Weekly Economic Update

March 26 - March 30, 2018

---

 

CHART OF THE WEEK

When Businesses Invest More,
the Economy Stands to Benefit

New orders for capital goods have risen briskly since the last election, which suggests an end to stagnating business capital investment. Greater business investment in machines and tools, enables workers to become more productive. This sets the stage for sustainable economic and wage growth.

Chairman’s Update

Chairman Erik Paulsen welcomed the Federal Reserve’s modest increase to its interest on excess reserves rate to 1.75 percent last Wednesday, as reported by POLITICO:

“According to our economic analysis, America’s new and faster growth is sustainable because Congress and the new Administration have pursued policies that bring American workers back to work and allow businesses to invest. I welcome this move by the Fed as part of its longstanding plan to normalize monetary policy, given that the economy itself is just returning to normal.”

LAST WEEK

JEC Releases

Chairman Paulsen Reacts to FOMC Announcement
March FOMC Review
February State Employment Data

News & Commentary Weekly Highlights

Wall Street Journal: Despite Stock Drop, U.S. Leading Economic Indicators Index Rose in February
Fortune: Congress Wants to Use Blockchain Tech to Make the Government ‘More Efficient’
The Money Illusion: The government is beginning to see the light
The Hill: Two words may unfairly haunt Fed Chairman Powell: dual mandate

Top Economic Indicator Highlights

Fed Raises its Key Policy Interest Rate

As expected, the Federal Reserve increased its key monetary policy interest rate, the interest on excess reserves rate (IOER, see “Note” below for more details). This decision was made as part of the Federal Reserve’s effort to return rates to their normal, pre-recession levels. (The 2008-09 recession prompted the Fed to drop the rate all the way down to 0.25%; its key policy rate was a high as 5.25% in 2007). Nonetheless, there are no signs of the economy “overheating.” This is because policies that artificially constrained the U.S. economy’s potential by deterring workforce participation and businesses investment are being abandoned in favor of a growth-oriented approach. Ongoing Administration and congressional GOP efforts like the Tax Cuts and Jobs Act can enable faster growth, as we have seen in 2017, without increasing inflation.

Category	After FOMC meeting	Before FOMC meeting
Interest on excess reserves (IOER)—upper bound	1.75%	1.50%
Federal funds rate target (average of IOER and ON-RRP rates)	1.63%	1.37%
Overnight reverse repurchase (ON-RRP) rate—lower bound	1.50%	1.25%

Federal Reserve FOMC Meeting Statement (March 2018)

Note: The fed funds rate is the market-determined rate banks charge each other for overnight loans when they do not hold large excess reserves at the Fed. The Fed would make small interventions in the fed funds market to influence that rate. However, beginning in 2008, the Fed’s emergency lending and quantitative easing programs created a vastly greater amount of excess reserves, which led to the administratively determined interest on excess reserves (IOER) supplanting the fed funds rate as the Fed’s key policy rate (see Chapter 2 of JEC’s Annual Report for more details on this topic). The Fed pays IOER on the funds banks deposit with the Fed, money that banks might otherwise lend to consumers or businesses. A higher IOER rate portends a tighter monetary policy because it encourages banks to hold reserves rather than to make more loans.

A much-reduced level of trading still occurs in the fed funds market as government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac), which are ineligible to earn IOER, lend their idle cash to banks at the fed funds rate. Banks then deposit the cash with the Fed to earn a higher IOER rate. To prop up the fed funds rate as the Fed raises the IOER rate, the Fed withdraws cash from the market by temporarily selling some of its securities for cash at its overnight reverse repurchase (ON-RRP) rate, which sets a floor for the fed funds rate. The continued existence of the fed funds market and the ON-RRP facility should not distract from the fact that the Fed now uses IOER as the key rate to conduct monetary policy.

 

THIS WEEK

Upcoming Economic Data

Monday
Chicago Fed National Activity Index (8:30am)
Dallas Fed Manufacturing Survey (10:30am)

Tuesday
Home Price Index (S&P CoreLogic Case-Shiller) (9:00am)
Consumer Confidence (10:00am)
Richmond Fed Manufacturing Index (10:00am)

Wednesday
Gross Domestic Product (Final Estimate) (8:30am)
Advance Economic Indicators Report (8:30am)
Pending Home Sales (10:00am)

Thursday
Jobless Claims (8:30am)
Personal Income/PCE Deflator (8:30am)
Chicago PMI (9:45am)
Consumer Sentiment (10:00am)
Federal Reserve Balance Sheet (4:30pm)
Money Supply (4:30pm)

Friday
No releases