Economist's Insights

Thursday’s Central Bank Chatter

Oct 12, 2017


Fed Governor Powell: Powell, who is considered one of the current front-runners to be Fed Chair when Yellen’s term is up in February, made remarks on the prospects for emerging market economies. He also addressed the current state of U.S. monetary policy. On the former, Powell said, “Corporate debt represents a moderate degree of vulnerability for EME [emerging market economy] prospects. The situation is not alarming, but risks are significant and bear close watching, especially in China.” He said small market surprises can created larger reactions, especially considering the currently absence of volatility. However, this shouldn’t distract the Fed from “continued pursuit of [the Fed’s] dual mandate.” As a result, he expects gradual policy normalization will continue.

Fed Governor Brainard: Brainard discussed inflation trends in an appearance in Washington, saying that she believed temporary factors were partly to blame for the downturn in inflation in 2017. However, she also believes a “reduction in the underlying trend rate of inflation that’s material,” may have occurred and said “there seems to be a global factor as well.” To Brainard, it’s not as simple as waiting on wages; she noted “It’s not so much that the Phillips Curve isn’t operative, it seems to be that the Phillips Curve is just not very important in the overall inflation process.” After posing the question of what are central banks to do to address lower-trend inflation – she clarified that she was talking about the future policy, not current policy, she discussed the merits of future use of price-level targeting.

ECB Officials: ECB President Draghi appeared on a monetary policy panel in Washington on Thursday, but didn’t tip his hand on what the bank plans to do with its QE program which is set to expire in December. Instead, he defended the use of a negative overnight rate, saying that specific policy had “by and large…been a success.” He also supports a continuation of that policy. The current statement reads that the ECB expects its key policy rates “to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.” Draghi added “the ‘well past’ is very, very important in anchoring rate expectations.” His Chief Economist, Peter Praet, also expects accommodation to continue for now. Praet said, “We are undoubtedly experiencing a solid, broad-based and resilient economic recovery that is contributing to a narrowing of the output and unemployment gaps. But there still appears to be a disconnect between growth and inflation…Crucially, the baseline scenario for future inflation remains contingent on easy financing conditions, which, to a large extent, depend on the support of monetary policy.”