Speech by Luis de Guindos, Vice-President of the ECB at the 24th Euro Finance Week | Frankfurt am Main, 15 November 2021 |
Good evening to you all. I am honoured to take part in the 24th Euro Finance Week. Since I joined the ECB in 2018, we have been gathering at this event every year to discuss the recent financial and economic developments in the euro area and beyond. As we are going to publish our Financial Stability Review in two days’ time, in my remarks today I will focus on the health of the euro area financial system. I will briefly sketch the current economic situation to highlight the key role of monetary policy in the recovery and its interplay with financial stability considerations, an important dimension we now explicitly pay attention to, in line with our new monetary policy strategy. I will give you an overview of our main financial stability concerns to stress the role of macroprudential policies as a first line of defence against a build up of vulnerabilities, and highlight the need for a careful mix of overall policy support.
Over the summer we saw the economic recovery from the pandemic take hold across euro area countries led by strong consumer spending and across sectors, as lockdown measures were lifted and vaccination rates rose. Global and domestic demand have spurred production, business investment and employment. And while employment has not returned to pre-pandemic levels and that gap is even greater for hours worked, unemployment rates have fallen and the recourse to job retention schemes has declined significantly.
The rebound in economic activity continued in the third quarter of the year, but despite the positive momentum, we started to feel the headwinds from global and domestic supply bottlenecks and energy price increases. Material, equipment and skilled labour shortages are limiting production capacities in some sectors, slowing down the exit from the crisis. Rising energy costs are also weighing on growth by limiting the purchasing power of households. At the same time, the current phase of higher inflation, reflecting in part the afore mentioned increase in energy prices and supply constraints, could last longer than expected only some months ago, as reflected in the European Commission’s projections released last week.
So far there is no evidence of second-round effects from higher inflation outcomes to wages and back to prices. But wage growth is expected to be somewhat higher in 2022 than in 2021. In the near term, supply bottlenecks and rising energy prices are the main risks to the pace of recovery and the inflation outlook. Supply-side shortages may dampen activity while pushing up prices, adding to the uncertainty in the outlook for growth and inflation.
As I have already indicated, in line with our new monetary policy strategy, financial stability considerations are now more explicitly taken into account in our monetary policy decisions. Our responsibility to contribute to the stability of the financial system has not changed. And price stability remains our primary objective. However, the revised strategy acknowledges that financial stability is a precondition for price stability and vice versa. Consequently, we will be conducting more direct assessments of potential monetary policy effects on financial stability risks, and of the impact of macroprudential policies on growth and inflation
Our monetary accommodation during the pandemic has ensured favourable financing conditions, which, alongside other policy measures, helped mitigate near-term tail risks to financial stability. However, as outlined in our Financial Stability Review to be published this week, when looking further ahead, financial stability vulnerabilities are rising on the back of elevated corporate and sovereign debt levels, stretched valuations in financial and real estate markets, and continued risk-taking by non-banks. We will therefore take both near- and medium-term financial stability risks into consideration when making monetary policy decisions. Nevertheless, macroprudential and microprudential policies remain the first line of defence against the build-up of financial stability risks for the banking system and individual banks, respectively.
Turning to financial stability risks more specifically, fiscal, monetary and prudential support measures have helped stabilise corporate liquidity and debt sustainability during the pandemic. The quick reactions of public authorities have laid the foundation for favourable financing conditions and improving profits in the non-financial corporate sector, keeping euro area insolvencies 15% below pre-pandemic levels. However, high corporate indebtedness and the continuing fragility of certain sectors that were more exposed to pandemic restrictions carry risks to corporate debt sustainability in these sectors.
Government intervention played a crucial role in shielding the financial system from large spillovers due to pandemic restrictions but has left sovereign debt at historically high levels, just below 100% of euro area GDP. Although governments were able to obtain financing at low interest rates and increased the maturity of their debt, a shock to financing costs and economic growth could make market participants reassess sovereign risk, particularly in higher-debt countries, and lead to economic and financial fragmentation across the euro area.
These corporate and sovereign vulnerabilities warrant a gradual phase-out of policy support. Many fiscal and other support measures, such as moratoria, tax deferrals, short-time working schemes and loan guarantees, have already expired or are set to expire towards the end of 2021. The remaining measures have become more targeted, focusing on solvency support for viable firms rather than broad-based liquidity support.
Waves of corporate loan defaults appear to have been avoided in the near term, and banks revised their risky loans back to a more benign credit risk assessment, releasing prudential provisions from 2020. In line with better-than-expected corporate solvency, financial markets continued to rebound from the pandemic, boosting investment banking revenues. Both factors contributed to growth in bank profitability of 5.2% in the second quarter of 2021, compared with 1.3% at the end of 2020. This improvement was, however, heterogenous across euro area banks, and the profitability levels remain structurally lower than in some other parts of the world.
Looking ahead, while euro banks have recently seen their returns recover to pre-pandemic levels, low cost efficiency, limited revenue diversification, overcapacity and compressed margins in a low interest rate environment look set to hamper profitability in the long term. Consolidation through mergers and acquisitions could be one potential avenue for helping the sector return to more sustainable levels of profitability. In terms of asset quality, the gradual withdrawal of government support may translate into a higher level of non-performing loans, reinforcing the need for effective solutions to this issue.
Euro area banks also face the need to act with increasing urgency to manage the implications of the green transition and to meet digital transformation needs. The first ECB climate stress test has shown that an early and gradual transition to green policies can limit the cost and mitigate the impact of physical risk. While digitalisation offers efficiency gains that enable banks to optimise their cost structure, it increases their vulnerability to cyber threats, which calls for particular caution when developing digital financial platforms.
In contrast to many other markets, the dynamics in residential real estate prices and mortgage lending have further accelerated during the pandemic in a number of countries. Moreover, this trend has been most pronounced in countries where valuations were already stretched prior to the pandemic.
Apart from structural shifts in housing preferences during the pandemic, these dynamics were also driven by the historically low financing conditions and search-for-yield behaviour. At the same time, the robust and rising growth in mortgage lending led to further increases in household indebtedness, accompanied by signs of easing lending standards in some countries. Together, these developments have fuelled the build-up of vulnerabilities in housing markets as growing signs of overvaluation leave them increasingly susceptible to corrections; this applies particularly to areas with more stretched valuations.
As the first line of defence, macroprudential policy is the instrument of choice to address the elevated and rising financial stability vulnerabilities we observe in some countries. To bolster system resilience and limit a further build-up of risks, some countries have already started tightening macroprudential policies or are planning to do so. At the same time, in an environment of great uncertainty, appropriate timing remains a challenge so as not to jeopardise the still fragile recovery.
Owing to transmission and implementation lags, now could be the time to consider starting to gradually implement country-specific macroprudential policies. Of course, as vulnerabilities differ substantially across euro area countries, this will have to be commensurate with the specific risks and stages of economic recovery.
Turning from banks to the non-bank financial sector, the economic recovery has also reduced credit risk for non-banks, which is converging to pre-pandemic levels. Medium-term risks have built up further, as non-banks have continued to increase their exposures to lower-rated corporate bond holdings, leaving them vulnerable to renewed corporate stress.
Low levels of liquidity and increasing duration exposure could cause valuation losses for the unhedged parts of investment funds’ portfolios in the event of an interest rate shock. High leverage in certain parts of the fund sector has the potential to further amplify market stress.
Given the increasing role played by non-banks in financing the real economy and their interconnectedness with the wider financial system, it is crucial for risks in the sector to be tackled from a macroprudential perspective.
Considerable progress has been made regarding the international policy agenda for money market funds in 2021. The Financial Stability Board proposals aim to increase the resilience of money market funds, for example by reducing liquidity mismatches, and further work on enhancing rules for open-ended investment funds is underway.
Conclusion
Let me conclude.
A strong, sustained and broad-based recovery is at the centre of our policy concerns. By ensuring favourable financing conditions, monetary policy continues to pave the way for the rebound and looks to fiscal policy to support its efforts in achieving this goal.
To prevent the materialisation of the medium-term risks that we have identified, it is essential to maintain the momentum of the recovery and avoid scenarios that could put our price stability objective in jeopardy.
Compliments of the European Central Bank.
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Chair, honourable members,
Before going to the Trade and Technology Council itself, let me first zoom out and outline why the year 2021 has been a landmark year for transatlantic relations.
We have successfully pressed the reset button with the Biden administration.
After the grounding of the Airbus-Boeing dispute at the EU-U.S. Summit in June, we also agreed to hit the pause button on the steel and aluminium trade dispute.
Our agreement includes starting discussions on a new Global Arrangement on Sustainable Steel and Aluminium.
Of course, we remain attentive and active on a number of US policy developments that may affect EU interests.
Those could be the increase of US domestic content via the reinforcement of Buy American, or the use of tax incentives, for example for the purchase of electrical vehicles.
But overall, it is clear that our trade and investment partnership remains the global engine of prosperity.
Beyond resolving our trade disputes, we must create space to find new avenues of cooperation and deal with the challenges and opportunities of the future.
In this respect, the first meeting of the Trade & Technology Council at the end of September represented an important step in the right direction, as well as an important political signal:

We are ready to lead the way in setting the standards and rules for the technologies of the 21st century, putting our core values at the centre.
We are addressing environmental challenges and market opportunities for clean technology.
And we are ensuring more resilient and secure supply chains, in particular in semiconductors, pharmaceuticals, and critical materials for our economies.

The trade component of the TTC is of particular importance:

We have determined shared principles and areas for export control cooperation, especially on dual use technologies.
We also agreed to cooperate on best practices in investment screening, for example on risk analysis and risk mitigation in relation to sensitive technologies.
There will be a special focus on SMEs and on policies that can accelerate their uptake of digital technologies.
We will work together on Global Trade Challenges like non-market economic policies and practices. The protection of labour rights, such as combatting forced and child labour, and addressing trade-related aspects of climate and environment action will also be part of our work.
Finally, we will aim at avoiding unnecessary barriers to trade in new technologies, while respecting our regulatory autonomy.

We have thus set in motion a whole range of work strands that we will now pursue with vigour.
To ensure concrete progress we will meet regularly, at Principles level. The next meeting is scheduled for spring 2022 in the EU.
There is a strong willingness on both sides of the Atlantic to make our cooperation in the TTC a success.
We are counting on your support for this.
MEPs, but also national governments, are essential in raising awareness around the fact that the benefits we gain from  transatlantic cooperation will also require some compromises.
We are committed to providing the European Parliament with information on the work of the TTC.
And we are committed to a transparent and inclusive engagement with key stakeholders and civil society at large.
Stakeholder engagement figured predominantly also in the first TTC meeting.
Last month, the Commission also opened a one-stop-shop to collect continuous stakeholder input on a platform called “Futurium”.
I strongly encourage you to promote this point of contact among your constituencies and stakeholders.
We also encourage stakeholders on both sides of Atlantic to join forces and, wherever possible, work together to shape joint transatlantic positions.
Thank you, and now Executive Vice-President Vestager will provide you with more input on the technology side of the Trade and Technology Council.
Compliments of the European Commission.
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One of the many figures in a new report released today by the European Commission shows just how important an open trade policy is for European employment. The Trade and Jobs Report provides a host of statistics on European jobs connected to European trade.
The report provides data over time at both European and Member State level, and gives statistics by industry, skill level, gender etc. For example, it shows that over 38 million jobs in the EU are supported by EU exports, 11 million more than a decade ago. These jobs are on average 12% better paid than those of the economy as a whole. The increase in export-supported jobs follows an even stronger increase in EU exports: alongside a 75% increase in export-related jobs between 2000 and 2019, total exports increased by 130%. The data indicate clearly that more trade means more jobs, and the best way to increase this is through securing new opportunities through trade agreements and diligently enforcing them. Given that 93% of all EU exporters are small and medium-sized companies (SMEs), it is also vital to help them understand opportunities and terms offered by a comprehensive network of 45 trade agreements concluded by the EU.
Executive Vice-President and Commissioner for Trade, Valdis Dombrovskis, said: “These figures confirm that trade is a key driver for job growth in the EU, as shown by the astonishing 75% growth in export-related jobs in the last two decades. As economic recovery gathers pace, it is our priority to keep boosting exports and create markets for EU goods and services. This will support our companies – especially SMEs, which represent 93% of all EU exporters – to create jobs for people across the EU. The continued roll-out of our new EU trade strategy, with its strong emphasis on opening new opportunities and being assertive in implementing our trade agreements, will play a crucial role in reinforcing this trend.”
Trade creates and supports jobs all across the EU, and the numbers are increasing. The highest increases seen since 2000 have been in Bulgaria (+368%), Slovakia (+287%), Ireland (+202%), Slovenia (+184%) and Estonia (+173%). The report includes detailed factsheets about the results for every EU Member State.
The figures released today also highlight an important positive spillover effect within the EU from exports to the world. When EU exporters in one Member State do well, workers in other Member States also benefit. This is because firms providing goods and services along the supply chain also gain when their end-customer sells the final product abroad. To give an example, French exports to non-EU countries support around 658,000 jobs in other EU Member States, while Polish exports support 200,000 such jobs.
Moreover, EU exports to countries around the world support almost 24 million jobs outside the EU. These jobs have more than doubled since 2000. For instance, 1.5 million jobs in the United States, 2.2 million in India and 530,000 in Turkey are supported by the production of goods and services in those counties that are incorporated into EU exports through global supply chains.
Finally, the study also looks into the gender pattern, concluding that there are more than 14 million women in jobs supported by trade in the EU.
Background
The European Commission identified trade policy as a core component of the European Union’s 2020 Strategy. Given the fast-changing global economic landscape it is more important than ever to fully understand how trade flows affect employment. This can only be done by gathering comprehensive, reliable and comparable information and analysis to support evidence-based policymaking.
Guided by that objective, the European Commission’s Joint Research Centre (JRC) and the Commission’s Directorate-General for Trade have collaborated to produce a publication that aims to be a valuable tool for trade policymakers and researchers.
Following the first edition from 2015, the report features a series of indicators to illustrate in detail the relationship between trade and employment for the EU as a whole and for each EU Member State using the World Input-Output Database released in 2016 as the main data source. This information has been complemented with data on employment by age, skill and gender. All the indicators relate to the EU exports to the world to reflect the scope of EU trade policymaking.
Although this report and analysis focus on exports for methodological reasons, it is important to note that imports are vital for the EU economy as well. Indeed, they are also essential for our domestic production and exports; two-thirds of the EU’s imports consist of raw materials, parts and components, many of which find their way into the EU’s exported goods and services. Access to the best inputs is a critical factor for EU production and competitiveness in today’s world.
Compliments of the European Commission.
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The Council of the European Union:

NOTES that in 2020, the framework for the annual coordination of economic, fiscal and employment policies across the European Union known as the European Semester was temporarily adjusted due to the COVID-19 pandemic towards addressing the negative health and socio-economic consequences. New economic circumstances and the European response to the COVID-19 crisis caused a temporary adjustment of the European Semester also in 2021 with policy guidance focusing solely on fiscal policies, as the attention was put on the preparation, adoption and implementation of the Recovery and Resilience Plans.
WELCOMES that the adjustment of the European Semester in 2020 and 2021 including on fiscal guidance contributed to the coordination of policy actions to effectively address the pandemic, sustain the economy and support a sustainable recovery. AGREES that also during this exceptional period, the European Semester proved to be a credible and flexible framework for the EU economic, fiscal and employment policy coordination.
UNDERLINES that the European Semester and the Recovery and Resilience Facility should continue, without duplications, to tackle the crisis’ impact and to contribute to strengthening economic resilience and sustainable, dynamic and inclusive long-term growth, thus enhancing convergence among the EU economies. STRESSES that the European Semester should continue to ensure comprehensive surveillance of fiscal, financial, economic and employment policies, and it should closely monitor remaining and evolving risks and challenges, detect policy gaps, and ensure their follow-up. The European Semester should pay particular attention to the green and digital transition, which must be a key driver in the recovery; it should promote sustainable economic growth, well-functioning labour markets and social inclusion.
CALLS for a swift return to the core elements of the European Semester in the 2022 cycle, especially reinstating country reports and country-specific recommendations. UNDERLINES the need to take into account the ongoing recovery process, the related uncertainties and the implementation of the Recovery and Resilience Facility. STRESSES that country-specific recommendations should focus on a comprehensive range of challenges concerning economic, fiscal and employment policies, including those with large spillovers.
STRESSES the need for ensuring the complementarity and exploring synergies between the European Semester and the implementation of the Recovery and Resilience Facility, including streamlining of reporting requirements, wherever possible, to avoid excessive administrative burden and overlaps. LOOKS FORWARD to the Commission’s early guidance on national reporting and monitoring requirements, especially regarding the minimum requirements for the annual national reform programmes.
UNDERLINES the importance of an open dialogue with the Commission services on national economic, fiscal and employment policies throughout the European Semester cycle. Broad-based mutual understanding of national policy needs can increase national ownership in the European Semester and contribute to the improved implementation of relevant policy reforms. HIGHLIGHTS that, together with national ownership, transparency of the process must be ensured.
RECALLS that multilateral surveillance and the related peer reviews remain central in the EU economic policy coordination under the European Semester. UNDERLINES that high-quality Commission analysis and policy recommendations are key for efficient multilateral reviews and subsequent national policy action.
ACKNOWLEDGES the expectation of the deactivation of the general escape clause of the Stability and Growth Pact as of 2023. STRESSES the need to safeguard the economic recovery, also taking into account the uncertainty of the economic outlook and the asymmetric impacts of this crisis, while ensuring that fiscal policy is agile and adjusted to circumstances, and fiscal sustainability preserved in the medium term.
STRESSES the importance of continued monitoring of the implementation of country-specific recommendations under the European Semester and the communication of the annual assessment of the implementation progress. Regular stocktaking at the EU level and related peer reviews remain crucial for promoting reform implementation. NOTES that it may require several years to effectively implement major structural reforms, and therefore RECALLS the possible benefits of issuing policy recommendations on structural economic policies less frequently than annually, combined with an annual assessment.
WELCOMES the continued implementation of the Macroeconomic Imbalance Procedure also during the COVID-19 pandemic and in the context of the related heightened economic uncertainties, including the Commission’s 2021 Alert Mechanism Report and in-depth reviews. CALLS for close monitoring of the evolution of existing imbalances and remaining vigilant for detecting and addressing also new imbalances. RECALLS that swift and effective implementation of the Recovery and Resilience Facility has a potential for contributing to the correction and prevention of imbalances.
PLANS to have thorough discussions on the economic governance review which was relaunched by the Commission on 19 October, and its potential implications on the operation of the European Semester, especially as regards the Stability and Growth Pact and the Macroeconomic Imbalance Procedure

Compliments of the Council of the European Union.
The post The future of the European Semester in the context of the Recovery and Resilience Facility – Council conclusions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Economic governance and recovery
Ministers exchanged views on the EU economy following the COVID-19 pandemic, and on the implications of recent developments for economic governance. They discussed the future of the EU’s economic governance framework and gave their initial views on the way forward. This topic will be discussed further and ministers will continue their consultations in order to reach a broad consensus in due course.

Our efforts on boosting the economic recovery are taking effect. The EU’s response to the pandemic is showing good results. Now it is time to reflect on the future of our economic governance. Today, we exchanged initial views on the future of fiscal policy. It is necessary to continue discussions and try and find common ground.

Andrej Šircelj, Slovenia’s Minister for Finance

They also discussed the current situation regarding the financing of Next Generation EU, a temporary recovery package to help boost EU economies in the wake of COVID-19, and the implementation of the Recovery and Resilience Facility, the centrepiece of Next Generation EU which supports reforms and investments in EU member states through loans and grants.

A recovery plan for Europe (background information)

Ministers approved conclusions on the future of the European Semester in relation to the Recovery and Resilience Facility. The conclusions call for the return of the essential elements of the European Semester in the 2022 cycle, in particular country reports and country-specific recommendations.

The future of the European Semester in the context of the Recovery and Resilience Facility (Council conclusions, 9 November 2021)
European Semester (background information)

Energy prices and inflation
Ministers discussed the recent steep increase in energy and consumer prices and the associated policy implications. They exchanged views on the Commission’s toolbox of measures that the EU and its member states can use and are already using to address the immediate impact of energy price increases.

Tackling rising energy prices: a toolbox for action and support (European Commission)

Financial services
Economy and finance ministers held a policy debate on a set of legislative proposals mostly aimed at implementing the outstanding Basel III agreements, i.e. reform measures intended to help reinforce the resilience of the EU banking sector and strengthen its supervision and risk management. The exchange of views was preceded by a presentation of this package of proposals by the Commission.

Banking package (European Commission)

The Slovenian presidency also provided information on the current financial services legislative proposals.
International meetings
The Slovenian presidency and the European Commission provided information and follow-up on the meetings of G20 finance ministers and central bank governors and on the IMF annual meetings of 13-14 October 2021.
Any other business
The European Court of Auditors presented its annual report on the implementation of the EU budget for the 2020 financial year.

ECA’s annual report on the implementation of the EU budget for the 2020 financial year

Compliments of the European Council.
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Today, the European Commission approved the eighth contract with a pharmaceutical company with a view to purchasing its potential vaccine against COVID-19. The contract with Valneva provides for the possibility for all EU Member States to purchase almost 27 million doses in 2022. It also includes the possibility to adapt the vaccine to new variant strains, and for Member States to make a further order of up to 33 million additional vaccines in 2023.
The contract with Valneva comes in addition to an already secured broad portfolio of vaccines to be produced in Europe, including the contracts already signed with AstraZeneca, Sanofi-GSK, Janssen Pharmaceutica NV, BioNtech-Pfizer, CureVac, Moderna, and Novavax. This diversified vaccines portfolio will ensure Europe is well prepared for vaccination, once the vaccines have been proven to be safe and effective.  Member States could decide to donate the vaccine to lower and middle-income countries or to re-direct it to other European countries.
President of the European Commission, Ursula von der Leyen, said: “The contract allows for the vaccine to be adapted to new variants. Our broad portfolio will help us to fight COVID and its variants in Europe and beyond. The pandemic is not over. Everyone who can should get vaccinated.”
Stella Kyriakides, Commissioner for Health and Food Safety, said: “Our EU Vaccines Strategy continues to deliver, at a time when COVID-19 case numbers are unfortunately rising again across the EU. The Valneva vaccine adds another option to our broad portfolio, once it is proven to be safe and effective by the European Medicines Agency. We continue to support Member States in their vaccination efforts, and the message remains the same: trust the science, and vaccinate, vaccinate, vaccinate.”
Valneva is a European biotechnology company developing an inactivated virus vaccine, made of the live virus through chemical inactivation. This is a traditional vaccine technology, used for 60-70 years, with established methods and high level of safety. Most of the flu vaccines and many childhood vaccines use this technology. This is currently the only inactivated vaccine candidate in clinical trials against COVID-19 in Europe.
The Commission, with the support of EU Member States, has taken a decision to support this vaccine based on a sound scientific assessment, the technology used, the company’s experience in vaccine development and its production capacity to supply all EU Member States.
Background
The European Commission presented on 17 June 2020 a European Strategy to accelerate the development, manufacturing and deployment of effective and safe vaccines against COVID-19. In return for the right to buy a specified number of vaccine doses in a given timeframe, the Commission finances part of the upfront costs faced by vaccines producers in the form of Advance Purchase Agreements.
In view of the current and new escape SARS-CoV-2 variants, the Commission and the Member States are negotiating new agreements with companies already in the EU vaccine portfolio that would allow to purchase rapidly adapted vaccines in sufficient quantities to reinforce and prolong immunity.
In order to purchase the new vaccines, Member States may use the REACT-EU package, one of the largest programmes under the new instrument Next Generation EU that continues and extends the crisis response and crisis repair measures.
Compliments of the European Commission.
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November 08, 2021 | “Flexible Average Inflation Targeting and Prospects for U.S. Monetary Policy” by Vice Chair Richard H. Clarida at the Symposium on Monetary Policy Frameworks, The Brookings Institution, Washington, D.C. (via webcast) |
Outlooks and Outcomes for the U.S. Economy
The U.S. economy in the second quarter of this year made the transition from economic recovery to economic expansion.1 Given the catastrophic collapse in U.S. economic activity in the first half of 2020 as a result of the global pandemic and the mitigation efforts put in place to contain it, few forecasters could have expected—or even dared to hope—in the spring of last year that the recovery in gross domestic product (GDP), from the sharpest decline in activity since the Great Depression, would be either so robust or as rapid. In retrospect, it seems clear that timely and targeted monetary and fiscal policy actions—unprecedented in both scale and scope—provided essential and significant support to the economic recovery as it got under way last year. Indeed, the National Bureau of Economic Research’s Business Cycle Dating Committee determined in July that the recession that began in March of last year ended in April, making it not only the deepest recession on record, but also the briefest.2 The recovery that commenced in the summer of 2020 was quite robust, and, with one quarter to go, GDP growth in 2021 is projected by the Fed and many outside forecasters to be the fastest since 1983. However, it must be noted that the course of the economy this year and beyond will depend on the course of this virus. That said, under the median projection for GDP growth in the September Summary of Economic projections, the level of real GDP will have returned to its pre pandemic trend growth trajectory by the fourth quarter of 2021, which if realized would represent one of the most rapid such recoveries in 50 years.3
In the September SEP round, my individual projections for GDP growth, the unemployment rate, inflation, and the policy rate path turned out to be quite close to the path of SEP medians for each of these variables over the 2021–24 projection window. Under these projections, GDP growth steps down from 5.9 percent this year to 3.8 percent in 2022 and further to 2.5 percent and 2 percent in 2023 and 2024, respectively. Not surprisingly, the projected path of above-trend GDP growth in 2021 and 2022 translates into rapid declines in the projected path for the unemployment rate, which is projected to fall to 3.8 percent by the end of 2022 and 3.5 percent by the end of 2023. This modal projection for the path of the unemployment rate is, according to the Atlanta Fed jobs calculator, consistent with a rebound in labor force participation to its estimated demographic trend and is also consistent with cumulative employment gains this year and next that, by the end of 2022, eliminate the 4.2 million “employment gap” relative to the previous cycle peak.4
My projections for headline and core PCE (personal consumption expenditures) inflation are, alas, also similar to the median SEP numbers. Under the projected SEP path for inflation, core PCE inflation surges to at least 3.7 percent this year before reverting back to 2.3 percent in 2022, 2.2 percent in 2023, and 2.1 percent in 2024. Thus, the baseline outlook for inflation over the three-year projection window reflects the judgment, shared with many outside forecasters, that under appropriate monetary policy, most of the inflation overshoot relative to the longer-run goal of 2 percent will, in the end, prove to be transitory. But as I have noted before, there is no doubt that it is taking much longer to fully reopen a $20 trillion economy than it did to shut it down. Although in a number of sectors of the economy the imbalances between demand and supply—including labor supply—are substantial, I do continue to judge that these imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity. But let me be clear on two points. First, realized PCE inflation so far this year represents, to me, much more than a “moderate” overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success. Second, as always, there are risks to any outlook, and I and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside.
Prospects for U.S. Monetary Policy
In September 2020, the FOMC introduced—and since then has reaffirmed—outcome-based, threshold guidance that specifies three conditions that the Committee expects will be met before it considers increasing the target range for the federal funds rate, currently 0 to 25 basis points.5 This guidance in September of last year brought the forward guidance on the federal funds rate in the statement into alignment with the new flexible average inflation targeting framework adopted in August 2020.6 To quote from the statement, these conditions are that “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
While we are clearly a ways away from considering raising interest rates, if the outlooks for inflation and unemployment I summarized a moment ago turn out to be the actual outcomes realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.7 Core PCE inflation since February 2020—a calculation window that smooths out any base effects resulting from “round trip” declines and rebounds in the price levels of COVID-19-sensitive sectors and, coincidentally, also measures the average rate of core PCE inflation since hitting the effective lower bound (ELB) in March 2020—is running at 2.8 percent through September 2021 and is projected to remain moderately above 2 percent in all three years of the projection window. Moreover, my inflation projections for 2023 and 2024, which forecast inflation rates similar to the SEP medians, would by year-end 2022, to me, satisfy the “on track to moderately exceed 2 percent for some time” threshold specified in the statement. Finally, while my assessment of maximum employment incorporates a wide range of indicators to assess the state of the labor market—including indicators of labor compensation, productivity, and price-cost markups—the employment data I look at, such as the Kansas City Fed’s Labor Market Conditions Indicators, are historically highly correlated with the unemployment rate.8 My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment if the unemployment rate has declined by then to the SEP median of modal projections of 3.8 percent.
Given this economic outlook and so long as inflation expectations remain well anchored at the 2 percent longer-run goal—which, based on the Fed staff’s common inflation expectations (CIE) index, I judge at present to be the case—a policy normalization path similar to the median SEP dot plot on page 4 of our September 2021 projections would, under these conditions, be entirely consistent, to me, with our new flexible average inflation targeting framework and the policy rate reaction function I discussed in remarks here at Brookings in November 2020.9 In the context of our new framework, it is important to note that while the ELB can be a constraint on monetary policy, the ELB is not a constraint on fiscal policy, and appropriate monetary policy under our new framework, to me, must—and certainly can—incorporate this reality. Indeed, under present circumstances, I judge that the support to aggregate demand from fiscal policy—including the roughly $2 trillion in accumulated excess savings accruing from (as yet) unspent transfer payments—in tandem with appropriate monetary policy, can fully offset the constraint, highlighted in our Statement on Longer-Run Goals and Monetary Policy Strategy, that the ELB imposes on the ability of inflation-targeting monetary policy, acting on its own and in the absence of sufficient fiscal support, to restore, following a recession, maximum employment and price stability while keeping inflation expectations well anchored at the 2 percent longer-run goal.10
Before I conclude, let me say a few words about our Treasury and mortgage-backed securities (MBS) purchase programs. In our December 2020 FOMC statement, we indicated that we would maintain the pace of Treasury and MBS purchases at $80 billion and $40 billion per month, respectively, until “substantial further progress” has been made toward our maximum-employment and price-stability goals. Since then, the economy has made progress toward these goals. At our meeting last week, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Thank you very much for your time and attention. I look forward to the conversation with Ben Bernanke, Philip Lane, and Rachana Shanbhogue.
Compliments of the U.S. Federal Reserve.
References
Ahn, Hie Joo, and Chad Fulton (2020). “Index of Common Inflation Expectations,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, September 2.
——— (2021). “Research Data Series: Index of Common Inflation Expectations,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 5.
Christiano, Lawrence, Martin Eichenbaum, and Sergio Rebelo (2011). “When Is the Government Spending Multiplier Large?” Journal of Political Economy, vol. 119 (February), pp. 78–121.
Clarida, Richard H. (2020). “The Federal Reserve’s New Framework: Context and Consequences,” speech delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington (via webcast), November 16.
——— (2021). “The Federal Reserve’s New Framework and Outcome-Based Forward Guidance,” speech delivered at “SOMC: The Federal Reserve’s New Policy Framework,” a forum sponsored by the Manhattan Institute’s Shadow Open Market Committee, New York (via webcast), April 14.
Eggertsson, Gauti B. (2011). “What Fiscal Policy Is Effective at Zero Interest Rates?” in Daron Acemoglu and Michael Woodford, eds., NBER Macroeconomics Annual 2010, vol. 25 (Chicago: University of Chicago Press), pp. 59–112.
National Bureau of Economic Research, Business Cycle Dating Committee (2021). “Determination of the April 2020 Trough in US Economic Activity,” announcement, July 19.
Powell, Jerome H. (2020). “New Economic Challenges and the Fed’s Monetary Policy Review,” speech delivered at “Navigating the Decade Ahead: Implications for Monetary Policy,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 27.
Woodford, Michael (2011). “Simple Analytics of the Government Expenditure Multiplier,” American Economic Journal: Macroeconomics, vol 3 (January), pp. 1–35.
Woodford, Michael, and Yinxi Xie (2020). “Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight,” NBER Working Paper Series 27521. Cambridge, Mass.: National Bureau of Economic Research, July.

1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. I would like to thank Burcu Duygan-Bump and Chiara Scotti for assistance in preparing these remarks. Return to text

2. See National Bureau of Economic Research (2021). Return to text

3. The most recent SEP, released following the conclusion of the September 2021 FOMC meeting, is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. Return to text

4. More information on the jobs calculator can be found on the Atlanta Fed’s website at https://www.atlantafed.org/chcs/calculator. Return to text

5. The FOMC statements containing the guidance (see the fourth paragraph in each statement) are available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. Return to text

6. The revised Statement on Longer-Run Goals and Monetary Policy Strategy, unanimously approved on August 27, 2020, is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm. For a discussion of the elements that motivated the launch of the review and a summary of the key changes that were introduced, see Clarida (2020, 2021) and Powell (2020). Return to text

7. Of course, data for December 2022 employment and 2022:Q4 GDP and PCE inflation will not be released until January 2023. Return to text

8. The Labor Market Conditions Indicators can be found on the Kansas City Fed’s website at https://www.kansascityfed.org/data-and-trends/labor-market-conditions-indicators. Return to text

9. The Fed staff’s CIE index—which is now updated quarterly on the Board’s website—is a relevant indicator that this goal is being met. See Ahn and Fulton (2020, 2021). Return to text

10. For a theoretical analysis of the fiscal and monetary policy mix at the ELB, see Woodford and Xie (2020). For studies of the government expenditure multiplier at the ELB, see Woodford (2011); Christiano, Eichenbaum, and Rebelo (2011); and Eggertsson (2011). Return to text

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November 08, 2021 | “The U.S. Housing and Mortgage Market: Risks and Resilience” by Governor Michelle W. Bowman at the Women in Housing and Finance Public Policy Luncheon, Washington, D.C. |
Good afternoon, everyone. It is a pleasure to join you today. Thank you for the invitation. Developments in the housing and mortgage markets have a major effect on the economy and the financial system, so the Federal Reserve Board monitors these markets closely. I am happy to share some of my observations about these markets and to learn from your knowledge and experiences as well.1
I know I am speaking to an audience with considerable expertise in these areas, and so you know already that 2020 and 2021 have been interesting times, to say the least, in housing and mortgage markets. I will focus my comments today on three areas: the strong increase in home prices in the past year and a half, the wind-down of forbearance programs enacted after the advent of COVID-19, and what we learned about the financial stability risks associated with nonbank mortgage companies during the pandemic. As I hope will become apparent during these remarks, these three topics may seem unrelated but they are actually connected.
I will start with some comments on home prices. Home prices had been rising at a moderate rate since 2012, but since mid-2020, their growth has accelerated significantly. In total, home prices in September were 21 percent higher than in June 2020. Home price increases are also widespread. In September, about 90 percent of American cities had experienced rising home prices over the past three months, and the home price increases were substantial in most of these cities.2
These sharp increases raise the concern that housing is overvalued and that home prices may decline. Historically, large home price increases are somewhat less concerning if they are supported by economic fundamentals rather than speculation. Fundamentals certainly seem to be a large part of the story behind the increases we’ve seen since the middle of last year. The demand for housing has risen for several reasons. Interest rates are low, families have accumulated savings, and income growth in the past 18 months has been quite strong. Families are also reconsidering where, and in what kind of home, they want to live. Purchases of second homes, for example, have been somewhat high in the past 18 months. Meanwhile, the supply of new homes has been held back by shortages of materials, labor, and developed lots.
Another reason to be less concerned about the recent escalation in home prices is that we do not see much of the decline in underwriting standards that fueled the home price bubble in the mid-2000s. Mortgage underwriting standards have remained conservative relative to the mid-2000s, in part because of the mortgage policy reforms that were put in place in the aftermath of the housing crisis. Investor activity is subdued relative to that time as well.
Nonetheless, home prices do decline from time to time. In inflation-adjusted terms, U.S. home prices fell from 1979 to 1982 and from 1989 to 1993, although by much less than from 2006 to 2012.3 Although the declines in national home prices were modest in some of these episodes, some areas of the country experienced sharp declines. As we all know, home price declines cause problems and strain throughout the economy. To give just one example, families and small business owners borrow against their homes to fund big-ticket purchases and business expansions, and house price declines make it harder to use homes as loan collateral. This effect can be amplified if a credit crunch occurs, in which lenders react to the decline in house prices by pulling back on their lending. With banks and the broader financial system currently quite robust, such a credit crunch seems unlikely. Nonetheless, I know how painful these declines can be, especially in certain markets. For example, from my experience living in rural Kansas, I understand how smaller communities with a less diversified housing and employment base can take a long time to recover from a fall in home prices. I wonder also about communities with a sizable share of second-home owners. So I will continue to watch the incoming data closely.
Falling home prices would certainly be very dramatic, but continued outsized increases could also be problematic. First, high home prices make it more difficult for low- to moderate-income households to become homeowners, as larger down payments and other financing requirements effectively lock these households out of the housing market. Second, and related to one of the Federal Reserve’s monetary policy goals, rising home prices and rents raise the cost of housing. Because housing costs are a large share of living expenses for most people, these increases are adding to current inflationary pressures in the economy. Indeed, we are already seeing sizable increases in rent and owners’ equivalent rent in many parts of the country.
In addition, there are signs of underlying supply and demand imbalances that will contribute to increases in housing costs and inflation. Early in the pandemic, the strength in home prices was thought to be driven by the decline in mortgage rates. But it has become increasingly clear that the low supply of homes, in combination with a strong demand for housing, is an important part of the story. Before this past year, the pace of construction of new homes was below its long-run average for more than a decade. The supply chain bottlenecks that I mentioned earlier are slowing down construction further. These issues affect the rental market too: The multifamily rental market is at historic levels of tightness, with over 95 percent occupancy in major markets.4 I anticipate that these housing supply issues are unlikely to reverse materially in the short term, which suggests that we are likely to see higher inflation from housing for a while.
I am also watching carefully what happens as borrowers reach the end of the forbearance on mortgage payments. As of October, 1.2 million borrowers were still in forbearance, down from a peak of 4.7 million in June 2020. Of these remaining borrowers, 850,000 will reach the end of their forbearance period by the end of January 2022. Meanwhile, the temporary limitations on foreclosures put in place by the Consumer Financial Protection Bureau will expire at the end of the year.5
Forbearance has been an important support for workers dislocated by the pandemic and for their families. Transitioning the remaining borrowers from forbearance to a mortgage modification or other resolution may be a heavy lift for some servicers. Each transition requires getting in contact with the borrower, discussing options, and figuring out which resolution makes the most sense for each borrower. This is time-consuming and detailed work. It is also crucially important. Obviously, we want to ensure that borrowers who are struggling financially receive the help that they need, and I want to acknowledge that many of these borrowers are from communities that have traditionally been underserved by the mortgage market. In addition, if servicers handle loan modifications poorly and on a large scale, the macroeconomy and financial stability can be affected as well. In the aftermath of the last financial crisis, the flood of foreclosures led to downward pressure on home prices. The same dynamic has not unfolded during the pandemic. Forbearance, foreclosure moratoriums, and fiscal support have kept distressed borrowers in their homes.6
Fed supervisory staff are communicating with significant supervised institutions to ensure that they are preparing for the increased operational risks. If the transition out of forbearance is handled smoothly, I am cautiously optimistic that it will not have a material effect on the larger economy. The share of mortgages in distress—defined as those in forbearance or seriously delinquent—was about 4.5 percent in October 2021, about half the share of mortgages that were seriously delinquent in 2010.7 In addition, many of the mortgages in distress now are insured by the Federal Housing Administration or the Department of Veterans Affairs, and these agencies can require that certain mortgage modification protocols are followed. Outside of these mortgages, the share of borrowers who are not making mortgage payments has returned to pre-pandemic levels. Nonetheless, we are aware of the risks and will monitor this situation closely.
Mortgage servicing, however, has increasingly moved from Fed supervised banks and into nonbank mortgage companies that are supervised by state regulators. In a speech late last year, I focused on some of the possible financial stability risks associated with nonbank mortgage servicers.8 I would like to update you on my thinking about this issue today.
When widespread forbearance was introduced last year, concerns were raised that it would impose strains on nonbank servicers. That is because when a borrower does not make a mortgage payment, the servicer is required to make the payment on the borrower’s behalf. Servicers are eventually reimbursed for these advances, but they are required to finance the unpaid amounts. And unlike banks, nonbanks cannot turn to the Federal Reserve System or the Federal Home Loan Banks when they need liquidity.
As it turned out, nonbank mortgage servicers had cash to meet their operational needs. Mortgage refinancing surged because of the drop in long-term interest rates, and nonbank servicers used the proceeds from these refinacings to fund the advances associated with forbearance.
However, if home prices had fallen, instead of rising so sharply, many borrowers might have faced obstacles to refinancing because their homes had fallen in value, and so nonbank servicers would not have had revenue from refinancing to put toward paying advances. Some nonbank servicers might obtain funds by borrowing against their mortgage servicing rights (MSRs). MSRs are a significant asset for nonbanks. In total, nonbanks hold about four times as much in MSRs as they do in cash.9 But MSRs decline in value when home prices fall, and so this borrowing might also have been less available as a funding source in those circumstances.
The Financial Stability Oversight Council raised concerns about the financial resilience of nonbank mortgage companies in its 2020 annual report and recommended that state and federal regulators coordinate closely to collect data, identify risks, and strengthen oversight of nonbank mortgage companies.10 I think this is appropriate. The ideal mortgage finance system must have a place for institutions of many different types and sizes—both bank and nonbank—that are able to serve the varying needs of different customers. For this system to be sustainable, though, I think like activities should be treated in a like manner, and I am concerned about some of the differences in the prudential oversight of banks and nonbanks in the mortgage market.
To return to my theme at the beginning: These are interesting times for housing and mortgage markets. And in such times, I think we can all agree that it’s wise to closely monitor developments and be prepared for whatever the future may bring. Fortunately, that is exactly what Women in Housing and Finance is all about. So I would encourage all of us—including the tremendous talent assembled here today—to continue thinking hard about how we can continue to build a resilient and dynamic housing market that meets the needs of the American people.
Compliments of the U.S. Federal Reserve Board.

1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. Return to text

2. Staff estimate based on data from CoreLogic on 383 metropolitan statistical areas (MSAs). An MSA’s price level is defined as having risen if its three-month percent increase exceeds 1 percent. All series are seasonally adjusted using the trend-cycle component of an ARIMA (autoregressive integrated moving average) model. In 85 percent of MSAs, the home price increase, measured on an annualized basis, was more than 10 percent. Return to text

3. Statistics are from historical housing market data used in Robert Shiller’s book Irrational Exuberance, which are updated monthly. See Robert J. Shiller (2015), Irrational Exuberance, 3rd ed., fig. 3.1 (Princeton, N.J.: Princeton University Press). Return to text

4. See Jay Parsons (2021), “U.S. Apartment Vacancy Plunges in September to Record Low as Leave Renewals Surge,” RealPage Analytics Blog, October 6, https://www.realpage.com/analytics/apartment-vacancy-plunges-lease-renewals-surge-september-2021. Return to text

5. The statistics in this paragraph are from Federal Reserve Bank of Philadelphia (2021), Examining Resolution of Mortgage Forbearances and Delinquencies (PDF) (Philadelphia: Philadelphia Fed, October 21). Return to text

6. See Elliot Anenberg and Tess Scharlemann (2021), “The Effect of Mortgage Forbearance on House Prices during COVID-19,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, March 19). Return to text

7. The statistic for October 2021 is from Federal Reserve Bank of Philadelphia (2021) in note 5; the statistic for 2010 is from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax. Serious delinquency is defined as 90 or more days delinquent or in foreclosure. Return to text

8. See Michelle W. Bowman (2020), “The Changing Structure of Mortgage Markets and Financial Stability,” speech delivered at the “Financial Stability: Stress, Contagion, and Transmission,” 2020 Financial Stability Conference hosted by the Federal Reserve Bank of Cleveland and the Office of Financial Research, Cleveland, November 19. Return to text

9. This calculation from the Board’s staff is based on data from the Conference of State Bank Supervisors, Nationwide Multistate Licensing System & Registry. Return to text

10. See Financial Stability Oversight Council (2020), 2020 Annual Report (PDF) (Washington: FSOC). Return to text

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