Friday, November 1, 2019 / 09:57PM / By Richard H.
Clarida / Header Image Credit: ValueWalk/CNBC
a speech by the Federal Reserve Vice Chair Richard H. Clarida, at a Special
Luncheon held today by The Japan Society, New York, New York
appreciate this opportunity to speak today at the Japan Society, a respected
institution dedicated to studying, advocating, and expanding interactions
between the United States and Japan.1 While
the society's remit is broad and includes arts, culture, and education, I will,
perhaps not surprisingly, focus my remarks on our two economies. Japan is an
important economic partner of the United States, and our economies are linked
through trade in goods and services as well as capital flows that affect
interest rates and other aspects of financial markets. Through these channels,
developments in Japan can affect economic conditions in the United States, and
More broadly, beyond bilateral linkages, economic conditions in
United States and Japan are tightly linked to global economic developments, and
today I will discuss several of the global factors that are relevant to the
outlook for both economies.
I will review the current U.S. outlook and some key global risks to that
outlook that we are monitoring at the Federal Reserve. I will next elaborate on
the channels through which global factors affect domestic economic conditions
in the United States and, in some cases, also Japan. I will conclude with some
remarks about the monetary policy decision we announced on Wednesday.
many metrics, the U.S. economy is in a good place. The current economic
expansion, now in its 11th year, is the longest on record, and the economy
continues to advance at a moderate pace, with real gross domestic product (GDP)
growth running at 2 percent over the past year and 1.9 percent in the most
recent quarter. Growth has been supported by the continued strength of
household consumption, underpinned, in turn, by a thriving labor market. The
unemployment rate is near a half-century low, real wages are rising, and
workers who had earlier left the labor force are returning to find jobs. There
is no sign that cost-push pressures are putting excessive upward force on price
inflation, and to me, plausible estimates of the natural rate of unemployment
extend from just above 4 percent to the current level. Core personal
consumption expenditures (PCE) inflation over the 12 months ending in
September, at 1.7 percent, remains muted, and headline inflation, currently
running at 1.3 percent, is likely this year to fall somewhat below our 2
percent objective. Price stability, as I see it, requires that inflation
expectations as well as actual inflation be stable and consistent with our 2
percent inflation target. We do not directly observe inflation expectations, and
I myself consult a wide range of survey and market estimates. Based on these
estimates, I judge that measures of inflation expectations reside at the low
end of a range I consider consistent with price stability.
Although the baseline expectation for the U.S. economy is
favorable, there are some evident downside risks to this outlook. Global growth
has been sluggish since the middle of 2018. This slowdown in global growth as
well as increased uncertainty about the outlook for global trade policy appear
to be headwinds for manufacturing activity and investment spending in the
United States and abroad.2 Also another source of uncertainty in the global economy has
been and continues to be Brexit. The global growth outlook also depends
importantly on the strength and sustainability of continued economic expansion
in China. China is balancing its desire to curtail credit growth and promote
deleveraging against its understandable aspiration to maintain a rapid pace of
economic growth in a country of 1.4 billion people. Finally, global
disinflationary forces remain and present ongoing challenges to many central
banks in their efforts to achieve and maintain price stability.
In sum, global conditions present headwinds for the U.S. outlook,
and, as my colleagues and I at the Federal Reserve have emphasized, these
headwinds have been a prominent consideration in our recent monetary policy
assessments. I would now like to elaborate on some of the channels through
which foreign developments more generally might be expected to affect the
outlook for the U.S. economy.3
the most direct link between economic conditions abroad and in the United
States is foreign demand for U.S. exports. To be sure, exports account for a
smaller share of the U.S. economy-about 12 percent-than the global average of
about 30 percent. Even so, when foreign demand for U.S. exports falls, the
effect on U.S. production is evident. The pace of economic expansion abroad is
a key determinant of the demand for U.S. exports. Most recently, the International
Monetary Fund projects foreign GDP growth in 2019 to have slowed to its weakest
pace since the financial crisis. Largely as a result, real U.S. exports been
about flat over the past year, an unusual development outside of recession.
U.S. exports also have slowed as a result of a decline in exports to China
following the imposition of tariffs on U.S. goods and also more recently
because of production-related disruptions in aircraft deliveries.
The pace of economic growth in our major trading partners affects
the demand for U.S. exports not only directly, but also indirectly by
influencing the value of the dollar. When foreign growth weakens and central
banks abroad ease monetary policy to support their domestic economies, returns
on dollar assets appear relatively more attractive, capital flows into U.S.
markets, and these flows will tend to boost the foreign exchange value of the
dollar. In addition, elevated uncertainties about the global outlook and/or
other evidence of financial stress abroad can also drive up the value of the
dollar, as investors flow into the safe haven traditionally provided by U.S.
assets. A stronger dollar, for either reason, makes U.S. exports more expensive
for foreign buyers, makes U.S. imports from abroad more attractive to U.S.
purchasers, and thereby tends to lower demand for U.S. goods and services. That
being said, I would note that the value of the dollar does not appear to play
much of a role in explaining the decline in sharp slowdown in U.S. exports over
the past year. The current level of the trade-weighted dollar is about where it
has been, on average, over the past few years. However, looking back several
years, the 25 percent appreciation of the dollar that occurred in 2014 was an
important contributing factor to the previous noticeable decline in U.S.
exports that took place in 2015 and 2016.
Global financial markets also link the United States to the global
economy, and developments abroad can spill over into domestic financial
conditions, with material effects on domestic activity. This is particularly
evident during episodes of global financial stress, in which
"risk-off" shifts in sentiment can depress U.S. equity prices and
widen domestic credit spreads even as flight-to-safety flows push down U.S. Treasury
yields. These global financial spillovers to the U.S. economy were notably
pronounced during the 1998 Russian crisis, the euro-area debt crisis earlier
this decade, and the China devaluation episode of 2015-16. Recently, global
financial spillovers have contributed to the significant decline in U.S.
Treasury yields that we have seen since the spring. Since the market for debt
is global, low-and, in many cases, negative-yields abroad encourage capital
inflows that put downward pressure on U.S. yields. Equity prices have also
reacted to global developments and recently appear particularly sensitive to
news about the outlook for U.S. international trade. Global factors have likely
also contributed to the estimated decline in the neutral rate of interest, or
r*, that we have observed in the United States and many other countries. Slow
productivity growth and population aging have lowered potential growth rates in
major foreign economies, decreasing demand for investment and increasing
desired saving, both of which have contributed to lower equilibrium interest
rates abroad, with spillovers to the rest of the world, including in the United
Global developments influence
not only U.S. economic activity and financial markets, but also U.S. inflation.
Global factors-through their influences on U.S. aggregate demand and supply
that I just described-can alter U.S. inflation dynamics. Foreign factors can
also directly affect the prices paid by U.S. firms and consumers, particularly,
but not exclusively, for imported goods. An appreciation of the dollar can
lower the dollar price of U.S. imports, although empirically, this effect is
less than one-for-one, as foreign exporters tend to keep the dollar prices of
their goods comparatively stable relative to observed exchange rate
fluctuations.5 In addition, swings in global commodity prices influence
U.S. inflation. Over the past year, the rise in the dollar and falling oil
prices have been important contributors to the subdued pace of U.S. inflation.
in the Global Economy
to now, I have focused on the U.S. economy. However, despite some important
differences that I will note, the Japanese economy exhibits some notable
similarities to the United States, both in terms of its overall performance and
its exposure to the global economy. To begin with, Japanese growth, while
slower than in the United States, has been running above the pace needed to
absorb new entrants to the labor force, and its strong labor market is
operating with an unemployment rate near multidecade lows at 2.2 percent. Also,
as in the United States, weak exports have recently been a drag on Japanese
growth. But, like the United States, Japan has been less exposed to the global
slowdown than many other economies. Exports represent only 17 percent of
Japanese GDP, higher than in the United States but well below the 30 percent
global average I mentioned earlier.
In some respects, however, Japan is more strongly linked to the
global economy than is the United States. One example is the relationship
between episodes of global financial stress and the exchange rate. In times of
stress, the dollar tends to appreciate as investors seek the safety of U.S.
markets. The same is even more true for Japan, with the yen often recording
even stronger appreciation than the dollar in times of increased risk aversion.
Other channels operate differently because of structural
differences between the United States and Japan. One difference is in the
currency used to invoice trade. In the United States, almost all trade, both
imports and exports, is invoiced in dollars. One aspect of this, as mentioned
earlier, is that changes in the value of the dollar tend to have a relatively
limited effect on U.S. import prices and import demand. Despite the importance
of the yen in global financial markets, a significant portion of Japan's trade
is also invoiced in dollars rather than yen, including not only Japan's exports
to the United States, but also its exports to other countries in Asia.6 Some scholars have proposed that the importance of the
dollar in Japan's trade lessens the responsiveness of Japan's exports to
movements in the yen while making exports more sensitive to changes in the
value of the dollar and, therefore, U.S. monetary conditions.7
Regarding inflation, through
the considerable efforts of the Bank of Japan's quantitative and qualitative
monetary easing program launched in early 2013, Japan has emerged from almost
15 years of modest deflation and is now operating with a positive inflation
rate. While the inflation remains below the Bank of Japan's long-run objective
of 2 percent, it represents a notable accomplishment given the difficulty of
changing public inflation expectations after a long period of modest deflation
in consumer prices.
to the United States, I would like to wrap up with a brief discussion of our
monetary policy decision this week. At our meeting earlier this week, the
Federal Open Market Committee (FOMC) lowered the target range for the federal
funds rate by 1/4 percentage point, bringing the range to 1-1/2 to 1-3/4
percent-the third such reduction this year.8 As
Chair Powell noted in his press conference, the Committee took these actions to
help keep the U.S. economy strong in the face of global developments and to
provide some insurance against ongoing risks. The policy adjustments we have
made since last year are providing-and will continue to provide-meaningful
support to the economy. The economy is in a good place, and monetary policy is
in a good place.
The policy adjustments we have made to date will continue to
provide significant support for the economy. Since monetary policy operates
with a lag, the full effects of these adjustments on economic growth, the job
market, and inflation will be realized over time. We see the current stance of
monetary policy as likely to remain appropriate as long as incoming information
about the economy remains broadly consistent with our outlook of moderate
economic growth, a strong labor market, and inflation near our symmetric 2
percent objective. Of course, if developments emerge that cause a material
reassessment of our outlook, we would respond accordingly. Policy is not on a
preset course, and we will be monitoring the effects of our policy actions,
along with other information bearing on the outlook, as we assess, at each
future meeting, the appropriate path of the target range for the federal funds
Thank you very much for your time and attention and for the
invitation to speak at the Japan Society this afternoon.
- These remarks represent my own views, which do not
necessarily represent those of the Federal Reserve Board or the Federal
Open Market Committee. I would like to thank Joseph Gruber for his
assistance in preparing this speech.
- Caldara and others find that increased trade policy
uncertainty, independent of the actual effect of higher tariffs, can exert
a significant negative drag on U.S. and global GDP. See Dario Caldara,
Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo
(2019), "The Economic Effects of Trade Policy Uncertainty
Finance Discussion Papers 1256 (Washington: Board of Governors of the
Federal Reserve System, September).
- For further discussion, see Richard H. Clarida (2019), "Global Shocks and the U.S. Economy," speech delivered at the BDF Symposium and 34th SUERF
Colloquium, sponsored by Banque de France and the European Money and
Finance Forum, Paris, March 28.
- See Richard Clarida (2019), "The Global Factor in Neutral Policy Rates: Some
Implications for Exchange Rates, Monetary Policy, and Policy Coordination
(PDF)," International Finance
Discussion Papers 1244 (Washington: Board of Governors of the Federal
Reserve System, April). For one example highlighting demographics, see
Etienne Gagnon, Benjamin K. Johannsen, and David Lopez-Salido (2016),
"Understanding the New Normal: The Role of
Demographics (PDF)," Finance and
Economics Discussion Series 2016-080 (Washington: Board of Governors of
the Federal Reserve System, October).
- See JosÃ© Manuel Campa and Linda S. Goldberg (2005),
"Exchange Rate Pass-Through into Import Prices," Review of
Economics and Statistics, vol. 87 (November), pp. 679-90;
and Christopher Gust, Sylvain Leduc, and Robert Vigfusson (2010),
"Trade Integration, Competition, and the Decline in Exchange-Rate
Pass-Through," Journal of Monetary Economics, vol.
57 (April), pp. 309-24.
- See Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato, and Junko
Shimizu (2019), "Growing Use of Local Currencies in Japanese Trade
with Asian Countries: A New Puzzle of Invoicing Currency Choice," Vox, June 10.
- See Gita Gopinath, Emine Boz, Camila Casas, Federico J. Diez,
Pierre-Olivier Gourinchas, and Mikkel Plagborg-MÃ¸ller (2019),
"Dominant Currency Paradigm," NBER Working Paper Series 22943
(Cambridge, Mass.: National Bureau of Economic Research, March).
- See Board of Governors of the Federal Reserve System (2019),
"Federal Reserve Issues FOMC Statement," press release, October 30.
1. Mid-Term Budget
Policy Statement: Should South Africa Be Worried?
Adds to Neighboring Economies' Headwinds
and Interest Rate Cuts in Frontier Economies
Nigeria - South
Africa New Trade Deal: Anything to Cheer?
Major UK Banks
Prepared for Brexit Challenges Ahead
President Meets Solomon Islands PM, Pledging Closer Cooperation
CIV, Kenya and
Ireland Join The Top Five of 20 Markets With The Greatest Potential
$72b in Africa as Its Continental Influence Gathers Pace
Global Monetary Commentary - Comercio Partners
10. Kenya's Economy:
Q2-19 GDP Growth Slows to 5.4%y/y
at Late Stage in Business Cycle
12. World GDP Growth
to Hit an Eight-Year Low in 2020
13. South Africa's
Economy in Q2-19: Fragile Still?
14. Can SSA's
Biggest Economies Join The 2nd Monetary Easing Cycle?
Choking Global Growth Prospects