Has the Fed Stabilized the Price Level?

Marc P. Giannoni and Hannah Herman

The Federal Reserve Reform Act of 1977 established the monetary policy objectives of maximum employment, stable prices, and moderate long-term interest rates. The goal of “stable prices” has long been understood to mean a low positive inflation rate. On January 25, 2012, the Federal Open Market Committee (FOMC) explicitly defined its price stability mandate in terms of a longer-run goal of 2 percent inflation measured by the total personal consumption expenditure (PCE) deflator. Here, we examine how the behavior of inflation over different time periods compares to this goal. We then discuss how the goal of stabilizing inflation over the long run, rather than on a year-after-year basis, tends to imply a stabilization of the U.S. price level around a trend line—an outcome similar to that from price-level targeting, which offers various theoretical benefits.

A Way With Words: The Economics of the Fed’s Press Conference

Fernando Duarte and Carlo Rosa

When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke’s June press conference confirms the importance of his comments in the marketplace.

At the N.Y. Fed: Managing the Risk of Catastrophes—Protecting Critical Infrastructure in Urban Areas

James Orr, Rae Rosen, Max Livingston, Kaivan K. Sattar, and Eric Stern

Correction: An earlier version of this posting misspelled Stephane Hallegatte’s surname. We apologize for the error.

Historical Echoes: What Color Is My Day of the Week?

Amy Farber

Black Monday, Black Friday, Green Monday, Black Thursday, Silver Thursday, Red Thursday, Black Tuesday—How to keep track? The more famous of these phrases refer to either political or economic/financial events. Black usually symbolizes something negative (and when finance-related, usually refers to a market crash), but it also suggests something positive (being “in the black,” or out of debt). All the days near Thanksgiving called “black” are “black” in this way. Red seems to refer to fire, communism, being “in the red” (in debt), or anger (Red Thursday is caused by retail workers being forced to work on Thanksgiving). “White” days are often religious. “Blue” and “purple” and sometimes “pink” tend to be for social causes. For some reason, British miners like these appellations—they have Red Friday and White Thursday. Silver does come up—Silver Thursday refers to a commodities market panic that began with a steep drop in the price of silver in 1980.

Just Released: Lifting the Veil—For-Profits in the Higher Education Landscape

Rajashri Chakrabarti and John Grigsby

Higher education is pivotal in our society—yet, its landscape is changing. Over the past decade, the private, for-profit sector of higher education has seen unprecedented growth, and its market share is at an all-time high. While we know much about traditional four-year public and private non-profit institutions, the for-profit sector seems more opaque. What services does it provide? Who enrolls at for-profits, and how has their enrollment changed during the Great Recession? What are their tuition levels? How about their net prices and student loans? And do their students succeed? We shed some light on these important questions in today’s economic press briefing at the Federal Reserve Bank of New York, and in a new set of interactive maps and charts released today by the New York Fed.

Intermediary Leverage Cycles and Financial Stability

Tobias Adrian and Nina Boyarchenko

The financial crisis of 2007-09 highlighted the central role that financial intermediaries play in the propagation and amplification of shocks. Intermediaries increase leverage during the boom, which then makes them more vulnerable to adverse economic developments. In this post, we review evidence on the balance-sheet behavior of financial intermediaries and describe a channel that allows intermediaries to increase leverage during booms when asset market volatility tends to be low, which in turn forces them to dramatically reduce leverage once volatility increases. As shown during the financial crisis of 2007-08, the contraction of intermediary leverage is accompanied by increases in borrowing rates for households and a contraction of credit. The formal modeling of this amplification mechanism allows a welfare analysis of the tightness of regulatory capital requirements. We find that while loose capital constraints generate excessive risk-taking by intermediaries, tight funding constraints inhibit intermediaries’ risk-sharing and investment functions, which then lowers welfare.

Yen and Yang: The Response of the Nikkei to the Yen

Andrew Howland and Benjamin Mandel

To what extent are Japanese equities driven by changes in the value of the yen? This question is especially relevant for recent developments in Japan, where both the Nikkei equity index and the dollar value of the yen appear to have reacted strongly to new policy initiatives that were introduced in late 2012 (that is, the fiscal and monetary policy changes collectively referred to as “Abenomics”). In this post, we use a particular statistical technique to compute how much of the post-Abenomics Nikkei reaction can be ascribed to changes in the foreign exchange rate. Our estimates imply that roughly half of the recent movements in the Nikkei can be ascribed to the changing value of the yen, with the remainder reflecting the domestic implications of Abenomics and other factors.

Just Released: November Empire State Manufacturing Survey Shows a Decline in Activity

Jason Bram and Richard Deitz

The results of this morning’s November Empire State Manufacturing Survey point to slightly weaker conditions in New York’s manufacturing sector. After five consecutive months of positive readings, the survey’s headline general business conditions index moved below zero, declining four points to -2.2. The index had been slowly drifting down since July, and was only slightly positive in October. The report also pointed to declines in new orders and unfilled orders. One hopeful sign in the report is that the six-month outlook remained quite optimistic.

A Long Road to Economic Recovery for the U.S. Virgin Islands

Jason Bram and Jonathan Hastings

The U.S. Virgin Islands are a small and unique component of the Second Federal Reserve District. Situated just east of Puerto Rico, the islands of St. Thomas, St. Croix, and St. John are home to roughly 106,000 residents—less than one-thirtieth of Puerto Rico’s population—and make up a territory of the United States. Yet the U.S. Virgin Islands are often ranked as the Caribbean’s top vacation destination on U.S. soil. In this post, we briefly describe the structure of the local economy and look at trends and developments over the years—especially the past few years, during which the islands lost a major employer and endured a prolonged and wrenching economic downturn . . . that now appears to be bottoming out.

Just Released: Deleveraging Decelerates and Household Balances Increase

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

Today, the New York Fed released the 2013:Q3 Quarterly Report on Household Debt and Credit. The data show the first substantial increase in outstanding balances since 2008, when Americans began reducing their debt. As of September 30, 2013, total consumer indebtedness was $11.28 trillion, up 1.1 percent from its level in the previous quarter, although still considerably below the peak of $12.67 trillion in 2008:Q3. This quarter, the increase was boosted by nearly across-the-board growth. Balances on mortgages, auto loans, student loans, and credit cards all increased. Balances on home equity lines of credit (HELOCs) were the only exception, with a $5 billion decrease. To better convey the implications of these balance changes, this post briefly updates our previous deleveraging analyses.