Behind the Fed's rate decision: a change in the way the FOMC views inflation.
The Fed’s well-known steady-state 2% inflation target, as measured by core personal consumption expenditure (PCE) inflation, has been surpassed in only two relatively brief periods since the 2008-9 financial crisis. This year, at of the end of July 2019—the most recent available figure—it languished at just under 1.6%. Meanwhile, the continuing strength of the labor market has yet to generate the wage inflation believed necessary to push overall inflation upward. The issue is more than technical: it affects how the Fed will react to future economic news.
On the Rise: U.S. High Yield Energy Debt
Although not all crude oil is created equal from a processing and shipping standpoint, many analysts suggest the estimated 5% short-term shortfall in global crude oil supply can be easily absorbed by other producers in the short-to-intermediate-term future. But the longer-term impact of the attack may be in the risk premium that market participants will embed in crude oil prices going forward to compensate for the newly-realized challenges in the markets for crude.
On the Slide: Overnight Availability of U.S. Dollars
Most observers accepted the explanation for the short-term cash crunch, but some participants observed that the Fed might be better served by creating a standing ability to supply liquidity on demand by the market rather than stepping in on a case-by-case basis – given the unlikely but far-reaching nature of any systemic risk in the vital interbank system. All parties are mindful of the fact that the interbank markets were an integral part of the “transmission mechanism” that amplified the effects of the Great Financial Crisis of 2007-9. The Fed’s rapid reaction to the liquidity crunch in the overnight market shows the Fed’s awareness of the importance of keeping markets liquid on a minute-by-minute basis.
1 Source: Bloomberg, September 17, 2019, 1:30 PM ET
The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
A repurchase agreement, or repo is a contract under which the seller commits to sell securities to the buyer and simultaneously commits to repurchase the same (or similar) securities from the buyer at a later date (maturity date), repaying the original sum of money plus a return for the use of that money over the term of the repo.
The repo market refers to the market for short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.
The unemployment gap is defined as the difference between the nonaccelerating inflation rate of unemployment and the actual unemployment rate.
The Bloomberg Barclays High Yield Energy Index and Bloomberg Barclays High Yield Ex Energy Index measure the return, spreads and yields of the below investment-grade debt of companies both in and out of the energy industries.
Option-Adjusted Spread (OAS) is a measure of risk that shows credit spreads with adjustments made to neutralize the impact of embedded options. A credit spread is the difference in yield between two different types of fixed income securities with similar maturities.
One basis point equals one one-hundredth of one percentage point.
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