Welcome address by Fabio Panetta, Member of the Executive Board of the ECB, at the joint BIS, BoE, ECB and IMF conference on “Spillovers in a “post-pandemic, low-for-long” world” |
Thank you very much for the opportunity to speak at this conference on spillovers in a “post-pandemic, low-for-long” world.[1]
Over the last decade, globalisation has called into question central banks’ ability to achieve domestic objectives. According to some[2], close economic and financial ties across borders make inflation more of a global phenomenon than a domestic one. And spillovers would leave central banks less able to control domestic financing conditions.
Today, these views are being put to the test.
US authorities are engaging in unprecedented fiscal and monetary expansion, which will show whether forceful policy stimulus can still raise inflation. The associated improvement in the US and global economic outlook has generated upward pressures on sovereign bond yields, which central banks whose economies are less advanced in the recovery are striving to resist. Whether they succeed will reveal the scope of monetary autonomy in a globalised world.
What will the outcome be? For smaller and emerging market economies, the constraints on policy may remain significant. But I expect this episode to confirm that globalisation cannot constrain monetary policy in large economies, like the euro area.
How globalisation affects both inflation and financing conditions in the euro area depends on our policy response to it. If globalisation leads to below-target inflation, it is because we are tolerating that undershooting.
The euro area has monetary autonomy – the only question is how to use it wisely.
Faced with uncertainty about the true economic damage caused by the pandemic, we must preserve accommodative financing conditions well into the recovery. Better still, monetary and fiscal policies should work together to deliver a stronger and more inclusive recovery, reducing the risk of inflation undershooting our aim for a prolonged period. This is the best way to avoid lasting scars.
Globalisation and inflation
Let me start by discussing the role of globalisation in inflation outcomes.
Inflation has a common global component, which is largely driven by energy and commodity prices. But the view that globalisation makes inflation a global phenomenon – and a disinflationary one – goes further.[3]
Trade integration might cause disinflation through lower import prices, lower production costs and the forced exit of less productive domestic producers.[4] By increasing global labour supply, it might have created “global slack”.[5] And growing international competition could limit the scope for firms to pass on domestic cost increases to consumers.[6]
These forces, especially commodity price shocks, can have sizeable effects on price developments. But the evidence suggests that globalisation has only marginal effects on trend inflation.[7]
While inflation has fallen across advanced economies over recent decades, its correlation with the pace of globalisation is weak. The sharpest reductions took place in the early 1980s, before globalisation took off (Chart 1). Since the 1990s, inflation has fallen fastest in two periods when trade integration was less intense.[8]

Chart 1
Median inflation rates in advanced economies and KOF Globalisation Index[9]

(left-hand scale: index; right-hand scale: annual percentage changes)
Sources: ECB staff calculations, KOF Swiss Economic Institute and national sources.
Notes: Headline median inflation of 22 OECD countries and KOF overall globalisation index. The latest observation is for 2018.

Similarly, global economic slack has little impact on domestic inflation or the slope of the Phillips curve.[10] And there is little evidence that the role of global factors has increased for core inflation over the last decade.[11] Consistent with this observation, euro area core inflation since the global financial crisis has been driven mainly by services (Chart 2, left panel), the inflation component that is most sensitive to the domestic output gap (Chart 2, right panel).[12]

Chart 2
Services price inflation and slack

(left panel: percentage points, rebased to January 2008 (= 1.74); right panel: sum of 2021 HICP weights)
Sources: Eurostat and ECB staff calculations.

Insofar as globalisation has influenced inflation in the euro area, it may rather be the result of macroeconomic policy choices.
From 1999 onwards, globalisation led to a stronger rise in trade openness in the euro area than in other large economies like the United States (Chart 3, left panel). This, in turn, created more opportunities for euro area economies to “rotate” demand to foreign markets when internal demand stalled. The result, especially in the wake of the global financial crisis, was a shift from domestic to external demand by the euro area as a whole. This led to a large current account surplus (Chart 3, right panel), while the protracted weakness in internal demand weighed down on inflation (Chart 4).[13]

Chart 3
Europe’s response to globalisation

(left panel: (exports + imports)/GDP; right panel: percentages of GDP)
Sources: National accounts and Ameco.

In fact, underlying inflation[14] in the period before the financial crisis had approached 2% only because domestic demand in “non-core” countries had pushed it higher, while “core” countries had lower demand and inflation (Chart 4, left panel). But after the crisis, lower domestic demand in “non-core” countries was not offset by higher domestic demand in core countries. Rather, domestic demand fell everywhere, which contributed to underlying inflation being compressed (Chart 4, right panel).

Chart 4
Domestic demand and core inflation in the euro area

(left panel: percentages of GDP; right panel: percentages per annum, HICP excluding food and energy)
Sources: ECB and Eurostat.
Note: Non-core refers to Spain, Italy, Greece, Portugal and Cyprus.

This fall in underlying inflation was not visible to the same extent in the United States, which relied more on internal demand.[15] In fact, the United States entered the global financial crisis with underlying inflation having averaged 2.2% over the previous decade, and after 2012 it was 0.2 percentage points lower on average. The euro area, meanwhile, entered the crisis with underlying inflation averaging 1.7% and, after the sovereign debt crisis, it was 0.6 percentage points lower on average (Chart 5).

Chart 5
Core inflation

(year-on-year percentage changes)
Sources: Eurostat and Federal Reserve.
Note: Dashed lines denote period averages.

Globalisation and policy autonomy
If globalisation does not directly lead to low inflation in the euro area, can it constrain the ability of monetary policy to influence the inflation process? This could happen through two channels.
First, globalisation could depress the natural rate of interest and make it harder for monetary policy to stoke price pressures, especially at the lower bound. That could happen if trade and financial integration increase global demand for safe assets.[16] Globalisation might also favour “winner-takes-all” markets that stifle productivity growth and put downward pressure on the natural rate.[17]
But the evidence about the importance of global factors in explaining the decline of the natural rate is inconclusive at best.[18] There is a stronger consensus that demographics have been the key common driver.[19]
Second, globalisation could constrain monetary autonomy by increasing exposure to financial spillovers, making it harder for central banks to set financing conditions at the appropriate level to stabilise domestic inflation. Evidence suggests that a “global financial cycle”[20] does exist, driven by international risk factors, and that financial spillovers from the United States to the euro area have been increasing since the 1990s.[21]
In particular, since the mid-2000s euro area term premia have become more responsive to global factors (Chart 6). This matters because central bank asset purchases that aim to lower market yields work mainly by compressing term premia. If those premia are simultaneously rising on account of external spillovers, this could weaken the traction of monetary policy over euro area yields.

Chart 6
Share of term premium movements driven by foreign spillovers

(percentages)
Sources: Haver and ECB staff calculations.
Notes: The estimation builds on the methodology proposed by Nyholm (2016), Diebold and Yilmaz (2009) and Diebold and Yilmaz (2016). A 250-day rolling window VAR(4) including inflation expectations and inflation risk premia for G4 markets is estimated, where these estimates are calculated using the model framework of D’amico, Kim and Wei (2018). Generalised impulse response functions (Pesaran and Shin (1998)) allowing for correlated shocks are used to estimate the variance decomposition of the forecast error with a ten-day horizon, which in turn is used to compute spillover indices. The latest observation is for 20 April 2021.

But in practice globalisation does not seem to impose an insurmountable constraint on the ECB’s monetary policy. Even when economic conditions in the United States have diverged from those in the euro area, the decisive action we have taken at the ECB has allowed us to deliver financing conditions appropriate for our economic cycle, decoupling from those in the United States.[22]
Indeed, when the ECB introduced forward guidance and asset purchases between 2013 and 2015, the correlation between US and euro area financing conditions weakened significantly (Chart 7, left panel). And in recent months, euro area yields have decoupled from those in the United States (Chart 7, right panel).[23] This reflects the ECB’s commitment to preserve favourable financing conditions, which was behind our decision in March to significantly increase the pace of our asset purchases.

Chart 7
Insulating financing conditions

(top panel: correlation coefficient; bottom panel: basis points)
Five-year rolling correlation between United States and euro area FCIs

Change in nominal and real ten-year yields since January 2021 and March Governing Council meeting
Sources: Refinitiv, Bloomberg Finance L.P. and ECB staff calculations.
Notes: Left panel: Original data at daily frequency collapsed to monthly averages. X-axis displays end date of five-year rolling window. Right panel: The cut-off date for the March Governing Council meeting was 9 March 2021.The latest observation is for 23 April 2021.

Asserting policy autonomy
So we do have policy autonomy in the euro area. In the face of two key facts, we should use it to shelter the domestic recovery from adverse foreign spillovers.
First, the recovery remains dependent on policy support. For example, job retention schemes are playing a major role in cushioning unemployment: the share of workers who are unemployed, discouraged or enrolled in such schemes is around double the headline unemployment rate (Chart 8, left panel). And €420 billion in guaranteed loans are still outstanding in the largest economies (Chart 8, right panel).

Chart 8
Policy support from job retention schemes and loan guarantees

(left panel: percentage of labour force; right panel: EUR billions)
Sources: Eurostat, March 2021 ECB staff macroeconomic projections for the euro area, and ECB staff calculations (left panel); Kreditanstalt für Wiederaufbau for Germany, Instituto de Crédito Oficial for Spain, Ministère de l’Économie et des Finances for France, Ministero dell’Economia e delle Finanze and Banca d’Italia for Italy and ECB calculations (right panel).
Notes: In the left panel, the unemployment rate in Q1 2021 is the average in January and February 2021 (latest observation). The quarterly labour force in Q1 2021 is based on the March 2021 MPE. The number of job retention schemes is up to March 2021 as collected by ECB staff from national employment and social security agencies for the four largest euro area countries. Discouraged workers are approximated with those leaving the labour force in Q1 2021. In the right panel, the data on the take-up of guaranteed loans are for the period between April 2020 and March 2021. In the absence of a breakdown by firm size for Italy, it is assumed that guaranteed loans to SMEs are those granted via the Fondo di Garanzia, while guaranteed loans to large firms are those granted via SACE (the Italian export credit agency). The latest observation is for Q1 2021.

This policy dependence masks the true underlying state of the economy – particularly in terms of labour market scarring and corporate vulnerabilities – and therefore its resilience to less expansionary policies. The recovery will need to be well advanced before we can get a clear picture of the underlying damage.
Second, even with the ongoing monetary and fiscal policy support, our recovery is expected to be slow and incomplete in terms of both growth and inflation. In fact, the euro area economy is projected to return to its pre-crisis GDP level only in the middle of 2022 and to remain below its pre-crisis trend (Chart 9, left panel).[24] GDP in the United States, in contrast, is projected to recover both its pre-crisis level this year and its trend thereafter (Chart 9, right panel). The euro area and Japan are the only major advanced economies where inflation is projected to remain subdued over the medium term.

Chart 9
Diverging recoveries

(index: 2019 = 100)
Sources: ECB and Federal Reserve.

This evidence suggests that we should avoid withdrawing policy support – either deliberately or by tolerating adverse spillovers – until the output gap is closed and we see inflation sustainably back at 2%.
For the ECB, this implies that we will have to maintain very favourable financing conditions well beyond the end of the pandemic period. The need for very accommodative policy over a longer period should in any case be uncontroversial, given that inflation remains well below our aim in our projection horizon and, according to survey measures of inflation expectations, even beyond it.
Towards more ambitious goals
As I have made clear, Europe has the capacity to overcome the pandemic and its economic consequences. So we face an important decision. We can act as a group of small, open economies, as we did after the global financial crisis, with each country competing to capture external demand. Or we can behave how a large economy would, with European and national policymakers working together to raise internal demand through adequate policy stimulus.
At this point in time, failure to pursue the latter option – reconnecting to the pre-crisis growth path and restoring healthy inflation levels – would increase the danger of the pandemic causing lasting damage to our economy. Three risks stand out.
The first risk relates to the record high levels of public and private debt reached during the pandemic, which make debt dynamics more sensitive to inflation undershooting.
An accounting exercise indicates that if euro area inflation were to undershoot our baseline by 1 percentage point each year for five years, the private debt ratio would increase by around 7 percentage points. This is equivalent to firms and households taking on €900 billion in extra debt at a time when debt needs to be reduced.[25] That could depress investment and consumption and further reduce inflation.
For governments, a similar exercise implies a 5 percentage point increase in the public debt ratio compared with the baseline over five years, and a 10 percentage point increase over ten years.[26] And for countries facing debt-to-GDP ratios of around 150%, ten years of inflation undershooting could increase their debt ratio by approximately 15 percentage points. This is the opposite of what we need at a time when interest rates are near the lower bound and fiscal policy is a transmission channel of monetary policy.
The second risk comes from the inequality that will likely result from the outsized impact of the pandemic on less advantaged groups.
These groups typically have a higher propensity to consume, so a fall in their share of labour income would hold back domestic demand and inflation. Moreover, if they cannot reintegrate into the labour market we could see long-lasting effects, including a permanent loss of human capital.[27] The best way to achieve that reintegration and contain scarring is through faster growth.
Getting back to our pre-crisis growth path would imply a 3% increase in GDP by 2022[28], which estimates suggest would create millions of new jobs.[29] That, in turn, would lead more quickly to tightness in the labour market, supporting wage growth and the return of inflation to our aim.
It would also boost the life chances of the poorest members of society. For example, a 1 percentage point narrowing of the overall unemployment gap in the euro area reduces the unemployment rate of ‘low-skilled’ workers by 1.3 percentage points more than the unemployment rate of ‘high-skilled’ workers.[30] Vibrant labour markets are the most effective way to support those who have lost the most from the pandemic and to reduce inequality.
The third risk is that persistently weak economic activity can reduce productivity.[31] Long periods of inactivity may hurt labour productivity through the loss of on-the-job knowledge. And weaker sales expectations may lead to firms investing less in capacity.[32]
With these risks in mind, it makes sense for the euro area to take advantage of the favourable financing conditions created by monetary policy to launch a stronger fiscal stimulus in order to rapidly return growth to its pre-pandemic path. The focus must be on productive investment, so that spending is concentrated on projects with high multipliers.
The additional investment required is well within our reach. According to simple, illustrative estimates, extra spending[33] on productive investment of around 2.8% of GDP[34] would be sufficient to reconnect with the pre-crisis growth trend by 2022 (Chart 10).

Chart 10
Euro area real GDP: reconnecting with the pre-crisis trend

(index: 2019 = 100)
Source: ECB illustrative calculations.

Conclusion
My main message today is that Europe’s economic trajectory is in our hands. The inflation process is still a domestic phenomenon which forceful monetary policy can control. The ECB has already asserted its monetary autonomy and will continue to use it to bring inflation back to our aim of 2%.
This, in turn, enables fiscal authorities to use the space available to them to bring about a full recovery, which would guarantee higher productivity, more sustainable debt and more inclusive growth.
Compliments of the European Central Bank.
The post ECB Speech | Monetary autonomy in a globalised world first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech on 20 April 2021 in Brussels by President von der Leyen | “Check against delivery”

Prime Minister Draghi, dear Mario,
Ladies and Gentlemen,
Thank you very much for joining us from all the different places!
We are in this together!
And we have to work together – because, as we all know, no one is safe until everyone is safe. We have to join forces to fight this pandemic from every angle and to recover sustainably. This is true for health authorities and all levels of government. It is true for scientists, universities and pharmaceutical companies. And it is of course true for civil society: NGOs and foundations, philanthropists and international institutions. People like you. People who are dealing with global health challenges on a daily basis.
This pandemic has shown to us that health is a true global public good. This is why the Italian G20 presidency and the European Commission decided to host a Global Health Summit on May 21st in Rome. And this is why we want to hear from YOU before we discuss how to prevent future crises, how to prepare better and how to become more resilient in an era of pandemics.
There are important questions to address: What is needed to ensure effective multilateral cooperation when responding to a global health crisis? What can we do to ensure that ALL countries, big or small, with high or with low income, have the necessary capacities to tackle the next crisis? And, last but not least: how can we mobilize the necessary resources on a global level?
Billions of people around the world urgently wait for answers. Not only to fight this pandemic. But also to be better prepared for the next one.
In the European Union we have started to prepare while also drawing our lessons. With our Hera Incubator, we want to get ahead of the curve in the next phase of the virus. For example, by boosting even further our production capacity in Europe.
Not only for Europe, but also for the world. Just as we are doing right now – with vaccines that are being delivered to Europe, and vaccines being exported around the world. We are accelerating the development of vaccines. Therefore we are stepping up research and data exchange between science and industry. And we are speeding up the approval procedures. Because as in any crisis time is of the essence.
It’s important, that we all learn from each other. Our joint ambition must be to achieve the same level of preparedness at a global level.
This is why we need your input.
Your ideas, your expertise and your passion.
Therefore, once again: I am excited to have you all with us today.
Thank you so much for joining, and I am looking forward to your contribution!
Compliments of the European Commission.

The post Opening remarks by President von der Leyen at the civil society consultation ahead of the Global Health Summit first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

As Prepared for Delivery on April 22, 2021 by Kristalina Georgieva |
Mr. President,
Special Envoy Kerry,
Secretary Yellen,
At the IMF we look at climate change as central in our work on macroeconomic and financial stability, growth and employment.  It presents huge risks to the functioning of our economies and offers incredible opportunities for transformative investments and green jobs.
Let me focus on three areas where the right policies can make a significant difference in accelerating the transition to the new climate economy.
First, a robust price on carbon: it provides a critical market signal to producers and consumers in all sectors of the economy.  It has proven to advance investments in renewable energy, electric mobility, energy efficient buildings, reforestation and other climate friendly activities — with positive impact on growth and jobs, while reducing carbon emissions.  Carbon revenues can also help secure a just transition, compensating households for price increases and helping businesses and workers move from high to low carbon intensity activities.
Our analysis shows that without it, we will not reach our climate stabilization goals. It also shows that a mix of steadily rising carbon prices and green infrastructure investment could increase global GDP by more than 0.7 percent per year over the next 15 years—and create millions of new jobs.
Carbon pricing is gaining momentum. Many businesses now use a shadow carbon price in their models. Over 60 pricing schemes have been implemented. But the average global price is currently $2 a ton, and needs to rise to $75 a ton by 2030 to curb emissions in line with the goals of the Paris Agreement.
Because of the urgency to act we propose an international carbon price floor among large emitters, such as the G20. Focus on a minimum carbon price among a small group of large emitters could facilitate an agreement, covering up to 80 percent of global emissions.
Such a price floor has to be pragmatic and equitable, with differentiated pricing for countries at different levels of economic development. And it can be implemented through carbon taxes, carbon trading systems, or equivalent measures that match local policy preferences.
Crucially, a price floor could avoid less efficient and contentious border carbon adjustments if some countries move ahead with robust pricing while others do not.
Second, green taxonomy and standardized reporting of  climate related financial risks.  Both are necessary to unlock trillions of dollars in private finance.
The financial industry is already stepping up, but in a recent survey of major investors more than half cited the poor quality or availability of data as the biggest barrier to sustainable investing. That is why the IMF is working with our members and partners on data quality and disclosure, as well as on financial sector stress testing for climate-related risks.
The third area is financial support to developing countries.
They offer many of the lowest-cost opportunities—so it’s in everyone’s interest to fulfill the commitment of $100 billion a year in climate finance for the developing world. Combined with technology transfer and policy support it will make it possible to decouple growth and carbon emissions.
We will play our part, integrating climate change into our annual economic ‘health checks’ of countries and financial systems and actively promoting low carbon and climate resilient growth paths.
Compliments of the IMF.
The post IMF Managing Director’s intervention at the Leaders Summit on Climate, Session 2: Investing in Climate Solutions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Introductory remarks by Christine Lagarde, President of the ECB, Frankfurt am Main, 22 April 2021 |
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of the meeting of the Governing Council.
While the recovery in global demand and the sizeable fiscal stimulus are supporting global and euro area activity, the near-term economic outlook remains clouded by uncertainty about the resurgence of the pandemic and the roll-out of vaccination campaigns. Persistently high rates of coronavirus (COVID-19) infection and the associated extension and tightening of containment measures continue to constrain economic activity in the short term. Looking ahead, progress with vaccination campaigns and the envisaged gradual relaxation of containment measures underpin the expectation of a firm rebound in economic activity in the course of 2021. Inflation has picked up over recent months on account of some idiosyncratic and temporary factors and an increase in energy price inflation. At the same time, underlying price pressures remain subdued in the context of significant economic slack and still weak demand.
Preserving favourable financing conditions over the pandemic period remains essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability. Euro area financing conditions have remained broadly stable recently after the increase in market interest rates earlier in the year, but risks to wider financing conditions remain. Against this background, the Governing Council decided to reconfirm its very accommodative monetary policy stance.
We will keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
We will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over. Since the incoming information confirmed the joint assessment of financing conditions and the inflation outlook carried out at the March monetary policy meeting, the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.
We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
We will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
Net purchases under our asset purchase programme (APP) will continue at a monthly pace of €20 billion. We continue to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.
We also intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Finally, we will continue to provide ample liquidity through our refinancing operations. In particular, the latest operation in the third series of targeted longer-term refinancing operations (TLTRO III) has registered a high take-up of funds. The funding obtained through TLTRO III plays a crucial role in supporting bank lending to firms and households.
These measures help to preserve favourable financing conditions for all sectors of the economy and thereby underpin economic activity and safeguard medium-term price stability. We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner, in line with our commitment to symmetry.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP declined by 0.7 per cent in the fourth quarter of 2020 to stand 4.9 per cent below its pre-pandemic level one year earlier. Incoming economic data, surveys and high-frequency indicators suggest that economic activity may have contracted again in the first quarter of this year, but point to a resumption of growth in the second quarter.
Business surveys indicate that the manufacturing sector continues to recover, supported by solid global demand. At the same time, restrictions on mobility and social interaction still limit activity in the services sector, although there are signs of a bottoming-out. Fiscal policy measures continue to support households and firms, but consumers remain cautious in view of the pandemic and its impact on employment and earnings. Despite weaker corporate balance sheets and elevated uncertainty about the economic outlook, business investment has shown resilience.
Looking ahead, the progress with vaccination campaigns, which should allow for a gradual relaxation of containment measures, should pave the way for a firm rebound in economic activity in the course of 2021. Over the medium term the recovery of the euro area economy is expected to be driven by a recovery in domestic and global demand, supported by favourable financing conditions and fiscal stimulus.
Overall, while the risks surrounding the euro area growth outlook over the near term continue to be on the downside, medium-term risks remain more balanced. On the one hand, better prospects for global demand – bolstered by the sizeable fiscal stimulus – and the progress with vaccination campaigns are encouraging. On the other hand, the ongoing pandemic, including the spread of virus mutations, and its implications for economic and financial conditions continue to be sources of downside risk.
Euro area annual inflation increased to 1.3% in March 2021, from 0.9% in February, on account of a strong increase in energy price inflation that reflected both a sizeable upward base effect and a month-on-month increase. This increase more than offset decreases in food price inflation and in HICP inflation excluding energy and food. Headline inflation is likely to increase further in the coming months, but some volatility is expected throughout the year reflecting the changing dynamics of idiosyncratic and temporary factors. These factors can be expected to fade out of annual inflation rates early next year. Underlying price pressures are expected to increase somewhat this year, owing to short-term supply constraints and the recovery in domestic demand, although they remain subdued overall, in part reflecting low wage pressures, in the context of economic slack, and the appreciation of the euro exchange rate. Once the impact of the pandemic fades, the unwinding of the high level of slack, supported by accommodative fiscal and monetary policies, will contribute to a gradual increase in inflation over the medium term. Survey-based measures and market-based indicators of longer-term inflation expectations remain at subdued levels, although market-based indicators have continued their gradual increase.
Turning to the monetary analysis, the annual growth rate of broad money (M3) stood at 12.3 per cent in February 2021, after 12.5 per cent in January. Strong money growth continued to be supported by the ongoing asset purchases by the Eurosystem, as the largest source of money creation. The narrow monetary aggregate M1 has remained the main contributor to broad money growth, consistent with a still heightened preference for liquidity in the money-holding sector and a low opportunity cost of holding the most liquid forms of money.
Overall, lending to the private sector remained broadly unchanged. The monthly lending flow to non-financial corporations showed a modest pick-up in February compared with the previous month. This was also reflected in a slightly higher annual growth rate of 7.1 per cent, after 6.9 per cent in January. Monthly lending flows to households continued to be solid with the annual growth rate of loans to households remaining unchanged at 3.0 per cent in February. The latest euro area bank lending survey for the first quarter of 2021 reports a moderate tightening of credit standards for loans to firms, following more significant tightening in the previous two quarters. Heightened risk perceptions among banks were again the main contributor to the tightening, although their impact was less pronounced than in previous survey rounds. Surveyed banks also reported a renewed fall in demand for loans to firms, mainly driven by a continued decline in demand for financing for fixed investment. With regard to lending to households, the survey indicated lower demand for loans for house purchase, while the credit standards for these loans eased slightly, supported by competition among lenders.
Overall, our policy measures, together with the measures adopted by national governments and other European institutions, remain essential to support bank lending conditions and access to financing, in particular for those most affected by the pandemic.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is necessary to support economic activity and the robust convergence of inflation to levels that are below, but close to, 2 per cent over the medium term.
Regarding fiscal policies, an ambitious and coordinated fiscal stance remains crucial, as premature withdrawal of fiscal support would risk delaying the recovery and amplifying the longer-term scarring effects. National fiscal policies should thus continue to provide critical and timely support to the firms and households most exposed to the ongoing pandemic and the associated containment measures. At the same time, fiscal measures taken in response to the pandemic emergency should, as much as possible, remain temporary and targeted in nature to address vulnerabilities effectively and to support a swift recovery of the euro area economy. The three safety nets endorsed by the European Council for workers, businesses and governments provide important funding support.
The Governing Council reiterates the key role of the Next Generation EU package and the urgency of it becoming operational without delay. It calls on Member States to ensure a timely ratification of the Own Resources Decision, to finalise their recovery and resilience plans promptly and to deploy the funds for productive public spending, accompanied by productivity-enhancing structural policies. This would allow the Next Generation EU programme to contribute to a faster, stronger and more uniform recovery and would increase economic resilience and the growth potential of Member States’ economies, thereby supporting the effectiveness of monetary policy in the euro area. Such structural policies are particularly important in improving economic structures and institutions and in accelerating the green and digital transitions.
We are now ready to take your questions.
The post Conference | Christine Lagarde, President of the ECB & Luis de Guindos, Vice-President of the ECB first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Index:

New regulatory framework on AI
Coordinated Plan – 2021 Update
New Machinery Regulation
Next steps

1. A new regulatory framework on AI
Why do we need to regulate the use of Artificial Intelligence technology?
The potential benefits of AI for our societies are manifold from improved medical care to better education. Faced with the rapid technological development of AI, the EU must act as one to harness these opportunities. While most AI systems will pose low to no risk, certain AI systems create risks that need to be addressed to avoid undesirable outcomes. For example, the opacity of many algorithms may create uncertainty and hamper the effective enforcement of the existing legislation on safety and fundamental rights. Responding to these challenges, legislative action is needed to ensure a well-functioning internal market for AI systems where both benefits and risks are adequately addressed. This includes applications such as biometric identification systems or AI decisions touching on important personal interests, such as in the areas of recruitment, education, healthcare or law enforcement. The Commission’s proposal for a regulatory framework on AI aims to ensure the protection of fundamental rights and user safety, as well as trust in the development and uptake of AI.
Which risks will the new AI rules address?
The uptake of AI systems has a strong potential to bring societal benefits, economic growth and enhance EU innovation and global competitiveness. However, in certain cases, the specific characteristics of certain AI systems may create new risks related to user safety and fundamental rights. This leads to legal uncertainty for companies and potentially slower uptake of AI technologies by businesses and citizens, due to the lack of trust. Disparate regulatory responses by national authorities would risk fragmenting the internal market.
To whom does the proposal apply?
The legal framework will apply to both public and private actors inside and outside the EU as long as the AI system is placed on the Union market or its use affects people located in the EU. It can concern both providers (e.g. a developer of a CV-screening tool) and users of high-risk AI systems (e.g. a bank buying this resume screening tool). It does not apply to private, non-professional uses.
What are the risk categories?
The Commission proposes a risk–based approach, with four levels of risk:
Unacceptable risk: A very limited set of particularly harmful uses of AI that contravene EU values because they violate fundamental rights (e.g. social scoring by governments, exploitation of vulnerabilities of children, use of subliminal techniques, and – subject to narrow exceptions – live remote biometric identification systems in publicly accessible spaces used for law enforcement purposes) will be banned.
High-risk: A limited number of AI systems defined in the proposal, creating an adverse impact on people’s safety or their fundamental rights (as protected by the EU Charter of Fundamental Rights) are considered to be high-risk. Annexed to the proposal is the list of high-risk AI systems, which can be reviewed to align with the evolution of AI use cases (future-proofing).
These also include safety components of products covered by sectorial Union legislation. They will always be high-risk when subject to third-party conformity assessment under that sectorial legislation.
In order to ensure trust and a consistent and high level of protection of safety and fundamental rights, mandatory requirements for all high-risk AI systems are proposed. Those requirements cover the quality of data sets used; technical documentation and record keeping; transparency and the provision of information to users; human oversight; and robustness, accuracy and cybersecurity. In case of a breach, the requirements will allow national authorities to have access to the information needed to investigate whether the use of the AI system complied with the law.
The proposed framework is consistent with the Charter of Fundamental Rights of the European Union and in line with the EU’s international trade commitments.
Limited risk: For certain AI systems specific transparency requirements are imposed, for example where there is a clear risk of manipulation (e.g. via the use of chatbots). Users should be aware that they are interacting with a machine.
Minimal risk: All other AI systems can be developed and used subject to the existing legislation without additional legal obligations. The vast majority of AI systems currently used in the EU fall into this category. Voluntarily, providers of those systems may choose to apply the requirements for trustworthy AI and adhere to voluntary codes of conduct.
How did you select the list of stand- alone high-risk AI systems (none embedded in products)? Will you update it?
Together with a clear definition of ‘high-risk’, the Commission puts forward a solid methodology that helps identifying high-risk AI systems within the legal framework. This aims to provide legal certainty for businesses and other operators.
The risk classification is based on the intended purpose of the AI system, in line with the existing EU product safety legislation. It means that the classification of the risk depends on the function performed by the AI system and on the specific purpose and modalities for which the system is used.
The criteria for this classification include the extent of the use of the AI application and its intended purpose, the number of potentially affected persons, the dependency on the outcome and the irreversibility of harms, as well as the extent to which existing Union legislation provides for effective measures to prevent or substantially minimise those risks.
A list of certain critical fields helps to make the classification clearer by identifying these applications in the areas of biometric identification and categorisation, critical infrastructure, education, recruitment and employment, provision of important public and private services as well as law enforcement, asylum and migration and justice.
Annexed to the proposal is a list of use cases which the Commission currently considers to be high-risk. The Commission will ensure that this list is kept up to date and relevant, based on the above mentioned criteria, evidence, and expert opinions in broad consultation with stakeholders.
How does the proposal address remote biometric identification?
Under the new rules, all AI systems intended to be used for remote biometric identification of persons will be considered high-risk and subject to an-ex ante third party conformity assessment including documentation and human oversight requirements by design. High quality data sets and testing will help to make sure such systems are accurate and there are no discriminatory impacts on the affected population.
The use of real-time remote biometric identification in publicly accessible spaces for law enforcement purposes poses particular risks for fundamental rights, notably human dignity, respect for private and family life, protection of personal data and non-discrimination. It is therefore prohibited in principle with a few, narrow exceptions that are strictly defined, limited and regulated. They include the use for law enforcement purposes for the targeted search for specific potential victims of crime, including missing children; the response to the imminent threat of a terror attack; or the detection and identification of perpetrators of serious crimes.
Finally, all emotion recognition and biometric categorisation systems will always be subject to specific transparency requirements. They will also be considered high-risk applications if they fall under the use cases identified as such, for example in the areas of employment, education, law enforcement, migration and border control.
Why are particular rules needed for remote biometric identification? 
Biometric identification can take different forms. It can be used for user authentication i.e. to unlock a smartphone or for verification/authentication at border crossings to check a person’s identity against his/her travel documents (one-to-one matching). Biometric identification could also be used remotely, for identifying people in a crowd, where for example an image of a person is checked against a database (one-to-many matching).
Accuracy of systems for facial recognition can vary significantly based on a wide range of factors, such as camera quality, light, distance, database, algorithm, and the subject’s ethnicity, age or gender. The same applies for gait and voice recognition and other biometric systems. Highly advanced systems are continuously reducing their false acceptance rates. While a 99% accuracy rate may sound good in general, it is considerably risky when the result leads to the suspicion of an innocent person. Even a 0.1% error rate is a lot if it concerns tens of thousands of people.
What are the obligations for providers of high-risk AI systems?
Before placing a high-risk AI system on the EU market or otherwise putting it into service, providers must subject it to a conformity assessment. This will allow them to demonstrate that their system complies with the mandatory requirements for trustworthy AI (e.g. data quality, documentation and traceability, transparency, human oversight, accuracy and robustness). In case the system itself or its purpose is substantially modified, the assessment will have to be repeated. For certain AI systems, an independent notified body will also have to be involved in this process. AI systems being safety components of products covered by sectorial Union legislation will always be deemed high-risk when subject to third-party conformity assessment under that sectorial legislation. Also for biometric identification systems a third party conformity assessment is always required.
Providers of high-risk AI systems will also have to implement quality and risk management systems to ensure their compliance with the new requirements and minimise risks for users and affected persons, even after a product is placed on the market. Market surveillance authorities will support post-market monitoring through audits and by offering providers the possibility to report on serious incidents or breaches of fundamental rights obligations of which they have become aware.
How will compliance be enforced?
Member States hold a key role in the application and enforcement of this Regulation. In this respect, each Member State should designate one or more national competent authorities to supervise the application and implementation, as well as carry out market surveillance activities. In order to increase efficiency and to set an official point of contact with the public and other counterparts, each Member State should designate one national supervisory authority, which will also represent the country in the European Artificial Intelligence Board.
What is the European Artificial Intelligence Board?
The European Artificial Intelligence Board would comprise high-level representatives of competent national supervisory authorities, the European Data Protection Supervisor, and the Commission. Its role will be to facilitate a smooth, effective and harmonised implementation of the new AI Regulation. The Board will issue recommendations and opinions to the Commission regarding high-risk AI systems and on other aspects relevant for the effective and uniform implementation of the new rules. It will also help building up expertise and act as a competence centre that national authorities can consult. Finally, it will also support standardisation activities in the area.
How do the rules protect fundamental rights?
There is already a strong protection for fundamental rights and for non-discrimination in place at EU and Member State level, but complexity and opacity of certain AI applications (‘black boxes’) pose a problem. A human-centric approach to AI means to ensure AI applications comply with fundamental rights legislation. Accountability and transparency requirements for the use of high-risk AI systems, combined with improved enforcement capacities, will ensure that legal compliance is factored in at the development stage. Where breaches occur, such requirements will allow national authorities to have access to the information needed to investigate whether the use of AI complied with EU law.
What are voluntary codes of conduct?
Providers of non-high-risk applications can ensure that their AI system is trustworthy by developing their own voluntary codes of conduct or adhering to codes of conduct adopted by other representative associations. These will apply simultaneously with the transparency obligations for certain AI systems. The Commission will encourage industry associations and other representative organisations to adopt voluntary codes of conduct.
Will imports of AI systems and applications need to comply with the framework?
Yes. Importers of AI systems will have to ensure that the foreign provider has already carried out the appropriate conformity assessment procedure and has the technical documentation required by the Regulation. Additionally, importers should ensure that their system bears a European Conformity (CE) marking and is accompanied by the required documentation and instructions of use.
How can the new rules support innovation?
The regulatory framework can enhance the uptake of AI in two ways. On the one hand, increasing users’ trust will increase the demand for AI used by companies and public authorities. On the other hand, by increasing legal certainty and harmonising rules, AI providers will access bigger markets, with products that users and consumers appreciate and purchase.
Rules will apply only where strictly needed and in a way that minimises the burden for economic operators, with a light governance structure. In addition, an ecosystem of excellence, including regulatory sandboxes establishing a controlled environment to test innovative technologies for a limited time, access to Digital Innovation Hubs and access to Testing and Experimentation Facilities will help innovative companies, SMEs and start-ups to continue innovating in compliance with the new rules for AI and the other applicable legal rules. These, together with other measures such as the additional Networks of AI Excellence Centres and the Public-Private Partnership on Artificial Intelligence, Data and Robotics will help build the right framework conditions for companies to develop and deploy AI.
What is the international dimension of the EU’s approach?
The proposal for regulatory framework and the Coordinated Plan on AI are part of the efforts of the European Union to be a global leader in the promotion of trustworthy AI at international level. AI has become an area of strategic importance at the crossroads of geopolitics, commercial stakes and security concerns. Countries around the world are choosing to use AI as a way to signal their desires for technical advancement due to its utility and potential. AI regulation is only emerging and the EU will take actions to foster the setting of global AI standards in close collaboration with international partners in line with the rules-based multilateral system and the values it upholds. The EU intends to deepen partnerships, coalitions and alliances with EU partners (e.g. Japan, the US or India) as well as multilateral (e.g. OECD and G20) and regional organisations (e.g. Council of Europe).

2. Coordinated Plan – 2021 Update
What is new compared to the 2018 Coordinated Plan?
The 2018 Coordinated Plan laid the foundation for policy coordination on AI and encouraged Member States to develop national strategies. Since then, the technological, economic and policy context on AI has considerably evolved. To remain agile and fit for the purpose, the Commission presents the 2021 review of the Coordinated Plan. To ensure a stronger link to the European Green Deal, developing markets and in response to the coronavirus pandemic, the updated plan strengthens its proposed actions on the environment and health.
What is the objective of the Coordinated Plan?
The Coordinated Plan puts forward a concrete set of joint actions for the European Commission and Member States on how to create EU global leadership on trustworthy AI. The proposed key actions reflect the vision that to succeed the European Commission together with Member States and private actors need to: accelerate investments in AI technologies to drive resilient economic and social recovery facilitated by the uptake of ‘new’ digital solutions; act on AI strategies and programmes by fully and timely implementing them to ensure that the EU fully benefits from first-mover adopter advantages; and align AI policy to remove fragmentation and address global challenges.
How many Member States have put in place a national AI strategy?
A total of 19 Member States (Bulgaria, Cyprus, Czechia, Denmark, Estonia, Finland, France, Germany, Hungary, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Sweden and most recently Spain and Poland, in December 2020), plus Norway have adopted national AI strategies. 
How will the EU drive excellence from the lab to the market?
The revised Coordinated Plan sets out the vision to co-fund Testing and Experimentation Facilities (TEFs), which can become a common, highly specialised resource at EU level that fosters the speedy deployment and greater uptake of AI.
In addition, the Commission is also setting up a network of European Digital Innovation Hubs (DIHs) which are ‘one-stop shops’ that help SMEs and public administrations to become more competitive in this area.
The Public-Private Partnership on AI, Data and Robotics also helps consolidate our efforts to boost resources, as it helps develop and implement a strategic research, innovation and deployment agenda, as well as a dynamic EU-wide AI innovation ecosystem.
The funding available through the AI/Blockchain Investment Fund and the European Innovation Council has proved to be successful and should be strengthened, including through the InvestEU and the implementation of Recovery and Resilience Facility by Member States.
How will the EU build strategic leadership in high-impact sectors?
To align with the market developments and ongoing actions in Member States and to reinforce the EU position on the global scale, the Coordinated Plan puts forward seven new sectoral action areas. The joint actions on environment and health are necessary to mobilise resources to reach the objectives of the European Green Deal, and effectively tackle the response to the coronavirus pandemic. The Commission also calls for and proposes concrete actions supported by funding instruments on the coordination and resources pooling in other five other areas: public sector, robotics, mobility, home affairs and agriculture.
How will Member States invest in AI? 
Maximising resources and coordinating investments is vital and a critical component of the Commission’s AI strategy. Through the Digital Europe programme, the first financial instrument of the EU focused on digital technology, and the Horizon Europe programme, the Commission plans to invest €1 billion per year in AI. The aim is to mobilise additional investments from the private sector and the Member States in order to reach an annual investment volume of €20 billion over the course of this decade. The newly adopted Recovery and Resilience Facility, the largest stimulus package ever financed through the EU budget, makes €134 billion available for digital. This will be a game-changer allowing Europe to amplify its ambitions and become global leaders in developing cutting-edge trustworthy AI.
How are EU-funded AI solutions helping to achieve Green Deal objectives?
The Commission will continue to accelerate research in this area by contributing to sustainable AI (e.g. developing less data-intensive and energy-consuming AI models). Specific calls for proposals under Horizon Europe on AI, data and robotics serving the Green Deal, as well as greener AI, are underway. As announced in the EU data strategy, the Digital Europe Programme will enable the Commission to invest in environmentally friendly AI through setting up data spaces, covering areas like the environment, energy and agriculture, to ensure that more data becomes available for use in the economy and society. Additionally, the Commission will invest in testing and experimentation facilities that have a specific focus on environment/climate (such as agriculture, manufacturing and smart cities / communities) to contribute to the environment/climate through their green dimension. The Recovery and Resilience Facility offers a unique opportunity for national actions supporting digital (including AI) and green transitions.

3. The new Machinery Regulation
How is the Machinery Regulation related to AI?
Machinery regulation ensures that the new generation of machinery products guarantee the safety of users and consumers, and encourage innovation. Machinery products cover an extensive range of consumer and professional products, from robots (cleaning robots, personal care robots, collaborative robots, industrial robots) to lawnmowers, 3D printers, construction machines, industrial production lines.
How does it fit with the regulatory framework on AI?
Both are complementary. The AI Regulation will address the safety risks of AI systems ensuring safety functions in machinery, while the Machinery Regulation will ensure, where applicable, the safe integration of the AI system into the overall machinery, so as not to compromise the safety of the machinery as a whole.
How will the new regulation ensure a high level of safety?
The Machinery regulation will adapt certain provisions in the scope, definitions and the safety requirements to bring greater legal clarity and capture the new features of machinery products. In addition, other elements seek to ensure a high level of safety, by setting classification rules for high-risk machinery and a conformity assessment for machinery products that have been substantially modified.
How will it benefit business, in particular SMEs?
Businesses will need to perform only a single conformity assessment for both the AI and the Machinery Regulations. The new legislation will reduce manufacturers’ administrative and financial burden by allowing digital formats for the instructions and the declaration of conformity, and by requesting an adaptation of fees for SMEs when a third party is needed for the machinery conformity assessment.

4. Next steps
The European Parliament and the Member States will need to adopt the Commission’s proposals on a European approach for Artificial Intelligence and on Machinery Products in the ordinary legislative procedure. Once adopted, the final Regulations will be directly applicable across the EU. In parallel, the Commission will continue to collaborate with Member States to implement the actions announced in the Coordinated Plan.
Compliments of the European Commission.
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The Commission proposes today new rules and actions aiming to turn Europe into the global hub for trustworthy Artificial Intelligence (AI). The combination of the first-ever legal framework on AI and a new Coordinated Plan with Member States will guarantee the safety and fundamental rights of people and businesses, while strengthening AI uptake, investment and innovation across the EU. New rules on Machinery will complement this approach by adapting safety rules to increase users’ trust in the new, versatile generation of products.
Margrethe Vestager, Executive Vice-President for a Europe fit for the Digital Age, said: “On Artificial Intelligence, trust is a must, not a nice to have. With these landmark rules, the EU is spearheading the development of new global norms to make sure AI can be trusted. By setting the standards, we can pave the way to ethical technology worldwide and ensure that the EU remains competitive along the way. Future-proof and innovation-friendly, our rules will intervene where strictly needed: when the safety and fundamental rights of EU citizens are at stake.”
Commissioner for Internal Market Thierry Breton said: “AI is a means, not an end. It has been around for decades but has reached new capacities fueled by computing power. This offers immense potential in areas as diverse as health, transport, energy, agriculture, tourism or cyber security. It also presents a number of risks. Today’s proposals aim to strengthen Europe’s position as a global hub of excellence in AI from the lab to the market, ensure that AI in Europe respects our values and rules, and harness the potential of AI for industrial use.”
The new AI regulation will make sure that Europeans can trust what AI has to offer. Proportionate and flexible rules will address the specific risks posed by AI systems and set the highest standard worldwide. The Coordinated Plan outlines the necessary policy changes and investment at Member States level to strengthen Europe’s leading position in the development of human-centric, sustainable, secure, inclusive and trustworthy AI.
The European approach to trustworthy AI
The new rules will be applied directly in the same way across all Member States based on a future-proof definition of AI. They follow a risk-based approach:
Unacceptable risk: AI systems considered a clear threat to the safety, livelihoods and rights of people will be banned. This includes AI systems or applications that manipulate human behaviour to circumvent users’ free will (e.g. toys using voice assistance encouraging dangerous behaviour of minors) and systems that allow ‘social scoring’ by governments.
High-risk: AI systems identified as high-risk include AI technology used in:

Critical infrastructures (e.g. transport), that could put the life and health of citizens at risk;

Educational or vocational training, that may determine the access to education and professional course of someone’s life (e.g. scoring of exams);

Safety components of products (e.g. AI application in robot-assisted surgery);

Employment, workers management and access to self-employment (e.g. CV-sorting software for recruitment procedures);

Essential private and public services (e.g. credit scoring denying citizens opportunity to obtain a loan);

Law enforcement that may interfere with people’s fundamental rights (e.g. evaluation of the reliability of evidence);

Migration, asylum and border control management (e.g. verification of authenticity of travel documents);

Administration of justice and democratic processes (e.g. applying the law to a concrete set of facts).

High-risk AI systems will be subject to strict obligations before they can be put on the market:

Adequate risk assessment and mitigation systems;

High quality of the datasets feeding the system to minimise risks and discriminatory outcomes;

Logging of activity to ensure traceability of results;

Detailed documentation providing all information necessary on the system and its purpose for authorities to assess its compliance;

Clear and adequate information to the user;

Appropriate human oversight measures to minimise risk;
High level of robustness, security and accuracy.

In particular, all remote biometric identification systems are considered high risk and subject to strict requirements. Their live use in publicly accessible spaces for law enforcement purposes is prohibited in principle. Narrow exceptions are strictly defined and regulated (such as where strictly necessary to search for a missing child, to prevent a specific and imminent terrorist threat or to detect, locate, identify or prosecute a perpetrator or suspect of a serious criminal offence). Such use is subject to authorisation by a judicial or other independent body and to appropriate limits in time, geographic reach and the data bases searched.
Limited risk, i.e. AI systems with specific transparency obligations: When using AI systems such as chatbots, users should be aware that they are interacting with a machine so they can take an informed decision to continue or step back.
Minimal risk: The legal proposal allows the free use of applications such as AI-enabled video games or spam filters. The vast majority of AI systems fall into this category. The draft Regulation does not intervene here, as these AI systems represent only minimal or no risk for citizens’ rights or safety.
In terms of governance, the Commission proposes that national competent market surveillance authorities supervise the new rules, while the creation of a European Artificial Intelligence Board will facilitate their implementation, as well as drive the development of standards for AI. Additionally, voluntary codes of conduct are proposed for non-high-risk AI, as well as regulatory sandboxes to facilitate responsible innovation.
The European approach to excellence in AI
Coordination will strengthen Europe’s leading position in human-centric, sustainable, secure, inclusive and trustworthy AI. To remain globally competitive, the Commission is committed to fostering innovation in AI technology development and use across all industries, in all Member States.
First published in 2018 to define actions and funding instruments for the development and uptake of AI, the Coordinated Plan on AI enabled a vibrant landscape of national strategies and EU funding for public-private partnerships and research and innovation networks. The comprehensive update of the Coordinated Plan proposes concrete joint actions for collaboration to ensure all efforts are aligned with the European Strategy on AI and the European Green Deal, while taking into account new challenges brought by the coronavirus pandemic. It puts forward a vision to accelerate investments in AI, which can benefit the recovery. It also aims to spur the implementation of national AI strategies, remove fragmentation, and address global challenges.
The updated Coordinated Plan will use funding allocated through the Digital Europe and Horizon Europe programmes, as well as the Recovery and Resilience Facility that foresees a 20% digital expenditure target, and Cohesion Policy programmes, to:

Create enabling conditions for AI’s development and uptake through the exchange of policy insights, data sharing and investment in critical computing capacities;

Foster AI excellence ‘from the lab to the market’ by setting up a public-private partnership, building and mobilising research, development and innovation capacities, and making testing and experimentation facilities as well as digital innovation hubs available to SMEs and public administrations;

Ensure that AI works for people and is a force for good in society by being at the forefront of the development and deployment of trustworthy AI, nurturing talents and skills by supporting traineeships, doctoral networks and postdoctoral fellowships in digital areas, integrating Trust into AI policies and promoting the European vision of sustainable and trustworthy AI globally;

Build strategic leadership in high-impact sectors and technologies including environment by focusing on AI’s contribution to sustainable production, health by expanding the cross-border exchange of information, as well as the public sector, mobility, home affairs and agriculture, and Robotics.

The European approach to new machinery products
Machinery products cover an extensive range of consumer and professional products, from robots to lawnmowers, 3D printers, construction machines, industrial production lines. The Machinery Directive, replaced by the new Machinery Regulation, defined health and safety requirements for machinery. This new Machinery Regulation will ensure that the new generation of machinery guarantees the safety of users and consumers, and encourages innovation. While the AI Regulation will address the safety risks of AI systems, the new Machinery Regulation will ensure the safe integration of the AI system into the overall machinery. Businesses will need to perform only one single conformity assessment.
Additionally, the new Machinery Regulation will respond to the market needs by bringing greater legal clarity to the current provisions, simplifying the administrative burden and costs for companies by allowing digital formats for documentation and adapting conformity assessment fees for SMEs, while ensuring coherence with the EU legislative framework for products.
Next steps
The European Parliament and the Member States will need to adopt the Commission’s proposals on a European approach for Artificial Intelligence and on Machinery Products in the ordinary legislative procedure. Once adopted, the Regulations will be directly applicable across the EU. In parallel, the Commission will continue to collaborate with Member States to implement the actions announced in the Coordinated Plan.
Background
For years, the Commission has been facilitating and enhancing cooperation on AI across the EU to boost its competitiveness and ensure trust based on EU values.
Following the publication of the European Strategy on AI in 2018 and after extensive stakeholder consultation, the High-Level Expert Group on Artificial Intelligence (HLEG) developed Guidelines for Trustworthy AI in 2019, and an Assessment List for Trustworthy AI in 2020. In parallel, the first Coordinated Plan on AI was published in December 2018 as a joint commitment with Member States.
The Commission’s White Paper on AI, published in 2020, set out a clear vision for AI in Europe: an ecosystem of excellence and trust, setting the scene for today’s proposal. The public consultation on the White Paper on AI elicited widespread participation from across the world. The White Paper was accompanied by a ‘Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics‘ concluding that the current product safety legislation contains a number of gaps that needed to be addressed, notably in the Machinery Directive.
Compliments of the European Commission.
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The Council’s and the European Parliament’s negotiators reached a provisional political agreement setting into law the objective of a climate-neutral EU by 2050, and a collective, net greenhouse gas emissions reduction target (emissions after deduction of removals) of at least 55% by 2030 compared to 1990.

We are very happy with the provisional deal reached today. The European climate law is “the law of laws” that sets the frame for the EU’s climate-related legislation for the 30 years to come. The EU is strongly committed to becoming climate neutral by 2050 and today we can be proud to have set in stone an ambitious climate goal that can get everyone’s support. With this agreement we send a strong signal to the world – right ahead of the Leader’s Climate Summit on 22 April – and pave the way for the Commission to propose its “fit-for-55” climate package in June.
João Pedro Matos Fernandes, Minister of Environment and Climate Action

Regarding the 2030 target, negotiators agreed on the need to give priority to emissions reductions over removals. In order to ensure that sufficient efforts to reduce and prevent emissions are deployed until 2030, they introduced a limit of 225 Mt of CO2 equivalent to the contribution of removals to the net target. They also agreed the Union shall aim to achieve a higher volume of carbon net sink by 2030.
Other elements of the provisional agreement include the establishment of a European Scientific Advisory Board on Climate Change, composed of 15 senior scientific experts of different nationalities with no more than 2 members holding the nationality of the same member state for a mandate of four years. This independent board will be tasked, among other things, with providing scientific advice and reporting on EU measures, climate targets and indicative greenhouse gas budgets and their coherence with the European climate law and the EU’s international commitments under the Paris Agreement.
The negotiators agreed that the Commission would propose an intermediate climate target for 2040, if appropriate, at the latest within six months after the first global stocktake carried out under the Paris Agreement. It will at the same time publish a projected indicative Union’s greenhouse gas budget for the period 2030-2050, together with its underlying methodology. The budget is defined as the indicative total volume of net greenhouse gas emissions (expressed as CO2 equivalent and providing separate information on emissions and removals) that are expected to be emitted in that period without putting at risk the Union’s commitments under the Paris Agreement.
Negotiators also agreed that the Commission would engage with sectors of the economy that choose to prepare indicative voluntary roadmaps towards achieving the Union’s climate neutrality objective by 2050. The Commission would monitor the development of such roadmaps, facilitate the dialogue at EU-level, and share best practices among relevant stakeholders.
The provisional agreement also sets an aspirational goal for the EU to strive to achieve negative emissions after 2050.
The provisional political agreement is subject to approval by the Council and Parliament, before going through the formal steps of the adoption procedure. The provisional agreement was reached by the Council’s Portuguese Presidency and the European Parliament’s representatives, based on mandates from their respective institutions.
The text of the agreement will follow.
Background
The European Council, in its conclusions of 12 December 2019, agreed on the objective of achieving a climate-neutral EU by 2050, in line with the objectives of the Paris Agreement, while also recognising that it is necessary to put in place an enabling framework that benefits all member states and encompasses adequate instruments, incentives, support and investments to ensure a cost-efficient, just, as well as socially balanced and fair transition, taking into account different national circumstances in terms of starting points.
On 4 March 2020, the European Commission adopted its proposal for a European climate law, as an important part of the European Green Deal. On 17 September 2020, the Commission adopted a proposal amending its initial proposal to include a revised EU emissions reduction target of at least 55% by 2030. The Commission also published a communication on the 2030 climate target plan, accompanied by a comprehensive impact assessment.
On 10-11 December the European Council in its conclusions, endorsed a binding EU target of a net domestic reduction of at least 55% in greenhouse gas emissions by 2030 compared to 1990.
The Council adopted a general approach on 17 December 2020, after which the Council and the Parliament launched a series of trilogue meetings with the aim of securing an agreement on the final text.
Compliments of the Council of the European Union.
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Testimony by Mark Van Der Weide, General Counsel before the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, Committee on Financial Services, U.S. House of Representatives, Washington, D.C. |
Chairman Sherman, Ranking Member Huizenga, and members of the subcommittee, thank you for the opportunity to appear today. My testimony will discuss the importance of ensuring a smooth, transparent, and fair transition away from LIBOR (formerly known as the London interbank offered rate) to more durable replacement rates, as well as some of the challenges posed by this transition. Before I delve into those issues, however, it may be helpful to review how LIBOR is used and why it will be discontinued.
LIBOR measures the average interest rate at which large banks can borrow in wholesale funding markets for different periods of time, ranging from overnight to one month, three months, and beyond. LIBOR is an unsecured rate that measures interest rates for borrowings that are made without collateral. Over the past few decades, LIBOR became a benchmark rate used to set interest rates for commercial loans, mortgages, derivatives, and many other products. In total, U.S. dollar LIBOR is used in more than $200 trillion of financial contracts worldwide.
By now the flaws of LIBOR are well documented.1 One of the fundamental problems is that LIBOR purported to be a representation of the actual funding costs of large banks in the London interbank market, but the evolution of that market over the years meant that, for many tenors, banks were estimating the likely cost of such funding rather than reporting the actual cost. This increasing element of subjectivity and discretion, coupled with the mechanisms that had been adopted to aggregate various banks’ inputs into the determination of LIBOR, made the rate vulnerable to collusion and manipulation. Particularly after the global financial crisis of 2008, as banks sharply reduced their reliance on wholesale unsecured funding, there were few actual funding transactions on which to base a rate for many tenors of LIBOR.
While banks are, of course, not required to price their credit as a direct function of their cost of funding or on any amalgam of actual transaction data, the LIBOR mechanism—by purporting to be a measure of such costs even though there were not sufficient transactions to justify that perception—had become potentially misleading to many of those relying on it for credit pricing and other decisions. Over time, with a large number of contracts referencing a thinly traded rate, the incentive to manipulate LIBOR grew and actual manipulation of LIBOR abounded.
Following the exposure of these weaknesses, and the imposition of material legal penalties on a number of banks and individuals that engaged in misconduct related to the setting of LIBOR rates, the great majority of the banks that had provided submissions to be used in the setting of LIBOR (the so-called panel banks) determined that they would not continue participating in the process. This was not the result of a regulatory or legal requirement to end LIBOR. It was a private sector decision to stop providing what had always been a completely voluntary service, given the firms’ assessment of the costs and benefits of doing so. While regulators are appropriately focusing on whether financial firms have prepared themselves for the date when the panel banks have said they will no longer provide LIBOR, the decision to end LIBOR itself has not been a governmental decision, but a private sector development.
Last month, LIBOR’s regulator in the United Kingdom announced that the one-week and two-month U.S. dollar LIBOR term rates will cease to be published at the end of 2021, while overnight and other LIBOR term rates will cease to be published on a representative basis in mid-2023.2 This definitive announcement about the end of panel-based LIBOR underscores the importance of transitioning away from this moribund benchmark rate.
Efforts to Transition Away from LIBOR
Market participants, regulatory agencies, consumer groups, and other stakeholders have put in a great deal of work to prepare for life after LIBOR. Beginning in 2013, the domestic Financial Stability Oversight Council and the international Financial Stability Board expressed concern that the decline in unsecured short-term funding by banks could pose serious structural risks for unsecured benchmarks like LIBOR.3 To mitigate these risks and promote a smooth transition away from LIBOR, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) in November 2014. Recognizing that the private sector must drive this transition, the ARRC’s voting members are private-sector firms. The Federal Reserve and the other agencies testifying today are ex-officio members of the ARRC.
The ARRC set about to identify alternative reference rates that were rooted in transactions from an active and robust underlying market. In June 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight, collateralized by Treasury securities. The Federal Reserve Bank of New York publishes SOFR each morning. Unlike LIBOR, SOFR is based on a market with a high volume of underlying transactions—regularly around $1 trillion daily. The ARRC developed a multi-step plan in October 2017 to facilitate the transition from LIBOR to SOFR.
The Federal Reserve and other agencies also sponsored a series of workshops with lenders and borrowers that focused on the use of credit-sensitive alternative reference rates for loans. Relatedly, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) issued a statement last year to emphasize that a bank may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs.4 The statement also noted, however, that a bank’s loan contracts should include robust fallback language that provides for a clearly defined alternative reference rate to be used if the initial reference rate is discontinued.
Supervisory Efforts
Beginning in 2018, Federal Reserve staff began outreach to supervised institutions and examiners to raise awareness about, and encourage preparation for, the transition away from LIBOR. In 2019, we established a LIBOR Transition Working Group to coordinate monitoring of the transition and develop supervisory plans to assess banks’ preparation efforts.
In November 2020, the Federal Reserve, OCC, and FDIC sent a letter to the banking organizations that we regulate, noting that there are safety and soundness risks associated with the continued use of U.S. dollar LIBOR in new transactions after 2021.5 Accordingly, we have encouraged supervised entities to stop using LIBOR in new contracts as soon as practicable and, in any event, by the end of this year. Federal Reserve Vice Chair for Supervision Randal Quarles emphasized in a recent speech that banking firms should be aware of the intense supervisory focus the Federal Reserve is placing on the LIBOR transition, and especially on plans to end issuance of new LIBOR contracts by year-end.6
Legacy Contracts
A key question is whether existing LIBOR-based contracts (legacy contracts) can seamlessly transition to alternative reference rates when LIBOR ends. The ARRC recently estimated that 35 percent of legacy contracts will not mature before mid-2023. Some of these legacy contracts have workable fallback language to address the end of LIBOR, but others do not. For example, most business loans have workable fallback language—by their terms, business loans generally fall back to an alternative floating rate, such as the prime rate. Similarly, most derivatives are governed by a master agreement published by the International Swaps and Derivatives Association (ISDA), and ISDA has published a “protocol” that allows derivative counterparties to amend their master agreements, on a multilateral basis, so that their derivative contracts fall back to a floating SOFR-based rate for counterparties that adhere to the protocol. Conversely, many floating-rate notes and securitizations have problematic fallback language—generally, these contracts convert to fixed-rate instruments at the last published value of LIBOR. Moreover, the rate terms in floating-rate notes and securitizations can typically be changed only with the unanimous consent of all noteholders, which typically would be difficult to secure.
The end of LIBOR may result in significant litigation. For example, if a legacy contract converts to a fixed rate when LIBOR ends, a party disadvantaged by that conversion might request that a court reform the contract by substituting an alternative floating rate for LIBOR.7 Parties also might request that a court reform or void a legacy contract that lacks any fallback language if the parties cannot agree bilaterally on a successor rate.8 Similarly, in instances where a legacy contract allows a person to select a replacement rate when LIBOR ends, a party disadvantaged by the replacement rate might argue that the manner in which another person—for example, a bond trustee—selected the replacement rate violates the implied covenant of good faith and fair dealing.9
Chair Powell and Vice Chair Quarles have publicly stated their support for federal legislation to mitigate risks related to legacy contracts. Federal legislation would establish a clear and uniform framework, on a nationwide basis, for replacing LIBOR in legacy contracts that do not provide for an appropriate fallback rate.10 Federal legislation should be targeted narrowly to address legacy contracts that have no fallback language, that have fallback language referring to LIBOR or to a poll of banks, or that convert to fixed-rate instruments. Federal legislation should not affect legacy contracts with fallbacks to another floating rate, nor should federal legislation dictate that market participants must use any particular benchmark rate in future contracts. Finally, to avoid conflict of laws problems, federal legislation should pre-empt any outstanding state legislation on legacy LIBOR contracts.
Thank you. I look forward to your questions on this important matter.
Compliments of the U.S. Federal Reserve Board.
The post Testimony | The End of LIBOR: Transitioning to an Alternative Interest Rate Calculation for Mortgages, Student Loans, Business Borrowing, and Other Financial Products first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Vice Chair Richard H. Clarida at “SOMC: The Federal Reserve’s New Policy Framework” a forum sponsored by the Manhattan Institute’s Shadow Open Market Committee, New York, New York (via webcast) |
On August 27, the Federal Open Market Committee (FOMC) unanimously approved a revised Statement on Longer-Run Goals and Monetary Policy Strategy, and, at its September and December FOMC meetings, the Committee made material changes to its forward guidance to bring it into line with this new policy framework.1 Before I discuss the new framework and the policy implications that flow from it, I will first review some important changes in the U.S. economy that motivated the Committee to assess ways we could refine our strategy, tools, and communication practices to achieve and sustain our goals in the economy in which we operate today and for the foreseeable future.2
Shifting Stars and the End of “Copacetic Coincidence”
Perhaps the most significant change in our understanding of the economy since the Federal Reserve formally adopted inflation targeting in 2012 has been the substantial decline in estimates of the neutral real interest rate, r*, that, over the longer run, is consistent with our maximum-employment and price-stability mandates. Whereas in January 2012 the median FOMC participant projected a longer-run r* of 2.25 percent and a neutral nominal policy rate of 4.25 percent, as of March 2021, the median FOMC participant projected a longer-run r* equal to just 0.5 percent, which implies a neutral setting for the federal funds rate of 2.5 percent.3 Moreover, as is well appreciated, the decline in neutral policy rates since the Global Financial Crisis (GFC) is a global phenomenon that is widely expected by forecasters and financial markets to persist for years to come (Clarida, 2019).
The substantial decline in the neutral policy rate since 2012 has critical implications for monetary policy because it leaves the FOMC with less conventional policy space to cut rates to offset adverse shocks to aggregate demand. This development, in turn, makes it more likely that recessions will impart elevated risks of more persistent downward pressure on inflation and inflation expectations as well as upward pressure on unemployment that the Federal Reserve’s monetary policy should—in design and implementation—seek to offset throughout the business cycle and not just in downturns themselves.
With regard to inflation expectations, there is broad agreement that achieving price stability on a sustainable basis requires that long-run inflation expectations be well anchored at the rate of inflation consistent with the price-stability goal. The pre-GFC academic literature (Clarida, Galí, and Gertler, 1999; Woodford, 2003) derived the important result that a credible inflation-targeting monetary policy strategy that is not constrained by the effective lower bound (ELB) can deliver, under either rational expectations or linear least-squares learning (Bullard and Mitra, 2002), inflation expectations that themselves are well anchored at the inflation target. In other words, absent a binding ELB constraint, a policy that targets actual inflation in these models delivers long-run inflation expectations well anchored at the target “for free.” And, indeed, in the 15 years before December 2008, when the federal funds rate first hit the ELB—a period when, de facto, if not de jure the Federal Reserve conducted a monetary policy that was interpreted to be targeting an inflation rate of 2 percent (Clarida, Galí, and Gertler, 2000)—personal consumption expenditures (PCE) inflation averaged very close to 2 percent (see figure 1).
But this “copacetic coincidence” no longer holds in a world of low r* in which adverse aggregate demand shocks drive the economy in downturns to the ELB. In this case, economic analysis indicates that flexible inflation-targeting monetary policy cannot be relied on to deliver inflation expectations that are anchored at the target but instead will tend to deliver inflation expectations that, in each business cycle, become anchored at a level below the target (Mishkin, 2016). This finding is the crucial insight in my colleague John Williams’s research with Thomas Mertens (2019) and in the research of Bernanke, Kiley, and Roberts (2019). This downward bias in inflation expectations under inflation targeting in an ELB world can in turn reduce already scarce policy space—because nominal interest rates reflect both real rates and expected inflation—and it can open up the risk of the downward spiral in both actual and expected inflation that has been observed in some other major economies.
Two other, related developments that have also become more evident than they appeared in 2012 are that price inflation seems empirically to be less responsive to resource slack, and that estimates of resource slack based on historically estimated price Phillips curve relationships are less reliable and subject to more material revision than was once commonly believed. For example, in the face of declining unemployment rates that did not result in excessive cost-push pressure to price inflation, the median of the Committee’s projections of u*—the rate of unemployment consistent in the longer run with the 2 percent inflation objective—has been repeatedly revised lower, from 5.5 percent in January 2012 to 4 percent as of the March 2021 Summary of Economic Projections (SEP). In the past several years of the previous expansion, declines in the unemployment rate occurred in tandem with a notable and, to me, welcome increase in real wages that was accompanied by an increase in labor’s share of national income, but not a surge in price inflation to a pace inconsistent with our price-stability mandate and well-anchored inflation expectations. Indeed, this pattern of mid-cycle declines in unemployment coincident with noninflationary increases in real wages and labor’s share has been evident in the U.S. data since the 1990s (Clarida, 2016; Heise, Karahan, and Sahin, 2020; Feroli, Silver, and Edgerton, 2021).
The New Framework and Price Stability
I will now discuss the implications of the new framework for the Federal Reserve’s price-stability mandate before turning to its implications for the maximum-employment mandate. Five features of the new framework and fall 2020 FOMC statements define how the Committee will seek to achieve its price-stability mandate over time.
First, the Committee expects to delay liftoff from the ELB until PCE inflation has risen to 2 percent and other complementary conditions, consistent with achieving this goal on a sustained basis, have also been met.4
Second, with inflation having run persistently below 2 percent, the Committee will aim to achieve inflation moderately above 2 percent for some time in the service of keeping longer-term inflation expectations well anchored at the 2 percent longer-run goal.5
Third, the Committee expects that appropriate monetary policy will remain accommodative for some time after the conditions to commence policy normalization have been met.6
Fourth, policy will aim over time to return inflation to its longer-run goal, which remains 2 percent, but not below, once the conditions to commence policy normalization have been met.7
Fifth, inflation that averages 2 percent over time represents an ex ante aspiration of the FOMC but not a time inconsistent ex post commitment.8
As I highlighted in speeches at the Brookings Institution in November and the Hoover Institution in January, I believe that a useful way to summarize the framework defined by these five features is temporary price-level targeting (TPLT, at the ELB) that reverts to flexible inflation targeting (once the conditions for liftoff have been reached).9 Just such a framework has been analyzed by Bernanke, Kiley, and Roberts (2019) and Bernanke (2020), who in turn build on earlier work by Evans (2012), Reifschneider and Williams (2000), and Eggertsson and Woodford (2003), among many others.
A policy that delays liftoff from the ELB until a threshold for average inflation has been reached is one element of a TPLT strategy. Starting with our September FOMC statement, we communicated that inflation reaching 2 percent is a necessary condition for liftoff from the ELB. TPLT with such a one-year memory has been studied by Bernanke, Kiley, and Roberts (2019). The FOMC also indicated in these statements that the Committee expects to delay liftoff until inflation is “on track to moderately exceed 2 percent for some time.” What “moderately” and “for some time” mean will depend on the initial conditions at liftoff (just as they do under other versions of TPLT), and the Committee’s judgment on the projected duration and magnitude of the deviation from the 2 percent inflation goal will be communicated in the quarterly SEP for inflation.
Our new framework is asymmetric. That is, as in the TPLT studies cited earlier, the goal of monetary policy after lifting off from the ELB is to return inflation to its 2 percent longer-run goal, but not to push inflation below 2 percent. In the case of the Federal Reserve, we have highlighted that making sure that inflation expectations remain anchored at our 2 percent objective is just such a consideration. Speaking for myself, I follow closely the Fed staff’s index of common inflation expectations (CIE)—which is now updated quarterly on the Board’s website—as a relevant indicator that this goal is being met (see figure 2).10 Other things being equal, my desired pace of policy normalization post liftoff to return inflation to 2 percent would be somewhat slower than otherwise if the CIE index at the time of liftoff is below the pre-ELB level.
Our framework aims ex ante for inflation to average 2 percent over time but does not make a commitment to achieve ex post inflation outcomes that average 2 percent under any and all circumstances. The same is true for the TPLT studies I cited earlier. In these studies, the only way in which average inflation enters the policy rule is through the timing of liftoff itself. Yet in stochastic simulations of the FRB/US model under TPLT with a one-year memory that reverts to flexible inflation targeting after liftoff, inflation does average very close to 2 percent (see the table). The model of Mertens and Williams (2019) delivers a similar outcome: Even though the policy reaction function in their model does not incorporate an ex post makeup element, it delivers a long-run (unconditional) average rate of inflation equal to target by aiming for a moderate inflation overshoot away from the ELB that is calibrated to offset the inflation shortfall caused by the ELB.
The New Framework and Maximum Employment
I turn now to the maximum-employment mandate. An important evolution in our new framework is that the Committee now defines maximum employment as the highest level of employment that does not generate sustained pressures that put the price-stability mandate at risk.11 As a practical matter, this means to me that when the unemployment rate is elevated relative to my SEP projection of its long-run natural level, monetary policy should, as before, continue to be calibrated to eliminate such employment shortfalls, so long as doing so does not put the price-stability mandate at risk. Indeed, in our September and subsequent FOMC statements, we indicated that we expect it will be appropriate to keep the federal funds rate in the current 0 to 25 basis point target range until inflation has reached 2 percent (on an annual basis) and labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment. Moreover, in our December and subsequent FOMC statements, we have indicated that we expect to continue our Treasury and MBS purchases at least at the current pace until we have made substantial further progress toward achieving these dual mandate goals. In our new framework, when in a business cycle expansion labor market indicators return to a range that in the Committee’s judgment is broadly consistent with its maximum-employment mandate, it will be data on inflation itself that policy will react to, but, going forward, policy will not tighten solely because the unemployment rate has fallen below any particular econometric estimate of its long-run natural level. Of note, the relevance of uncertainty about the natural rate of unemployment or the output gap for monetary policy reaction functions is a long-studied topic that remains important.12 For example, Berge (2020) provides a discussion around the difficult task of estimating the output gap (see figure 3).
These considerations have an important implication for the Taylor-type policy reaction function I consult. Consistent with our new framework, the relevant policy rule benchmark I will consult once the conditions for liftoff have been met is an inertial Taylor-type rule with a coefficient of zero on the unemployment gap, a coefficient of 1.5 on the gap between core PCE inflation and the 2 percent longer-run goal, and a neutral real policy rate equal to my SEP projection of long-run r*.13 The most recent Monetary Policy Report features a box on policy rules, including a Taylor-type “shortfalls” rule in which the federal funds rate reacts only to shortfalls of employment from the Committee’s best judgment of its maximum level but reverts to the rule previously described once that level of employment is reached (see figure 4).14
Concluding Remarks
In closing, I think of our new flexible average inflation-targeting framework as a combination of TPLT at the ELB, to which TPLT reverts once the conditions to commence policy normalization articulated in our most recent FOMC statement have been met. In this sense, our new framework indeed represents an evolution, not a revolution, from the flexible inflation-targeting framework in place since 2012. Thank you very much for your time and attention, and I look forward to my conversation with Peter Ireland and Athanasios Orphanides.
Compliments of the U.S. Federal Reserve.
The post Speech | The Federal Reserve’s New Framework and Outcome-Based Forward Guidance first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.