facing the prospect of another major war, the Fed, for the first time, sought to free itself from its commitment to keep long-term Treasury yields below 2½ percent. At the same time, Secretary of the Treasury John Snyder and President Truman sought a reaffirmation of the Fed’s commitment to the 2½ percent ceiling.

The impasse continued until mid-February 1951, when Snyder went into the hospital and left Assistant Secretary William McChesney Martin to negotiate what has become known as the “Treasury-Federal Reserve Accord.” Alan Meltzer has observed that the Accord “ended ten years of inflexible [interest] rates” and was “a major achievement for the country.”

Related Reading

Kenneth D. GarbadeKenneth D. Garbade is a senior vice president in the Research and Statistics Group of the Federal Reserve Bank of New York.

How to cite this post:

Kenneth D. Garbade, “How the Fed Managed the Treasury Yield Curve in the 1940s,” Federal Reserve Bank of New York Liberty Street Economics, April 6, 2020, https://libertystreeteconomics.newyorkfed.org/2020/03/how-the-fed-manage....




Disclaimer

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Telegraph Journo Embarrassed by Sargon and Robinson’s Free Speech Organisation

As we know, embarrassing the Tories is good and righteous work. So Carl Benjamin, aka Sargon of Akkad, the man who broke UKIP, deserves especial congratulations for making the Tories uncomfortable over the whole question of free speech. He didn’t do it intentionally. It’s just that they found the similarities between Toby Young’s Free Speech Union and a rival right-wing organisation founded by Sargon and the islamophobic thug Tommy Robinson far too close for comfort.

Last month the Spectator’s vile Toby Young announced that he was founding the Free Speech Union along with a load of other rightists. This was going to defend those expressing controversial opinions from being silenced and kicked out of their jobs. The Heil on Sunday quoted Tobes as saying

“People who become the target of ‘Twitter storms’ after making controversial remarks will be defended by a new body called the Free Speech Union. The organisation will ‘stand up for the rights of its members to tell the truth in all circumstances’. The union has been set up by the journalist Toby Young in response to police investigations into a string of ‘non-crime hate incidents’ triggered by outspoken comments”.

“If someone at work writes to your boss to complain about something you’ve said, we’ll write to them, too, and explain the importance of intellectual tolerance and viewpoint diversity. If self-righteous social-media bullies pick on you, we’ll return the fire. If someone launches an online petition calling for you to be sacked, we’ll launch a counter-petition. The enemies of free speech hunt in packs; its defenders must band together too.”

The organisation has a Latin motto, which runs something like ‘Audi altri partem’, which I think means ‘Hear the other side.’

However, it’s not a union, but an incorporated, whose five directors are all spokesmen for the right. They include Young himself, Prof Nigel Biggar, who defends colonialism, Douglas Murray, who has islamophobic opinions, and Radomir Tylecote, who was suspended from the Treasury for writing a book against the EU. And their record of defending their opponents’ right to express their opinions is actually very poor. Zelo Street in their article about the wretched union quoted Paul Bernal, who tweeted

“As Toby Young should know, your commitment to free speech isn’t shown by how well you defend those whose speech you agree with, but how you defend those whose speech you don’t. When his ‘free speech union’ talks about the excesses of the Prevent programme, then see”.

The Street himself commented that it was just free speech for the right, and a way for Tobes and co. to complain about how unfair the world is.

https://zelo-street.blogspot.com/2020/02/toby-youngs-free-speech-sham.html

Unfortunately for Tobes’ outfit, Sargon and Tommy Robinson, the founder and former leader of the EDL, have launched their own right-wing free speech organisation, the Hearts of Oak Alliance. And the similarities between the two concerned Tory feminist academic Zoe Strimpel to write a piece for the Torygraph on the first of this month, March 2020, complaining about this fact. Strimpel’s a Cambridge graduate with an M. Phil in gender studies. She’s the author of a series of book on men’s psychology, feminism, dating and romance. She began her article with the statement that her circle of friends has taken on a left-wing hue. It includes many Labour supporters, against whom she has to defend capitalism and Zionism. Well, at least she said ‘Zionism’, rather than accuse them once again of anti-Semitism. She’s upset by them chuckling off her fears about the erosion of free speech and thought, which, she claims, is under attack by a visible machinery of censorship in offices, the cops, universities, arts and online. She cites approvingly a report by the right-wing think tank Policy Exchange, which advised universities to guard against being the voice of critics of those, who despise the supporter of the traditional values of patriotism, family, faith and local traditions. They have to be willing to represent and not sneer at those, who feel justifiable pride in British history, culture and traditions.

However, she was worried whether it was possible to defend free speech, without sullying the cause with too many real thugs, who wanted to get as close as possible to inciting actual violence under the guise of expressing their democratic rights. Was it possible to challenge the climate of intimidation, snide snitching, and mendacious and manipulative accusations of hate-mongering, racism and making people feel ‘unsafe’, without being a magnet for the alt-right? She agreed to become a member of the advisory board, but has her reservations. She’s uncomfortable about Sargon’s and Robinson’s organisations, because of Sargon’s own anti-feminist, misogynistic views. Sargon was, she declared, far right, a thug, who called feminism ‘a first world female supremacy movement’, and ‘all kinds of blokeish’. He’s also the man responsible for sending that Tweet to Labour MP Jess Philips, telling her that he ‘wouldn’t even rape her’.

She concluded her article by stating that the aims of Tobes’ outfit were perfectly legitimate and free speech is under threat. But it was ‘just a shame that in defending those who ought to speak freely, one has to defend those, who – in an ideal world – wouldn’t have anything to say.’

Sargon was naturally upset at this assault on his character. He therefore posted a piece up on his YouTube channel, Akkad Daily, on the 2nd of March defending himself from her attack. He didn’t deny he was anti-feminist, and defended his own comments on this. But he roundly denied being a thug and far right. He was, he repeated, a Lockean classical liberal, and believed in precisely the same values as those Policy Exchange’s report claimed were under attack.

Sargon is indeed far right. He’s a libertarian, who would like everything privatised and the end of the welfare state. He’s against the European Union and immigration, and is bitterly critical of feminism and affirmative action for women and ethnic minorities. And yes, he is an islamophobe like Robinson. But in very many ways he and Robinson are absolutely no different from Young and his crew. Young is also far right. He’s a right-wing Tory, who attended eugenics conferences whose members and speakers were real Nazis and anti-Semites. And Young also is all kinds of blokeish as well. He’s posted a number of tweets expressing his obsession with women’s breasts. Way back in the ’90s, he also wrote a piece for the men’s magazine, GQ, about how he once dressed up in drag in order to pose as a woman, because he wanted to snog lesbians in gay clubs.

And it’s not just the people in the Free Speech Union, who have no real interest in free speech. Neither does Conservatism or Zionism. Thatcher tried to pass legislation making it illegal for universities to employ Marxists. A week or so ago, Turning Point UK announced that it was launching a British version of its parent organisation’s Professor Watch, a blacklist of university lecturers, who dared to express or teach left-wing views. And anti-Zionist and Israel-critical bloggers, like Tony Greenstein and Martin Odoni have described how Israel’s super-patriotic supporters, like Jonathan Hoffman, don’t want to permit free debate about Israel and its barbarous treatment of the Palestinians. Rather, they turn up at pro-Palestinian meetings with the intention of heckling, shouting down and otherwise disrupting the proceedings. They also seek to use the law to suppress criticism and factual reporting of Israeli atrocities as anti-Semitism.

Now there are opponents of free speech on the left. But Stimpel, as a good Tory, doesn’t want to recognise that it exists on the right. She’s embarrassed that supporting right-wing speech also means supporting extreme right-wing figures like Sargon and Robinson. But she doesn’t recognise, because she can’t afford to, that Sargon and Robinson aren’t actually much different from Toby Young, Douglas Murray, Radomir Tylecote, Nigel Biggar and the rest. In fact, there’s little difference between the two groups in fundamental attitudes.

It’s just that Sargon’s a little more extreme and doesn’t have a column in a major right-wing newspaper or magazine.

Blair Warns Labour Party against Culture War over Trans Rights

This is also another story from Friday’s I, for 21st February 2020. Speaking at King’s College London, the Thatcherite warmonger and privatiser of the NHS urged the Labour Party not to get into a war over Trans rights and said he would not have signed the 12-point pledge card that Rebecca Long-Bailey has.

The article, by Patrick Daly, runs

Tony Blair has urged Labour not to get into a “culture war” on trans rights after the issue split the current crop of leadership hopefuls.

The former prime minister has advised the party to avoid signing up to activist pledges on transgender rights – an issue that has dogged the three-horse race to replace Jeremy Corbyn.

“We don’t need to be fighting that culture war,” Mr Blair told an audience at King’s College London yesterday.

“That does mean to say you don’t take the right positions on things.”

Leadership contenders shadow Business Secretary Rebecca Long-Bailey and backbencher Lisa Nandy have both given their backing to the controversial 12-point pledge card issued by the Labour Campaign for Trans Rights.

The pledges have drawn criticism for demanding that members deemed to be “transphobic” are expelled from the party. The document also describes organisations such as Woman’s Place UK, a group that calls for biological sex to be acknowledged as part of maintaining women’s rights, as a “trans-exclusionist hate group”.

Sir Keir Starmer, the shadow Brexit Secretary and third contender in the leadership battle, has not said whether he backs the 12 pledges but has called for transgender rights to be seen as human rights.

Mr Blair said that, rather than signing up to pledges, Labour should instead be engaging with the formal Government consultation on whether those living as transgender should be able to self-identify.

Asked whether he would have signed the LCTR pledges, the ex-Labour leader of 13 years replied: “No, I wouldn’t”.

Meanwhile, Mr Blair’s successor Gordon Brown gave a speech at a London School of Economics event last night where a student asked the former Chancellor what the optimal relationship between the Treasury and No. 10 is.

In response to the question, Mr Brown laughed and said: “That was me and Tony.”

As much as I despise Blair, he’s right on this issue. There are real dangers with the radical transgender lobby, not least in the way their proposals for expanding the definition of transgender and making people question their gender identity could mean persuading mentally and emotionally vulnerable people into transitioning when they don’t need it and would bitterly regret it later.

More specifically, it risks creating another witch hunt in the Labour Party, like that the Israel lobby started with the anti-Semitism smears. That has scores of ordinary, decent people smeared and expelled as anti-Semites for no other reason than they supported Jeremy Corbyn or weren’t sufficiently vociferous in praising or defending Israel.

Blair’s right on the issue of trans rights, but I wish his supporters hadn’t gleefully participated in the anti-Semitism witch hunt. The fact that Blair’s warning against transphobia witch hunt probably means he’s afraid his supporters won’t benefit from it.

British Diplomat Resigns Over Brexit Half-Truths

Published by Anonymous (not verified) on Tue, 10/12/2019 - 2:58am in

Another set-back for the Tories was the resignation of Alexandra Hall Hall, the leading Brexit negotiator, in protest at politicians’ deceit and half-truths about it and its effects. This was also reported in Saturday’s I in the article ‘British diplomat quits with tirade at ‘half-truths”, written by Jane Merrick. This ran

A senior British diplomat in Washington has resigned, saying she can no longer “peddle half-truths” on behalf of a government she does not “trust”.

Alexandra Hall Hall, the lead envoy for Brexit at the embassy, accused ministers of “misleading or disingenuous” claims about the UK’s departure from the EU which had made diplomats’ jobs promoting democracy abroad “that much harder”.

The blistering resignation letter will fuel concerns over a lack of trust in Boris Johnson and his arguments on Brexit, highlighted by the leaked Treasury documents obtained by Jeremy Corbyn showing there will be customs checks between Northern Ireland and Great Britain under the Prime Minister’s deal.

Ms Hall Hall’s letter was sent to her bosses in the Diplomatic Service this week and obtained by CNN. She said her position had become “unbearable personally and untenable professionally”.

She added: “I am also at a stage in life where I would prefer to do something more rewarding with my time than peddle half-truths on behalf of a government I do not trust.”

Ms Hall Hall’s job was to explain the UK Government’s Brexit strategy to politicians and officials on Capitol Hill and in the White House.

Her letter is all the more astounding because diplomats rarely criticise the government they have worked for, even after resigning.

She argued that ministers’ actions in the UK had made it harder to British diplomats to uphold “core values” abroad.

She added: ” I have been increasingly dismayed by the way in which our political leaders have tried to deliver Brexit, with reluctance to address honestly, even with our own citizens, the challenges and trade-offs which Brexit involves; the use of misleading or disingenuous arguments about the implications of the various options before us; and some behaviour towards our institutions, which, were it happening in another country, we would almost certainly as diplomats have received instructions to register our concern.

“It makes our job to promote democracy and the rule of law that much harder, if we are not seen to be upholding these core values at home.”

Ms Hall Hall said she was not “for or against Brexit, per se”, adding: “I took this position with a sincere commitment, indeed passion, to do my part, to the very best of my abilities, to help achieve a successful outcome on Brexit.”

But she added: “Each person has to find their own level comfort with this situation. Since I have no other element to my job except Brexit, I find my position has become unbearable personally, and untenable professionally.”

A Foreign Office spokesman said: “We won’t comment on the detail of an individual’s resignation.”

In short, Ms Hall Hall, a conscientious and extremely capable diplomat, felt unable to do her job because of the massive deceit coming from Boris Johnson’s government. This deceit is so great, that it is comparable to that of the undemocratic governments British diplomats have the job of protesting against.

Boris Johnson is not only a threat to democracy in the UK, but a threat to Britain’s role in spreading democracy throughout the world.

This is blistering condemnation and should be taken very seriously by anyone, who thinks that Johnson is somehow standing up for patriotic British values because of Brexit.

He isn’t. He’s a real and present threat to them. Get him out, and someone else in who will defend democracy and genuinely open and transparent government: Corbyn.

The Tories’ Brexit Cover-Up on Northern Ireland

Published by Anonymous (not verified) on Tue, 10/12/2019 - 2:06am in

It wasn’t a good weekend for the Tories. For one thing, Jeremy Corbyn used leaked Treasury documents to show that the Tories were covering up the effects Brexit would have on trade between Northern Ireland and the rest of the UK. This was reported in the I in the article ‘Corbyn accuses Tories of Brexit cover-up’ by Hugo Gye. This ran

Jeremy Corbyn has accused the Conservatives of trying to hide the true effects of their Brexit deal, claiming it would put a border in the Irish Sea despite Boris Johnson’s denials.

The Tories insisted Labour is indulging in “wild conspiracy theories” after the party produced leaked Treasure documents on the implications of the Withdrawal Agreement.

The new Brexit deal puts Northern Ireland in a different customs and regulatory regime from the rest of the UK. The Prime Minister has told Northern Irish business leaders that if they are asked to fill in forms when transporting goods to or from Breat Britain, they should “throw that form in the bin.”

But the Treasury documents say: “Exit summary declarations will be required when goods are exported from NI to GB.” It adds that the Government “will need to balance the benefits of unfettered access against the risks of reduced control over imports”.

The dossier adds that increased friction on trade across the Irish Sea will increase the price of high street goods and hit business profits. It is the equivalent of imposing tariffs on 30 per cent of all purchases in Northern Ireland, officials wrote.

Mr Corbyn said: “For trade going from Northern Ireland to Great Britain the Government cannot rule out regulatory checks, rules of origin checks and animal and public health checks.

“And for trade going the other way from Great Britain to Northern Ireland there will be all of the above plus, potentially damaging tariffs. This drives a coach and horses through Boris Johnson’s claim that there will be no border in the Irish Sea. It’s simply not true.”

Asked about the leak, Mr Johnson said: “I haven’t seen the document you are referring to but that’s complete nonsense.

“What I can tell you is that with the deal we have, we can come out as one whole UK – England, Scotland, Wales, Northern Ireland, together.”

His own ministers have previously admitted that some form of checks will be needed on goods crossing the Irish Sea. 

So the Treasury predicts that there will have to be customs checks for goods going to and from Northern Ireland, despite the Tories’ assurances to their DUP allies that this wouldn’t happen. And there is the danger of a 30 per cent rise in the cost of goods in the Six Counties. And, note, Boris has offered absolutely no evidence to back up his denial that this will occur.

It’s more waffle from a waffling, mendacious, deceitful government, and a party, which has done so much to break up the centuries-old union between England, Scotland, Wales and Ulster.

Corbyn is right, and is the right man if anyone is, for sorting out Brexit and creating a lasting peace in Northern Ireland. A peace that has been thrown into grievous jeopardy by Brexit and the Tories.

If you want to boost the economy, big infrastructure projects won't cut it: new Treasury boss

Published by Anonymous (not verified) on Wed, 23/10/2019 - 2:19pm in

Treasury secretary Steven Kennedy – in the job for for just weeks after moving across from the department of infrastructure last month – has dismissed talk of spending big on infrastructure in order to escape an economic downturn.

Such calls “sound straightforward, but in practice are difficult to achieve”, he told a Senate hearing on Wednesday.

The timing requirements of fiscal stimulus are hard to give effect to while ensuring large projects are well planned and executed, and cost and capacity pressures are managed. There are some opportunities though, usually related to smaller projects and maintenance expenditure. The Commonwealth and state Governments are currently actively exploring these opportunities.

More broadly he made it plain that it was the role of the Reserve Bank rather than the Treasury to provide economic stimulus.

The bank has already cut its cash rate to a record low of 0.75% and has indicated it is prepared to consider unconventional monetary policy measures that would have the effect of cutting a wider range of rates.

Read more: 0.75% is a record low, but don't think for a second the Reserve Bank has finished cutting the cash rate

However, bank Governor Philip Lowe said last week such tools would be most effective “when used together with a broader set of policies”, including government spending and tax policies.

Without crisis, no need to spend more

Kennedy rejected the idea of extra spending except in an emergency, saying Treasury could best serve Australia’s interests by a “stable and predictable” policy framework that kept the budget near balance over time.

There would be times when a downturn cut revenue and increased spending on support payments, pushing the budget into deficit, but beyond allowing those so-called automatic stabilisers to operate there wasn’t normally a case for doing more.

The exceptions were “periods of crisis”.

“It is important to consider separately broader policy objectives and temporary responses to crisis,” Kennedy said.

“The circumstances or crisis that would warrant temporary fiscal responses are uncommon.”

Although Australia’s economy is not in crisis, Brexit, the US-China trade war and turmoil in Hong Kong have slowed economic and trade growth worldwide, as businesses opt to stay on the sidelines.

No crisis, but weak growth worldwide

In Australia, economic growth had been unusually weak, weighed down by weak household spending which was itself the result of weak income growth, weak house prices, weak housing investment, and weaker than expected non-mining investment.

Mining investment was down sharply, as was to be expected after the completion of several large liquefied natural gas projects.

Given low interest rates, it was “somewhat of a puzzle” that business investment was not growing faster. Partly that might be because the “hurdle rates” businesses use to assess projects have not been adjusted down as they should have been. Partly it might be because of uncertainties surrounding the global economy and technological change.

Structural factors may also be at play — it is not clear what business investment looks like in a world where more than two thirds of our economy is now services based.

The budget tax cuts that flowed into returns from July have not yet led to a “particularly large improvement” in household spending.

Wages, investment “somewhat of a puzzle”

“We will continue to assess the data on consumption as it becomes available, but it is worth noting that even if households initially use the tax cuts to pay down debt faster, this will still bring forward the point at which households could increase their spending,” Dr Kennedy said.

It is possible that spending might have been even weaker without the tax cuts.

Holding back the economy during the year to June has been drought and dry weather which knocked 0.2 percentage points of the economic growth. Holding it up has been larger than normal growth in government spending that contributed 0.2 percentage points more to economic growth than was normal.

Read more: Why we've the weakest economy since the global financial crisis, with few clear ways out

No one had been able come up with a complete explanation for Australia’s unexpectedly low rate of wage growth. One explanation might be that even though the unemployment rate of 5.2% was unusually low, increases in employment were drawing in older workers and women rather than pushing up wages.

Ultimately what was needed to sustain higher wage growth was productivity growth, and that would be difficult to achieve while business investment was weak. The Productivity Commission had come up with a set of recommendations state and federal ministers were working their way through.

Although economic growth has been very low - just 1.4% in the year to June – it grew more strongly in the last half of that year than the first. It might be “strengthening from here”.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

From the Vault: A Look Back at the October 15, 2014, Flash Rally

Published by Anonymous (not verified) on Tue, 15/10/2019 - 10:00pm in

Tags 

Treasury

Michael J. Fleming, Peter Johansson, Frank M. Keane, and Justin Meyer

 A Look Back at the October 15, 2014, Flash Rally

Five years ago today, U.S. Treasury yields plunged and then quickly rebounded for no apparent reason amid high volatility, strained liquidity conditions, and record trading volume in the market. Federal Reserve Chair Jerome Powell, then a Board governor, noted that such episodes, “threaten to erode investor confidence” and that investors need “to have full faith in the structure and functioning of Treasury markets themselves.” The October 15, 2014, “flash rally” led to an interagency staff report on the events of that day, an annual series of Treasury market conferences, additional study of clearing and settlement practices, and the introduction of a new transactions reporting scheme. Many of these developments are discussed in posts (see, for example, here and here) in the Liberty Street Economics archive.

The Flash Rally Episode

On October 15, 2014, the benchmark 10-year Treasury note traded within a 37-basis-point range, only to close just 6 basis points below its opening level. Moreover, in the narrow window between 9:33 a.m. and 9:45 a.m. ET, the 10-year Treasury yield dropped 16 basis points and then rebounded, without a clear cause. Such a large price change and reversal in such a short time, and without an obvious reason, is unprecedented in the recent history of the Treasury market.

The Joint Staff Report

The events of October 15 are described in a report by staff of the U.S. Treasury, the Federal Reserve Board, the New York Fed, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, summarized in this post. While the report does not pinpoint a single cause of the events that day, it does identify notable changes in Treasury market structure. Principal trading firms, for example, were accounting for more than half of traded volume in the electronic interdealer market, a market segment once limited to broker-dealers.

A Series of Treasury Market Conferences

The October 15 episode also led to a continuing series of conferences that provides a forum for examining the evolving Treasury market. These conferences, hosted by the New York Fed and co-sponsored with the other agencies involved in the Joint Staff Report, bring together market participants, policymakers, and academics to discuss the changing market and its drivers. The 2019 conference, for example, featured panel discussions on new developments in debt management, managing risks including liquidity dynamics, and the future of Treasury market structure.

Better Understanding of Clearing and Settlement

The evolving Treasury market has spurred efforts to better understand the extent to which risk management practices have kept pace. To this end, the Treasury Market Practices Group released a consultative white paper, described in this post, on clearing and settlement practices for secondary market trades. The paper describes in detail the many ways Treasury trades are cleared and settled, and identifies potential risk and resiliency issues.

Advent of Treasury TRACE Data

The October 15 flash rally also raised questions about data availability, with the associated report relying on data not typically available to the official sector. Following a deliberative process, described in this post, the Financial Industry Regulatory Authority (FINRA) began requiring the reporting of Treasury transactions by its member broker-dealers as of July 10, 2017, via FINRA’s Trade Reporting and Compliance Engine (TRACE). These data were examined in a post describing trading activity by market segment and in another describing activity by security type and on-the-run/off-the-run status.

For more insight on the Oct. 15, 2014, flash rally and subsequent market developments, see these posts: