Listen: Federal Reserve, Federal Reserve Board And Lael Brainard discussed on C-SPAN2 Book TV
"House this morning. We now take you live to the Peterson institute where Lael Brainard of the Federal Reserve Board has just begun speaking much for that kind introduction Olivier, and it's really great to be here at the Peterson institute. I'm going to spend a little time talking about our financial stability work in a little time. Talking about the outlook financial stability is integral to achieving the Federal Reserve's objectives of full employment and price stability, we need only. Look back a decade to see the deep damage that is allowed to occur. When financial vulnerabilities increase unchecked since then financial sector resilience has been rebuilt and household balance sheets have been repaired over the course of the lengthy recovery. Today. Employment is strong inflation is around target and incomes are growing. If we learned anything it's that, we have to be a specially vigilant to safeguard the resilience of the financial system when times are good. At also when the owner abilities may be building. That's why the Federal Reserve. Now, actively monitors the potential vulnerabilities to the financial system last week for the first time we released our assessment in the financial stability report. And I want to just say how much I appreciate all the hard work that went into that report from the staff in the division of financial stability. Let me just spend a moment talking about the outlook. And then I will turn to what that means. In terms of how I assess financial vulnerabilities in touch briefly on the implications for policy domestic economic momentum has been strong as evidenced by the labor market with November data in hand payroll gains, have averaged about one hundred and seventy thousand per months over the past three months. That's well above the pace necessary to absorb new entrance into the labor force the share of the prime age population. It's working is close to its pre-crisis level and wages have exceleron over the past year. And they're now growing around three percent the highest level since the crisis. These are all welcome developments while the most recent reading on core PC inflation ticked down indicators of underlying trend inflation remain encouraging overall providing little sign of an. An outbreak of inflation to the upside on the one hand, and and some reassurance that underlying trend inflation, maybe close to our target on the other. In the figure on right on figure one. You can see the strong decline in unemployment on the left and inflation moving back to target on the right? The economy's growing three percent over the past year. And there are good reasons to expect growth to remain solid next year. Supported by the strong underlying momentum in domestic demand. Consumer spending looks to be robust going into the fourth quarter, an ongoing gains in income and employment should provide positive fundamentals. In addition business investment should be solid. Even with recent declines in oil prices sizable fiscal stimulus has provided an important boost to demand this year and will likely contributes somewhat further next year, given the usual lags outlays and in the effects of tax cuts on spending Are-are, she's been radio programming from Friday. So the most likely Taffer economies positive, although some tailwinds that have provided a boost our face. Reading, and we may face some cross-currents the global growth that provided a strong tailwind going into this year has moderated their earlier strong growth in Europe and Japan appears to be softening towards trend. China has shifted to an accommodative policy stands to contend with a challenging trade environment and lagged affects from its earlier tightening here at home the impetus to growth from fiscal policies likely to fade going into twenty twenty and after being exceptionally accommodated financial conditions. Have tightened in recent months as you can see from figure two according to a few measures of overall financial conditions. Financial conditions are still supportive of growth overall, but less so than last year, there are risks to both sides of that most likely path for the economy in Europe. There are risks associated with Italy and Brexit here at home, we hear from businesses that the uncertainty associated with trade policy, and the implication. For supply chains may at some point way on capital spending. And although it's reasonable to expect fiscal spending to be extended around current levels in real terms after the bipartisan budget act expires. We can't rule out that fiscal policy could become a headwind in twenty twenty. Of course, the risks are two sided business contacts report difficulties finding qualified workers and increased assault increase costs associated with inputs tariffs and transportation along with somewhat greater ability to pass through those increases to consumer prices at three point seven percent. The unemployment rate is the lowest we've seen in nearly fifty years and he rolls have been growing at a pace. Well above that, which is consistent with labor market stabilisation historically few periods. When resource utilization has been similarly tight have seen elevated risks of either accelerating inflation on the one hand or financial imbalances on the other. Our goal now is to in the expansion by maintaining the economy around full employment and inflation around target the gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we proceeded that approach remains appropriate in the near term, although the path increasingly will depend on how the outlook evolves. The last several times resource utilization approached levels similar to today signs of overheating showed up in financial sector imbalances rather than an accelerating inflation in contrast to the past we now have a systematic forward. Looking approach to identifying changes in financial vulnerabilities, which informs deliberations of the epilepsy and the board and last week we released the public financial stability report to promote some accountability and transparency. Around our responsibilities in this area. As you can see in that report while there has been substantial progress on reducing household debt burdens and increasing the resilience of the banking system. Our assessments suggest that financial vulnerabilities associated with corporate debt are building against a backdrop of elevated risk appetite. Let me just go through each of those developments briefly, intern male Brainard is a member of the Federal Reserve Board as you can see in contrast to the years preceding the crisis. When hustled borrowing was growing at a pace far above that of GDP. It's since come down, and is now growing more. Slowly, moreover, recent borrowing has been concentrated among households with strong credit profiles. The regulated financial sector is also more resilient. A wing too far reaching reforms as well as favorable conditions. The ratio of common equity to risk weighted assets at large banks has increased by about half relative to the pre-crisis average as you can see from that lower black line. It's now close to level seen at smaller banks, although the risk weighted capital ratio at large banks moved down somewhat over the past quarters. Financial reform has also reduced funding risks associated with both banks and money market funds. Large banks subject to liquidity regulation. Rely less on unstable wholesale funding and have thicker liquidity buffers as a result of money market reforms investors have migrated toward government only funds, which pose low run risk. Those are depicted as the dark blue band and away from prime institutional funds, which are the lower bands, which provided which proved highly susceptible to runs during the crisis and required extraordinary government support. In contrast, we're seeing elevated vulnerabilities in the nonfinancial business sector as you can see in figure six business borrowing has risen more rapidly than GDP for much of the current expansion and now sits near its historical peak the run up in corporate debt has brought the ratio of debt to assets close to its highest level in two decades on an overall. Basis which you can see in that lower line in figure seven and this is also true for speculative grade and unrated firms which is the upper blue line, and whereas previously most high earning firms with relatively low leverage were taking on that additional debt analysis of detailed balance sheet information suggests that over the past year firms with high leverage high interest expense ratios and low earnings and cash holdings have been increasing their debt loads. The most historically high leverage has been linked to elevated financial distress in retrenchment in economic downturns regarding corporate bonds outstanding recent years have witnessed little change in the relative shares of investment grade and high yield bonds, however, credit quality has deteriorated within the investment grade segment where the share bonds rated at the lowest level has reached near record levels as the middle of this year around thirty five percent of corporate bonds outstanding were at. At that lowest end of the investment grade segment which amounts to about two and a quarter trillion dollars overall in comparison share a high yield bonds that are rated deep junk has stayed relatively flat at about one third over the last few years well below the financial crisis peak which was forty five percent. As I think the people in this room know, too well in a downturn widespread. Downgrades of these low rated investment grade bonds to speculative grade ratings could induce investors to sell rapidly, for instance, because lower rated bonds might have regular trae capital requirements that are higher or because bond funds have limits on non investment grade bonds this concern may be higher now than in the past total assets under management in bonds mutual funds have more than doubled in the past decade there now about two point three trillion and these funds now hold about one tenth of the overall corporate bond market. And of course, the redemption behavior of investors in these funds during a market downturn is unclear bond sales could lead to larger changes in bond prices, if they encounter strains on market liquidity a possibility that's been relatively untested over the course of this expansion farther down. Credit quality ladder. There's been sizable growth in."