1) Here’s a quote from Fed head Janet Yellen on at a meeting in Cleveland on Jul
ID: 1198468 • Letter: 1
Question
1) Here’s a quote from Fed head Janet Yellen on at a meeting in Cleveland on July 10 this year. (see www.federalreserve.gov then click news and events… Regarding inflation, as I mentioned earlier, the recent effects of lower prices for crude oil and for imports on overall inflation are expected to wane during this year. Combined with further tightening in labor and product markets, I expect inflation will move toward the FOMC's 2 percent objective over the next few years. Importantly, a number of different surveys indicate that longer-term inflation expectations have remained stable even as recent readings on inflation have fallen. If inflation expectations had not remained stable, I would be more concerned because consumer and business expectations about inflation can become self- fulfilling Explain why the FOMC is concerned not only about actual recent inflation rates as measured by the CPI, but also about longer term inflation expectations remaining “stable” In particular, what is the problem if inflation expectations start to converge to an opinion that inflation will fall to “0” or less? 4pts
Explanation / Answer
. The dollar depreciated early in the period following the weaker-than-expected U.S. employment report for September and the subsequent downward shift of the expected path for U.S. policy rates. But this decline was balanced by subsequent appreciation, in part as expectations increased for greater monetary policy accommodation abroad. These shifting expectations also contributed to a decline in sovereign yields in the advanced foreign economies.
The staff provided its latest report on potential risks to financial stability. Since the previous report in July, financial markets around the globe experienced a surge in volatility that peaked in late August amid concerns regarding slowing economic growth in emerging market economies and potential implications for advanced economies. This volatility was accompanied by sizable declines in the prices of some risky assets, and an increase in risk aversion eased valuation pressures in the corporate bond market. Issuance of speculative-grade corporate bonds and leveraged loans slowed from the rapid pace seen earlier this year. The U.S. financial system appeared to absorb the shocks without systemic strains, supported by relatively high capital positions of large banking organizations and insurance firms and by restrained use of short-term wholesale funding across the financial sector. Moreover, leverage in the nonfinancial sector remained modest overall. However, leverage of speculative-grade and unrated nonfinancial corporations stayed near record levels. Rising CRE prices, accompanied by loosening underwriting standards in CMBS markets, continued to suggest valuation pressures.
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