Brainard would prefer yield curve caps to asset buys at zero lower bound

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While “forward guidance and balance sheet policies” remain useful tools should rates return to zero lower bound, Federal Reserve Board Gov. Lael Brainard said Tuesday she would replace quantitative asset purchases with a yield curve cap.

“The quantitative asset purchase policies that were used following the crisis proved to be lumpy both to initiate at the [effective lower bound] and to calibrate over the course of the recovery,” she said, according to prepared text released by the Fed. “This lumpiness tends to create discontinuities in the provision of accommodation that can be costly.”

One problem is that the public doesn’t know what would trigger asset purchases or the time they would be needed, which “undercuts the efficacy of the policy,” she said. Additionally, the “normalization process” resulted in issues.

“There may be advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range of the maturity spectrum — yield curve caps — in tandem with forward guidance that conditions liftoff from the ELB on employment and inflation outcomes,” she said.

The caps would provide “accommodation through the longer rates that are relevant for households and businesses in a manner that is more continuous than quantitative asset purchases.”

The caps would end when “the targeted outcome is achieved,” and “any securities that were acquired under the program would roll off organically, unwinding the policy smoothly and predictably.”

As for the 2% inflation target, Brainard said she would “prefer a more flexible approach,” whereby inflation would average 2% “over time or over the cycle.”

Economic data
New home sales slid to a seasonally adjusted 733,000 annual pace in October from a 738,000 level in September, the Commerce Department reported Tuesday.

The September number was raised from the initially reported 701,000. Sales had not been at those levels since July 2007 and easily surpassed the 709,000 level forecast by economists polled by IFR Markets.

Sales were up nearly 32% from the 557,000 pace a year ago.

“This huge jump from one year ago partly reflects builders now building less expensive homes (the median new home price was lower this year compared to last year),” said National Association of Realtors Chief Economist Lawrence Yun. “Several of today’s fresh data on home price and new home sales, combined with earlier data on existing-home sales and the median home price, essentially say the same thing: housing demand is solid. But buyers are facing not enough choices. Therefore, prices are getting bid up, especially in the starter home market and in the Mountain States.”

The median price rose to $316,700 from $310,200, while the mean price grew to $383,300 from 366,900.

Separately, the S&P CoreLogic Case-Shiller 20-city composite index was up 2.1% in September, compared to a year earlier, while the national index was up 3.2%, each 0.1-point higher than in August. The 10-city composite was up 1.5% year-over-year, flat from a month before.

Consumer confidence
Consumer confidence slipped again in November, falling to 125.5 from 126.1 in October, the Conference Board reported. The present situation index fell to 166.9 from 173.5 and the expectations index gained to 97.9 from 94.5.

Economists expected the confidence index to rise to 127.0.

“Consumer confidence declined for a fourth consecutive month, driven by a softening in consumers’ assessment of current business and employment conditions,” according to Lynn Franco, senior director of economic indicators at the think tank. “The decline in the present situation index suggests that economic growth in the final quarter of 2019 will remain weak. However, consumers’ short-term expectations improved modestly, and growth in early 2020 is likely to remain at around 2%. Overall, confidence levels are still high and should support solid spending during this holiday season.”

Regional surveys
The Federal Reserve Bank of Philadelphia’s Nonmanufacturing Business Outlook Survey showed expansion continued in the region, as the regional general business conditions index climbed to 20.7 in November from 12.6 in October, while at the firm level, the general business conditions index rebounded to 31.7 from 8.7.

The six months from now index for the region rose to 21.1 from 15.5, while at the firm level, dipped to 47.2 from 47.5.

“The firms continued to report overall increases in prices of both their inputs and their own goods and service,” the survey reported.

Meanwhile, the Texas Service Sector Outlook Survey showed expansion slowed, and firms’ optimism waned, according to the Federal Reserve Bank of Dallas.

“Expansion in the state service sector moderated in November, as revenue and employment growth slowed slightly,” said Christopher Slijk, Dallas Fed assistant economist. “Firms reported continued optimism in their outlooks, and retailers in particular noted a strengthening in current business activity.”

The revenue index fell to 12.2 in Nov. from 15.4 in Oct., while the general business activity index rose to 4.7 from 1.8. The future general business activity index jumped to 8.5 from 0.2.

The Federal Reserve Bank of Richmond reported contraction in the manufacturing sector in November as the composite index declined to negative 1 in November from positive 8 a month earlier. The index was “weighed down by negative readings for shipments and new orders, while the third component — employment — declined but remained positive,” the Fed said. “Survey respondents were optimistic that conditions would improve in the coming months.”

The service sector saw moderate growth in the month. Although the revenues index fell to 15 from 24 and the demand index slid to 13 from 15, both reads were “positive, suggesting continued expansion,” the Fed said.

Despite the declines, the Fed said, “firms broadly continued to report improvements in local business conditions and increased capital spending. They were also optimistic that conditions would continue to improve in the near future.”

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Monetary policy Economic indicators Housing Manufacturing industry Lael Brainard Federal Reserve Federal Reserve Bank of Richmond Federal Reserve Bank of Philadelphia Federal Reserve Bank of Dallas FOMC