Today the OECD/G20 Inclusive Framework on BEPS released further technical guidance on the 15% global minimum tax agreed in October 2021 as part of the two-pillar solution to address the tax challenges arising from digitalisation of the economy. The Commentary published today elaborates on the application and operation of the Global Anti-Base Erosion (GloBE) Rules agreed and released in December 2021. The GloBE Rules provide a co-ordinated system to ensure that Multinational Enterprises (MNEs) with revenues above EUR 750 million pay at least a minimum level of tax – 15% – on the income arising in each of the jurisdictions in which they operate.
The release of the Commentary to the GloBE Rules now provides MNEs and tax administrations with detailed and comprehensive technical guidance on the operation and intended outcomes under the rules and clarifies the meaning of certain terms. It also illustrates the application of the rules to various fact patterns. The Commentary is intended to promote a consistent and common interpretation of the GloBE Rules that will facilitate co-ordinated outcomes for both tax administrations and MNE Groups.
“The release of the Commentary today is a significant achievement which concludes many months of hard work by Inclusive Framework members in reaching a detailed agreement on the substantive provisions of the GloBE Rules,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “With the completion of the technical work on the Model Rules and Commentary, Inclusive Framework members now have all the tools they need to begin implementing the rules.”
The OECD/G20 Inclusive Framework on BEPS will now develop an Implementation Framework to support tax authorities in the implementation and administration of the GloBE Rules. As the first step in this process, the Inclusive Framework will undertake a public consultation to collect input from stakeholders on the matters they consider need to be addressed as part of the Implementation Framework.
To access the full text of the GloBE Rules and its Commentary, visit https://oe.cd/pillar-two-model-rules.
Further information on the two-pillar solution for addressing the tax challenges arising from digitalisation and globalisation of the economy is available at https://oe.cd/bepsaction1.
Contacts:

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration (CTPA) | Pascal.Saint-Amans@oecd.org
Achim Pross, CTPA’s Head of International Co-operation and Tax Administration | achim.pross@oecd.org

Compliments of the OECD.
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14/03/2021 – HR/VP Blog – Putin’s war against Ukraine has already caused thousands of death but also major economic damages globally. We need to handle the impact of this third asymmetric shock in 15 years, at home and abroad. EU leaders agreed at the informal summit in Versailles to bolster European economic resilience, radically reduce our energy imports from Russia and move ahead with a serious strengthening of European defence.

“To handle the wider impact of the war against Ukraine, we need to bolster European economic resilience, end our energy dependence on Russia and further strengthen European defence”

Josep Borrell, HR/VP

The war against Ukraine that Vladimir Putin started is already having considerable economic consequences in Russia, where the rouble has lost half its value and inflation is soaring. Moscow’s stock exchange is closed. Many international companies, like Ikea, McDonald’s, Visa and MasterCard have left the country. Russia’s economy is expected to shrink by at least 15% this year. Weakened and isolated, Russia risks becoming very dependent on China in the future.
 

The price of freedom and democracy
However, we are also seeing significant effects in Europe, with energy and other prices rising and probably set to continue to do so. We, inside the EU, have to accept to pay also a price to stop this outrageous and unprovoked war: the future of our security and our democracies depends on it. The price to pay is the price of freedom.

The war in Ukraine is the third asymmetric shock, as economists call it, that the Union has experienced in the last two decades, after the 2008 financial and economic crisis and the following Eurozone crisis and the COVID-19 pandemic. An asymmetric shock is a sudden change in economic conditions that affects some EU countries more than others. The war in Ukraine is indeed having a much greater impact on neighbouring countries due to the influx of refugees and their heavy dependence on Russian gas.
To prevent asymmetric shocks from weakening the EU, we need to step up our capacity to show solidarity with the most affected countries. This is what we did after the 2008-2009 crisis, even if we were slow to do so. This is what we did facing the economic impact of the COVID-19 pandemic, both by pooling vaccine purchases and through the Next Generation EU plan. This is also what we need to do now.

The consequences of the war in Ukraine were at the centre of the informal EU leaders meeting in Versailles. The heads of states and government agreed to phase out our dependence on Russian gas, oil and coal imports as soon as possible. It is not possible for us to continue to feed Vladimir Putin’s war machine through our energy imports. The Commission will present, by the end of March, a plan to secure our supply in the coming winter season and specify by the end of May the details for the REPower EU plan to end our dependency to fossil fuels imports from Russia.
In parallel, the heads of states and governments will address the impact of rising energy prices on EU citizens and businesses at the next meeting of the European Council on 24-25 March. In particular, we probably need to rethink our wholesale electricity pricing system, which is currently driven for all energy sources by gas prices, even though gas-fired power generation is a very small fraction of the whole.
“The three ways of cutting our dependence on Russia are diversification of supplies, energy efficiency and the acceleration of renewables.”
This plan has many important internal implications for the EU, but also for its external policy. The three ways of cutting our dependence on Russia are diversification of supplies, energy efficiency and the acceleration of renewables. On the diversification front, we need to increase our purchases of Liquefied Natural Gas (LNG) from suppliers such as the US, Qatar, Norway, African producers and others.
To achieve this, we need in particular the infrastructure capable of receiving and processing LNG. These are currently very unevenly distributed in Europe with many in Spain, for example, but almost none in Germany or in the countries of Central and Eastern Europe. However, we currently lack sufficient pipeline connections between Spain and the rest of the continent. We will have to create new infrastructure and organise ourselves to pool these LNG supplies.

In addition, we must reduce energy consumption in the EU and hence our need for gas, but also for oil and coal, for which Russia is also our main supplier. Otherwise, our efforts to reduce our dependence on Russia risk leading to a sharp rise in the EU’s overall energy bill. We also need to avoid simply replacing  one excessive external dependence with another.
At the same time, we have to accelerate the deployment of renewable energies: in 2020, almost all EU countries had exceeded the targets set in 2008 for the share of renewables, but there is still a need to reinforce this trend. This is the purpose of the Fit for 55 action plan proposed by the Commission last year to implement our emission reduction commitments made in Glasgow. We must accelerate its implementation.
The need to increase defence spending
Finally, this war will also force us to increase our defence spending. We need to spend more but above all to spend better, i.e. jointly. Some member states, such as Germany, have already taken important new measures in this area with €100 billion additional defence spending in 2022 and an increase of the defence budget to above 2 % of GDP from 2024. This must be the case everywhere where defence spending is still too low. Again, these are always painful decisions in a context of high public debt and scarce public resources, but Vladimir Putin clearly leaves us no choice.

“With the return of war to European soil, all of us in Europe must contribute more actively to taking responsibility for our own security. The Strategic Compass will provide a framework for using these additional means, ensuring full complementarity with NATO.”

With the return of war to European soil, all of us in Europe must contribute more actively to taking responsibility for our own security. The Strategic Compass, which I have prepared and which we are in the process of adjusting to the new situation, should be adopted by the Foreign Affairs Council on 21 March. It will provide a framework for using these additional means in an efficient and coordinated way within the EU, ensuring full complementarity with NATO. With the European Defence Agency, we will also analyse the structure of our military spending and the investment gaps, and propose additional initiatives to strengthen the European defence industrial and technological base.
Welcoming the refugees
In addition, this war is already causing a massive influx of refugees into the European Union. As I write, more than 2 million people have crossed our borders and this number is expected to increase further in the days and weeks ahead, as long as Putin continues his aggression. Ukraine’s EU neighbours have shown remarkable mobilisation and solidarity in welcoming these refugees. Here too, we already help the EU countries most directly concerned to cope with this influx and we will need to do more in the next future. But the refugees issue also raises the broader question of the renewal of our common policy on asylum and migration to build more solidarity, a process that began in 2020 but has not yet been finalised.
The war in Ukraine also makes it more urgent to prevent this conflict to spill over elsewhere in the world and to solve other crises. We have been working for a long time now to help find a political solution to the political and humanitarian crisis in Venezuela. We also need to reduce tensions in the Gulf region, which is closely linked to the resumption of the JCPoA, the Iranian nuclear deal, a file on which we have been working hard for many months. We must also monitor closely the situation in Western Balkans or in the Caucasus.
A negative impact on emerging and developing countries
This war will also have important repercussions for emerging and developing countries that are energy importers. They will suffer even more than us from the rise in the price of fossil fuels. And it is not just about energy. The impact on the market for grain, wheat but also maize, sunflower and fertiliser, for which Russia and Ukraine were major exporters, will also be significant. The prices of basic agricultural products were already high. They will probably increase further with major potential for creating suffering and political instability.
“We saw last year that developing countries had been hit harder than developed ones by the economic impact of the COVID-19 pandemic. The war in Ukraine may make things even worse with the risk of major unrests related to food and energy price hikes.”
We saw last year that developing countries had been hit harder than developed ones by the economic impact of the COVID-19 pandemic. World hunger and poverty had again increased significantly. The war in Ukraine may make things even worse in this respect with the risk of major unrests related to food and energy price hikes, as we have already seen in the past in comparable circumstances. Despite our own difficulties, we must therefore increase our support to poorer countries most affected by the indirect effects of this war, including in Africa and the Middle East.
With the invasion of Ukraine, Vladimir Putin is forcing us to urgently rethink many elements of our internal organisation and our worldview. We must rise to this challenge to defend our security and our democratic values.
Author:

Josep Borrell, EU High Representative

Compliments of the European Union External Action.
The post The war in Ukraine and its implications for the EU first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

With fiscal policy having gained fresh prominence, governments must carefully calibrate their policies in the pandemic’s aftermath
Before the global financial crisis of 2008, the general consensus was that the most important contribution fiscal policy could make to macroeconomic policy was to avoid becoming a source of instability. That is, while sound public tax and spending policies were considered fundamental to financial stability, it was monetary policy, with its focus on price stability, that would deliver the optimal level of output and employment. A contribution from fiscal policy to stabilizing the economy was not only unnecessary, it was also undesirable, because changes in fiscal policy act with such long lags, and politics can produce unsound policies.
Fiscal institutions, rules, and procedures that kept spending and taxing in sync were considered the key ingredients to ensuring sound public finances. Fiscal policy’s main role was not price stability or output stabilization but long-term sustainable and inclusive growth. Government taxes and spending were largely looked at for their effects on the allocation and distribution of resources. The bottom line: despite its limited contribution to stabilization, fiscal policy was central to macroeconomic priorities that determine the relative prosperity of nations and the well-being and capacities of successive generations.
But in 2020, in response to the COVID-19 pandemic, fiscal policy took on a crucial role in macroeconomic stabilization. As prices and demand plummeted and central banks in many advanced economies were hamstrung by interest rates that could go no lower, fiscal policy took on new importance—extending lifelines to vulnerable households and firms and limiting the impact of business shutdowns on economic activity and employment. Fiscal actions were implemented decisively and rapidly.
Massive increases in spending
Fighting the effects of the pandemic, however, required a massive increase in spending that led to large budget deficits and unprecedented levels of government debt. It is remarkable that historically high levels of public debt have been accompanied by historically low interest rates and, for advanced economies, low interest cost of servicing public debt. But now, with inflation and interest rates on the rise, the issue is becoming how, and how fast, those deficits and debt levels will be reduced. There is reason to fear that the burden of policies aimed at reducing deficits and debt, such as spending cuts and tax increases, will fall predominantly on people already hit hardest by the pandemic—such as caregivers, low-wage earners, and less-qualified workers. Moreover, in many countries, there is also concern that premature austerity could jeopardize economic recovery.
The United States provides an important example of the beneficial power of an activist fiscal policy. US poverty actually fell in 2020, the first year of the COVID-19 pandemic, because of a massive widening of the social safety net. The US Census Bureau’s Supplemental Poverty Measure rate—which, in contrast to the official poverty rate, takes into account government assistance to families and individuals—was 9.1 percent of the population in 2020, 2.6 percentage points lower than in 2019. This is all the more remarkable because the official poverty rate increased 1.0 percentage point to 11.4 percent (an increase of 3.3 million people). The expansion of the US social safety net (which includes support checks and increased unemployment benefits) more than compensated for wages and jobs lost during the first year of the pandemic. The government has a special role in protecting the vulnerable when things go wrong, and 2020 demonstrated its power to do so. The United States is not the only case: poverty also fell in 2020 in other countries, such as Brazil. Poverty and inequality are fundamentally influenced by political choices.
In times of crisis, fiscal politics dominates the public sphere, as it has during the pandemic. But another important phenomenon during the COVID-19 emergency is the interaction of monetary and fiscal policies when monetary policy is constrained by an effective lower bound on nominal interest rates. Manipulating interest rates is the primary way monetary policy operates. In the United States, the euro area, and Japan, estimates of the neutral real interest rate—the rate that supports the economy at full potential while keeping inflation in check—have been declining significantly in recent decades. A falling neutral rate implies that the effective lower bound will increasingly constrain central banks’ ability to lower interest rates to offset falling demand, which leads to declines in both economic activity and employment and to an inflation rate that is below target.

‘The power of fiscal policy is greatest when it is needed the most.’

Interest rates at zero
In 2020 interest rates fell to near zero, but they could not revive an economy in free fall during the pandemic. That resulted in monetary policy ramping up the use of unorthodox techniques such as forward guidance—committing to low interest rates for a long period—and asset purchases to prop up demand and prices. But even as monetary policy’s ability to influence the economy was constrained, fiscal policy space increased. Governments cut taxes and directed resources to households and businesses to offset the effects of the pandemic—which included lockdowns, massive job losses, and a decline in demand that threatened severe disinflation. Fiscal policy became instrumental in stabilizing expectations and supported monetary policy’s aim of delivering price stability in a timely way. The power of fiscal policy is greatest when it is needed the most.
In 1923 John Maynard Keynes—the progenitor of the eponymous Keynesian economics, which spawned monetary and fiscal policies—warned in A Tract on Monetary Reform that “what Government spends the public pays for. There is no such a thing as an uncovered deficit.” This observation reflects the inescapable reality of governments’ budget constraints. An important activity of the IMF, enshrined in its Articles of Agreement, is to make resources available to member countries to facilitate their ability to correct imbalances—such as a sudden stop in external financing, unsustainable public finances, or a banking crisis—without resorting to drastic measures that destroy national and international prosperity. The availability of IMF resources is meant to build confidence during crises—when countries have lost, or are at risk of losing, their ability to borrow in open markets. Still, under these circumstances, budgetary adjustment is unavoidable and must be compatible with available financing, which is typically scarcest when and where it is most needed.
During 2020, advanced economies and China contributed more than 90 percent to the accumulation of public and nonfinancial private debt. The remaining countries accounted for only about 7 percent. The advanced economies and China are projected to return to the pre-COVID growth path over the next one to three years. In contrast, developing economies are expected to fall below the growth prospects projected before the pandemic, because they were severely constrained in their ability to respond. Reduced growth prospects and persistent declines in tax revenues are major concerns for the eradication of poverty and, more generally, for the attainment of the Sustainable Development Goals (SDGs) agreed to by 190 countries in 2015. Those 17 goals aim to result in a world in which extreme poverty is eliminated and opportunities and capacities expand for all. Financing and revenue mobilization are key enablers of the SDGs. The international community provided critical support in 2020 and 2021. But more is urgently needed.
Author:

Vitor Gaspar, Director, IMF Fiscal Affairs Department

Compliments of the IMF.
The post IMF | A Fine Balancing Act first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Washington, DC : The Executive Board of the International Monetary Fund (IMF) today approved a disbursement of US$1.4 billion (SDR 1,005.9 million) under the Rapid Financing Instrument (RFI) to help meet urgent financing needs and mitigate the economic impact of the war.
The Executive Board expressed its strong support for the Ukrainian people.
The war in Ukraine is resulting in tragic loss of life and human suffering. While the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious, with refugee flows of over 2 million persons in just 13 days and large-scale destruction of key infrastructure in Ukraine. This disbursement under the RFI, equivalent to 50 percent of Ukraine’s quota in the IMF, will help meet urgent balance of payment needs arising from the impacts of the ongoing war and will provide critical support in the short term while playing a catalytic role for financing from other partners.
The Ukrainian authorities have canceled the Stand-by Arrangement and the authorities have expressed their intent to work with the IMF to design an appropriate economic program aimed at rehabilitation and growth, when conditions permit. The authorities intend to remain in close consultation with staff as they continue to design and implement effective crisis mitigation measures.
Following the Executive Board discussion, Ms. Kristalina Georgieva, Managing Director and Chair, made the following statement:
The Russian military invasion of Ukraine has been responsible for a massive humanitarian and economic crisis. The tragic loss of life, huge refugee flows, and immense destruction of infrastructure and productive capacity is causing severe human suffering and will lead to a deep recession this year. Financing needs are large, urgent, and could rise significantly as the war continues.
The emergency policy response of the Ukrainian authorities has been remarkable. Administrative and capital controls have been introduced to preserve the availability of foreign exchange reserves and reduce uncertainty regarding the exchange rate. To further support financial stability, the National Bank of Ukraine has established a new liquidity facility and introduced regulatory forbearance measures. While cash withdrawal limits have been imposed, cashless transactions have not been limited. Fiscal policy has focused on ensuring priority payments. Ukraine has stayed current on all debt obligations.
Against this extraordinary background, the IMF has approved critical financial support. This should be instrumental in catalyzing the large-scale mobilization of additional concessional financing that will be required to help fill the financing gap and mitigate the economic impacts of the war. Once the war is over and a proper damage assessment can be performed, additional large support is likely to be needed to support reconstruction efforts.
The Fund expresses its deepest sympathy to the Ukrainian people in these extraordinarily difficult times and will remain closely engaged with the Ukrainian authorities.
Contact:

Press Officer: Meera Louis | +1 202 623-7100 | MEDIA@IMF.org

Compliments of the IMF.
The post IMF Executive Board Approves US$ 1.4 Billion in Emergency Financing Support to Ukraine first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Fighting Inflation with Rate Hikes and Balance Sheet Reduction | Governor Christopher J. Waller | At the Economic Forecast Project, University of California, Santa Barbara, Santa Barbara, California |
Thank you Peter, and thank you to the UCSB Economic Forecast Project for the invitation to speak today. My plan is to start with my outlook for the U.S. economy in 2022, and then describe what I consider the appropriate path of monetary policy to keep the economy on a healthy and sustainable course.1 But, before I get into that discussion, let me comment on what I think is on everyone’s minds today, Russia’s attack on Ukraine. Obviously, there are people in harm’s way and we shouldn’t lose sight of them. It is far too early to judge how this conflict will affect the world, or the world economy, and what the implications will be for the U.S. economy. But this situation adds uncertainty to my outlook and will be something I will be monitoring very closely. As my speech will say, we will need to carefully look at the incoming data, especially during a time of heightened uncertainty.
Turning to my outlook for the economy, my greatest concern is continued elevated inflation. Inflation is too high, and I think concerted action is needed to rein it in. The Federal Open Market Committee (FOMC) has multiple tools to tighten monetary policy, and I will go into some detail about how I believe the Fed should approach increasing the target range for the federal funds rate and reducing the size of the balance sheet.
But let me start with the outlook for economic activity. I expect the economy to continue expanding at a healthy rate this year, slower than in 2021 but still at a solid pace that will keep employment growing strongly. While there are some signs that the effects of the Omicron variant have dampened economic growth in the last month or two, it does not appear to have affected hiring, given the healthy jobs report for January. Even COVID-sensitive sectors such as leisure and hospitality saw big job gains last month. With COVID cases dropping sharply, I expect this latest surge in infections will not be a major factor affecting the economy in 2022. Supply bottlenecks and labor shortages, some of them related to the pandemic, continue to weigh on economic output, but I expect those to diminish later this year.
The combination of strong consumer demand and supply constraints has produced very high inflation. The consumer price index (CPI) was up 7.5 percent for the 12 months through January, the highest yearly rate in 40 years. With appropriate monetary policy, and the expected easing in supply constraints, I am hopeful inflation will move down over the course of this year, even with the recent geopolitical developments. Nevertheless, the path of inflation is the biggest risk to my outlook.
As we move through this year, I can’t emphasize enough how much this outlook, and the appropriate stance of monetary policy, will be influenced by the data that we see about the performance of the economy. I know, I know. Saying you need to be data dependent is like saying you are for motherhood and apple pie—who would disagree? But in the current situation, it is urgently important to be data dependent. For example, like most people, I expected the Omicron surge would hammer job creation in January, but the data showed that this didn’t happen. The ups and downs in forecasts during the pandemic should be evidence enough that policy decisions this year, more than ever, will need to be guided by the data, and not by what past experience suggests should happen.2 Missouri, which is home for me, is the Show Me State, so if you want to know how my outlook will evolve, show me the data. With that in hand, I will evaluate the outlook with respect to the Fed’s dual mandate in determining the appropriate setting for monetary policy.
The Labor Market
Let’s start with where the economy stands with respect to maximum employment. In December, I said that we were “closing in” on this objective.3 Since then, the labor market has continued to strengthen. I now believe we have achieved the FOMC’s objective of maximum employment. So, what has changed and made me more certain about that?
A big factor was the jobs report for January, which included very strong data for that month, upward revisions for November and December, and revisions for all of 2021. What we learned from those changes was that a reported slowdown in job creation in the second half of the year never happened, and that in fact job creation was remarkably steady throughout the year, averaging 555,000 a month and never deviating very far from that trend. These revisions helped explain why we saw such large and steady declines over the year in the unemployment rate, which fell from 6.4 percent in January 2021 to 4 percent in January 2022, which happens to be the median of FOMC participants’ December estimates of the longer-run unemployment rate. Accounting for retirees leaving the workforce, I estimate that employment is close to the levels of February 2020, right before the pandemic shock hit the economy and when the target range for the federal funds rate was much higher than the current target range.
The January job numbers were just one monthly report, but one reason I have the confidence to declare that maximum employment has been reached is the message January sent about the durability of the continuing recovery. Based on recent data, including a big increase in retail sales in January, it sure looks like a very significant surge in COVID has failed to derail or even appreciably slow the economy. It has been hazardous to predict much about the economic effects of the pandemic more than a month or two out, but I’m comfortable saying we are at maximum employment in part because of the evidence that the labor market is continuing to strengthen.
Another message from the January report, including the revisions to each month of 2021, is that, so far at least, labor shortages do not seem to be having a huge effect on the economy’s capacity to create jobs. Job creation didn’t slow appreciably in November and December as originally reported; it actually was higher than the average for the rest of the year. Labor force participation isn’t growing as much as one would expect with the hot job market, but apparently it’s growing enough to keep the job creation machine humming.
Another factor that signals we are at maximum employment is the continued rise in measures of labor compensation. The broadest measure of labor compensation, covering wages and benefits, is the employment cost index, which for private sector workers rose at a 4.7 percent annual rate in October, November and December, the fastest pace in 20 years. Average hourly earnings also continue to grow more strongly than they have in decades, and the gains are widespread across sectors. Job vacancies also indicate labor demand is exceptionally strong with nearly 3 million more vacancies than individuals looking for work.
Inflation
While I will continue to watch data on the labor market, I am focusing most of my attention on inflation, which is far too high and needs to come down. In December, some people were a little surprised to hear me say that inflation was “alarmingly high,” but after the latest inflation numbers, I think we all should be alarmed. It is alarming because high inflation is especially painful for lower- and middle-income people, who don’t have a choice about paying more for gasoline, groceries, shelter, and other necessities. It is alarming because of the risk that high inflation could become ingrained in people’s expectations and prove difficult to rein in, undermining economic growth.
The 7.5 percent increase in the CPI in January came after a 7.1 percent increase in December. It was the 11th consecutive month that inflation exceeded 2 percent. The FOMC targets another measure of inflation, the price deflator for personal consumption expenditures (PCE), which will be reported tomorrow. But for both measures, inflation has been increasingly broad-based for quite some time. For the CPI, better than 70 percent of items measured are up 3 percent or more in the last 12 months, and for PCE inflation, 60 percent of items were up that much in December.
High inflation is a significant problem for individuals and families, and it makes it difficult for businesses to control costs and adjust prices. There is also the risk that the public’s expectations of future inflation rise significantly, which affects spending decisions in the short term and thus can have the effect of driving inflation even higher. Keeping longer-term inflation expectations anchored is vitally important for monetary policy. In fact, the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy emphasizes that longer-term inflation expectations that are well anchored at 2 percent foster price stability and enhance the Committee’s ability to promote maximum employment in the face of significant economic disturbances.
Surveys of consumers’ expected inflation over the next year moved up quite notably through 2021 and are currently elevated. And the public’s expectations of inflation over the next five years have risen as well. That said, five-year inflation expectations are where they were over the past couple of decades when inflation stayed low. Importantly, longer-term expectations are much more stable. For example, future inflation measured by investors trading inflation-adjusted securities has 5-to10-year implied compensation around 2.2 percent, which, adjusted for the FOMC’s preferred measure, PCE, is close to 2 percent. In the same way that expectations of much higher inflation can drive a cycle of ever-increasing inflation, when expectations are “anchored” and don’t move significantly, it can have the effect of helping moderate surges in inflation, such as the one we have seen over the past year.
As for what inflation does next, I think anyone who makes a forecast has to own the fact that very few of us foresaw how much inflation would increase in 2021. We underestimated the extent to which supply constraints—from bottlenecks to labor supply shortages—and strong demand would drive up inflation, and we thought bottlenecks and shortages would begin to resolve sooner than now. I think we have a clearer idea today of the effect of those factors on inflation but going forward we need see how geopolitical effects influence energy, commodity, and other prices. With some humility, while I am alarmed about the level of inflation and a bit uncertain about how the near-term may play out, I am hopeful that these factors and their price effects are likely to ease in the second half of 2022 and that with appropriate monetary policy, inflation will be coming down significantly by year end.
I will be watching closely the data on supply pressures and how those feed into total consumer prices, and I’ll be monitoring carefully to see whether expectations rise out of a range that would suggest they are becoming unanchored. As I said earlier, it is too soon to know how Russia’s attack on Ukraine will affect the U.S. economy, and it may not be much easier by the time of our March meeting.
Appropriate Monetary Policy
Now let me spell out what my outlook implies for appropriate monetary policy over the course of 2022. Based on the inflation data in hand, I believe the Fed needs to act promptly to begin tightening monetary policy. As I said earlier, I believe that we have achieved our employment goal and that the labor market will keep improving, which means there should be no delay in responding to inflation that is significantly above our target.
The FOMC has already taken actions to end asset purchases in early March, and I believe that the recent inflation and jobs reports have made the case to begin raising the target range for the federal funds rate at our March FOMC meeting.
Based on my outlook, my preference is to increase the target range 100 basis points by the middle of this year. That is, I expect inflation to remain elevated and only show modest signs of deceleration over the next several months. As a result, I believe appropriate interest rate policy brings the target range up to 1 to 1.25 percent early in the summer. That would be a bit below where rates were at the outbreak of the pandemic, when inflation was considerably lower, and before we more than doubled the Fed’s balance sheet, so I consider this a necessary and prudent start to tightening policy.
The pace of tightening will depend on the data. One possibility is that the target range is raised 25 basis points at each of our next four meetings. But if, for example, tomorrow’s PCE inflation report for January, and jobs and CPI reports for February indicate that the economy is still running exceedingly hot, a strong case can be made for a 50-basis-point hike in March. In this state of the world, front-loading a 50-point hike would help convey the Committee’s determination to address high inflation, about which there should be no question. Of course, it is possible that the state of the world will be different in the wake of the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen. With the economy at full employment and inflation far above target, we should signal that we are moving back to neutral at a fast pace based on the performance of the economy, and a 50-basis point hike would help do that. Consequently, should the data break against us in the coming weeks, we need to be prepared to hike the policy rate by 50-basis points.
No matter the near-term path of reducing accommodation, the FOMC must respond decisively to the data so as to maintain our credibility that we will bring down inflation. We constantly say we have the tools to fight inflation, and now we must demonstrate the will to use them.
While I believe that we should raise the target range by 1 percentage point over the next several months, I will be assessing the incoming data to decide whether further rate increases in 2022 are warranted and, if so, at what pace they should be implemented. If high inflation persists, then I would most likely support that we continue hiking, and potentially increase the pace of tightening. If inflation moderates in the second half of the year, as I expect, and as market participants expect, then we can slow the pace of tightening or even pause. As I said earlier—show me the data.
Turning to balance sheet policy, as I noted, the Committee has decided to end asset purchases in early March. Initially, we will be keeping the size of the Fed’s balance sheet constant by reinvesting the proceeds of maturing securities. The FOMC has not decided when to begin the reduction in the size of the balance sheet, but we issued a set of principles last month that make it clear that changing the target range of the federal funds rate is our principal monetary policy tool, and that balance sheet reductions through the “runoff” from maturing securities would commence after rate hikes have begun.
I support starting this process no later than the July FOMC meeting. The pace of the reduction in asset holdings has not been determined but will be consistent with promoting the FOMC’s employment and inflation goals and will be communicated well in advance to the public so that the plan is predictable.
The last time we reduced our balance sheet we did the following: First, we waited two years after our first-rate hike before commencing balance sheet runoff. Second, we imposed monthly caps on the amount of maturing securities that we would let run off. These caps started out very low and were gradually lifted over a period of 12 months. So, why not follow the same strategy this time?
First, back in 2017 and 2018 we had never intentionally reduced our balance sheet before. This was new territory for the Fed, so we went slow. Second, the Committee was considering moving to an ample reserves regime for conducting monetary policy, where we wanted to keep the banking system flush with reserves. Thus, we had no idea how far we could let reserves fall before we might cause an unwelcome shortage of reserves. Third, the economy was in a much different place; in particular inflation was much lower. Finally, we only expected to run off about $2 trillion of securities from our balance sheet. In that environment it made sense to go slow and gradual in terms of balance sheet reduction.
Fast forward to today. This is now the second time we have done balance sheet reduction and we learned from experience and can go faster than before. Policymakers and markets have a good understanding now of how the process works.
In terms of the appropriate size of the caps, I believe they can be larger than last time for several reasons. First, we have a very large balance sheet—securities holdings have increased $4.5 trillion since the start of the pandemic and the balance sheet is nearly $9 trillion. So even with a hefty reduction in holdings over the next year, we will still have a balance sheet that will be more than sufficiently large enough to conduct monetary policy. Second, the Fed’s overnight reverse repurchase agreement facility, put in place to help conduct monetary policy, receives a large amount of deposits each day. The daily average take-up of $1.6 trillion so far in 2022 tells me that there is tremendous excess liquidity in financial markets. Large redemption caps will assist in removing this excess liquidity. Third, we have learned a lot about operating in an ample reserves regime over the past decade. And we learned lessons from the 2019 experience in reducing reserves. In the first quarter of 2019 the ratio of reserves to nominal gross domestic product (GDP) was approximately 8 percent and financial markets worked well and banks were flush with liquidity. Right now, reserves are far more than ample, standing at 17 percent of GDP. When evidence suggests that we are getting closer to a more appropriate and sustainable level of reserves, we can slow the pace of redemptions. Finally, we have the newly established standing repurchase facility, which acts as a backstop to buffer any unexpected liquidity needs. This facility can help assist us with any unexpected bumps along the way.
With large caps and sizable amounts of securities maturing over the course of the next year or two, I do not see the need to consider asset sales anytime soon. However, because the Fed’s mortgage-backed securities (MBS) holdings have long maturities and are quite sizable, prepayments are unlikely to bring these holdings down to de minimis levels over the next decade. So, MBS sales could be something the Committee considers down the road to satisfy our balance sheet principles long run goal of holding primarily Treasury securities. But that is a conversation for another day. In the meantime, I would support having no caps on MBS redemptions so our MBS holdings decline as fast as prepayments allow, which would modestly assist in moving us toward an all-Treasury portfolio.
Thinking about possible monetary policy actions in 2022, I expect it will be a very fluid year. The Chair has said we will be nimble. I believe nimble describes how we acted in 2021 as well, when nimbleness and good communications served the FOMC well. Think back to the middle of 2021. Just last June, markets expected tapering to begin sometime in 2022, the majority of FOMC participants called for liftoff in 2023, and primary dealers surveyed in July by the Federal Reserve Bank of New York predicted a decline in the balance sheet wouldn’t start until the middle of 2025. Wow, how things have changed.
Over the course of the second half of last year, market expectations of the taper’s beginning quickly moved to November, and then a month after it started, markets predicted it would be completed this March. Soon after, markets were pricing liftoff in March, with several rate hikes over the course of 2022. And now markets are also focused on the start of the decline in the balance sheet sometime this year. It is interesting to note that these dramatic changes in actual and anticipated monetary policy have occurred without volatility or strain in financial markets. I believe the FOMC has been highly effective in communicating its shifting outlook for the economy and appropriate policy actions as the data revealed that inflation was increasing much more than forecasters expected.
Another point to make about the big changes in actual and anticipated monetary policy is that they are showing up in the financial data today. Financial conditions are tighter, I believe, because of the credible, forward guidance policymakers have communicated to the public. Although the Fed hasn’t started raising rates or reducing the balance sheet, interest rates have moved up notably. For example, the 2-year Treasury yield is more than 1 percentage point higher today than at the start of the third quarter of last year. The 10-year Treasury yield is up 1/2 percentage point, and the 30-year fixed mortgage rate is up about 1 percentage point over this period. Going forward, policymakers will adjust policy as needed, which will reinforce the Fed’s credibility.
Let me conclude by saying I hope my remarks today contribute to the Fed’s effective and credible communications. One message you should take away is that the course of policy is not pre-set, and the course I favor will be determined by my interpretation of new data. In the past couple months, inflation and employment data have been sending the same, unequivocal message—it is time to start tightening monetary policy. We need to take the first step in March to get off the effective lower bound. Then we should continue with hikes as well as begin to reduce our balance sheet. I will continue to monitor the geopolitical situation to assess the appropriate timing of this near-term monetary policy tightening. These actions will get us into the second half of the year, when we will have six months of inflation data, and we can assess what the appropriate path will be for the rest of 2022. Our goal is a soft landing for the economy that keeps output and employment growing at a healthy pace and inflation moving toward the FOMC’s 2 percent objective.
Compliments of the U.S. Federal Reserve.

1. These views are my own and do not represent any position of the Board of Governors or other Federal Reserve policymakers. Return to text

2. In December, I discussed lessons from the pandemic for economic forecasters, which included a review of forecasting misses for output and inflation. See Christopher J. Waller (2021), “A Hopeless and Imperative Endeavor: Lessons from the Pandemic for Economic Forecasters,” speech delivered at the Forecasters Club of New York, New York, December 17. Return to text

3. See Waller, “A Hopeless and Imperative Endeavor,” in note 2. Return to text

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The Commission outlines today the very substantial support the EU is making available to help people fleeing war in Ukraine, as well as the EU countries receiving them. In the face of Russia’s unprovoked and unjustified military invasion of Ukraine, European solidarity in action is helping people through direct humanitarian aid, emergency civil protection assistance, support at the border, as well as a clear legal status allowing those fleeing the war to receive immediate protection in the EU.
The assistance available includes:

Humanitarian support: As President von der Leyen has announced, €500 million from the EU budget is being directed to deal with the tragic humanitarian consequences of the war, both inside Ukraine and beyond. Of this, €90 million in humanitarian aid including €85 million for Ukraine and €5 million for Moldova, is already under way to provide food, as well as water, healthcare, shelter, and to help cover the basic needs of the most vulnerable. Through the largest ever activation of the EU Civil Protection Mechanism in response to an emergency, millions of items including vehicles, medical kits, tents, blankets, and sleeping bags have already reached those in need in Ukraine, while further assistance is delivered to neighbouring Moldova, Poland and Slovakia to support all those fleeing the war.

Support for border management: The Commission has issued operational guidelines to help Member States’ border guards in managing arrivals at the borders with Ukraine efficiently and reduce waiting time while maintaining a high level of security. EU agencies are also providing extra staff and expertise to support Member States, with for instance 49 Frontex staff deployed at EU-Ukraine and Moldova-Ukraine borders and an extra 162 staff being deployed to Romania. Moldova will also receive an additional €15 million to help manage the situation.

Protection for those fleeing and support for reception capacity: In record time the EU unanimously agreed to activate the Temporary Protection Directive to bring clarity and security to people in need, offering rights to welfare support, access to the job market and education. Central to this approach is the solidarity between Member States. A ‘Solidarity Platform’, where Member States can exchange information about reception capacity will be coordinated by the Commission. The Home Affairs funds for 2021-27 will also bring significant extra resources for Member States to ensure adequate reception facilities and effective asylum procedures. The Commission is also proposing to prolong the implementation period for the money available to Member States under the 2014-2020 Home Affairs funds, which would release around €420 million in additional support. The Commission will publish on the Europa website information to help citizens and the private sector ensure that their support to those fleeing the war can come through trusted organisations and match the needs.

Cohesion policy action for refugees in Europe: The Commission is also adopting the “Cohesion’s Action for Refugees in Europe” (CARE) legislative proposal. This will bring additional flexibility to finance a wide range of measures supporting people fleeing Ukraine, from the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Fund for the European Aid to the Most Deprived (FEAD). For example, these cohesion funds can be spent on investments in education, employment, housing, health and childcare services, and in the case of FEAD, on basic material assistance like food and clothing. To further support Member States, the exceptional 100% co-financing rate applied in response to the pandemic will be extended by a year. Moreover, around €10 billion from the 2022 Recovery Assistance for Cohesion and the Territories of Europe (‘REACT-EU’) funds is readily available and can also be used to finance actions to support those fleeing Ukraine.

Members of the College said:
High Representative/Vice President Josep Borrell said: “We are living the darkest times in Europe since World War II. Civilians are the first victims of Putin’s senseless war against Ukraine. The EU will support and protect those escaping Russia’s aggression – no matter their nationality, no matter where they come from. The EU will also mobilise all its tools to help those who host them.” 
Vice-President for Promoting out European Way of Life, Margaritis Schinas, said: “Visiting the borders, we witnessed incredibly moving scenes, with national officials, civil society and ordinary citizens coming to the aid of those arriving from Ukraine. The European Union is supporting these efforts with the full force and breadth of our instruments, personnel and funding. The activation of the temporary protection directive is an unequivocal and very tangible expression of support with those fleeing the war in Ukraine. And today we are mobilising additional funding to support Member States in this effort.”
Commissioner for Home Affairs, Ylva Johansson, said: “A welcome reprieve in these difficult times is the solidarity shown by Europeans and European Member States to people fleeing the war in Ukraine. I saw this spirit first hand in Siret, Romania and Medyka, Poland, but it is there across the EU. When we act together we act effectively – protecting people fleeing the war in Ukraine. This is Europe at its best: Providing the temporary protection needed and the funds to back it up.”
Commissioner for Crisis Management, Janez Lenarčič, said: “The biggest casualty of this brutal military aggression are innocent people living in Ukraine. The EU together with its Member States is working around the clock to bring emergency assistance in Ukraine and to countries directly affected by the influx of migrants. At the same time, we are providing lifesaving aid to our humanitarian partners on the ground to reach people in need. It is imperative that this aggression stops now as the humanitarian situation is getting critical with each passing day.”
Commissioner for Enlargement and Neighbourhood, Olivér Várhelyi, said: “With the Russian invasion of Ukraine, war has unfortunately returned to Europe and in these darkest hours we need to help Ukraine but also its neighbours who are affected. Our first emergency assistance is already being delivered. And we are, as part of €500 million, urgently preparing a package of €330 million to provide assistance to people both in Ukraine and those forced to flee, especially the children and the elderly. And we work on longer-term objectives, from energy security to economic recovery and resilience.”
Background
On 24 February, the Russian armed forces launched a large-scale invasion of Ukraine. As a result of this unprovoked and unjustified aggression, substantial areas of the Ukrainian territory now constitute areas of war from which many persons are fleeing. Through stepping up humanitarian assistance in Ukraine, as well as financial and operational support to Member States and Moldova, the EU and its Member States are providing protection for people fleeing war in Ukraine. The EU has also reacted swiftly and decisively to Russia’s aggression by adopting severe sanctions that will have massive consequences for Russia.
The EU will continue to stand united in its solidarity with Ukraine and its people. The Commission will continue providing support, including by ensuring the adequate level of preparation and a long-term focus on delivery in all Member States and Moldova to be ready to meet the needs as they evolve.
Compliments of the European Commission.
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WASHINGTON – Today, U.S. Secretary of the Treasury Janet L. Yellen released the following statement on President Biden’s executive order on digital assets.
“President Biden’s historic executive order calls for a coordinated and comprehensive approach to digital asset policy. This approach will support responsible innovation that could result in substantial benefits for the nation, consumers, and businesses. It will also address risks related to illicit finance, protecting consumers and investors, and preventing threats to the financial system and broader economy.
Under the executive order, Treasury will partner with interagency colleagues to produce a report on the future of money and payment systems. We’ll also convene the Financial Stability Oversight Council to evaluate the potential financial stability risks of digital assets and assess whether appropriate safeguards are in place. And, because the questions raised by digital assets often have important cross-border dimensions, we’ll work with our international partners to promote robust standards and a level playing field.
This work will complement ongoing efforts by Treasury. Already, the Department has worked with the President’s Working Group on Financial Markets, the FDIC, and OCC to study one particular kind of digital asset – stablecoins– and to make recommendations. Under the executive order, Treasury and interagency partners will build upon the recently published National Risk Assessments, which identify key illicit financing risks associated with digital assets.
As we take on this important work, we’ll be guided by consumer and investor protection groups, market participants, and other leading experts. Treasury will work to promote a fairer, more inclusive, and more efficient financial system, while building on our ongoing work to counter illicit finance, and prevent risks to financial stability and national security.”
Compliments of the U.S. Department of Treasury.
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“Check against delivery” | Paris, 7 March 2022 |
Introduction
Good morning. Thank you so much for inviting me to be with you today. I am glad to be here in person. Because getting together, being in one room  makes a difference.
This is especially true these days. The events of the past weeks are a watershed moment for us all. They alter the course of our policies and the calculus of our foreign relations.
I don’t want to say too much about it. But I do feel these events will galvanise us: As Europeans and as global citizens who believe in sovereignty, democracy and respect for international law, the unacceptable aggression of the Russian leadership, and the inspiring bravery and sacrifice of the Ukrainian people, unite us and reinforce our sense of purpose.
We need to strengthen our ability to stand up to illegal aggression. In addition to our determined support to Ukraine, we have taken coordinated action with like-minded partners to strengthen our sanctions against Moscow and Minsk.
Our sanctions are only effective because of the size and strength of our economy. And we will be able to handle the potential knock-on effects of these sanctions due to the resilience of our Single Market. This is why nurturing our Single Market is also investing in our capacity to act on the global stage.
Strengthening Resilience
With this in mind, our focus must continue to be the resilience of our economy – supporting innovation, making the most of the transition to the digital and green economy, and allowing businesses to compete and to scale-up on fair terms. In short, we need to make our Single Market stronger. This strengthening exercise has both an internal and an external dimension.
An example of internal strengthening is our upcoming Single Market Emergency Instrument, which is aimed at ensuring the functioning of the Single Market at all times. As we have been progressing out of the Covid crisis, little have we known that another, very different crisis would arrive at our doorstep. This shows the importance of crisis preparedness.
Then there is the external dimension. As part of our Industrial Strategy, we have been working with industry to identify strategic dependencies, and find durable solutions, so we don’t end up in a vulnerable position.
For semiconductors, such a solution is already in the pipeline. The European Chips Act will protect the Union against extreme dependency in this vital sector, by strengthening Europe’s position in research and chip production, and partnering with like-minded democracies to stabilise supply chains. Because, crisis or not, Europe cannot do it alone.
And let’s face it, the current events in Ukraine showed us what we already knew– that our strategic dependency on Russian gas makes our energy sector vulnerable in the short to medium term. It also give us yet another reason to intensify our commitment to the green energy transition.
The point is not to turn inwards. The point is that a greener, more diversified energy mix creates resilience, by giving us options. That same logic holds for all our work on competition policy. Whether in manufacturing, retail or financial services, we need open and dynamic markets to stay resilient.
Foreign Subsidies
This is also where our Foreign Subsidies Proposal comes in – it makes clear that distortive foreign subsidies will not be tolerated in the Single Market, while keeping the Union open to the foreign investment, innovation and global competition.
It empowers the Commission to take action against foreign subsidies granted to companies operating in our Single Market. Because such subsidies can distort the level playing field, we have been building for 60 years through our State aid control. This is not about protectionism; it’s about ‘fairness. Our proposal strikes a careful balance between effectiveness and the burden it creates. And it respects the balance between our own State aid rules and our international commitments, making sure everyone is treated fairly on the Single Market. It also makes sure that undistorted foreign investment can flow to Europe.
A targeted instrument as part of a wider approach
That said, for the instrument to work, it must remain targeted. There have been calls to broaden the scope to address aspects that go well beyond subsidies – things like lower labour law standards or environmental standards.
I don’t mean to say these issues are trivial. They are as important as they are complex. What does and does not constitute a ‘fair’ competitive advantage in trade between two very different countries, is a question trade policy has been concerned with for decades.
But the Foreign Subsidies Regulation cannot resolve all these issues. This is a Single Market instrument, and that is where its focus should be: on maintaining fair competition in the Single Market.
At the same time, this instrument will not exist in a vacuum. There are a number of other initiatives that deal with labour and environmental issues. For example, our new legislative instrument on due diligence in companies’ supply chains, or the Carbon Border Adjustment Mechanism to stop carbon leakage.
And the EU remains fully committed to supporting the multilateral framework, in particular the work of the World Trade Organisation. We also actively support fair and open trade through our bilateral and neighbourhood policies.
But we are also expanding our toolkit of instruments in support of a more assertive EU trade policy. These range from a screening mechanism for Foreign Direct Investment, to the proposals for an anti-coercion instrument and the International Procurement Instrument.
Conclusion
All the initiatives I have mentioned aim at making our Single Market more resilient, fairer and more assertive on the global stage. What I see, and which I find encouraging in these momentous times, is that we are strongly united behind this common goal.
The unprovoked aggression of the kind we are witnessing in Ukraine is a sign of weakness and desperation. We do right to show solidarity towards the Ukrainian people. We also do right by remaining strong and resolved in our principles; and in our commitment to fairness, to openness, and to peace.
Thank you.
Compliments of the European Commission.
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