American - Public | February 4, 1953 -
Below-target inflation increases the real value of debts owed by households and businesses and reduces the ability of central banks to respond to downturns.
Jerome Powell
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The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace.
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Increased fragmentation of production across international borders - a natural outgrowth of the gains from specialization - meant more trade for any given value of final production, thus adding to the major expansion in gross trade flows in the 1990s and 2000s.
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It is quite plausible that the process of increased fragmentation of production across borders is subject to 'diminishing returns' and has its natural limits.
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Given that trade benefited the Asian economies on the way up, it seems natural that the slowdown in global trade, whatever its causes, could lead to some loss of dynamism and growth in the region.
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It is worth noting that 'too big to fail' is not simply about size. A big institution is 'too big' when there is an expectation that government will do whatever it takes to rescue that institution from failure, thus bestowing an effective risk premium subsidy. Reforms to end 'too big to fail' must address the causes of this expectation.
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Bailouts may have been more tolerable in the early 1990s when they were rare and their use for a failing bank was uncertain. That is no longer the case.
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The longer workers are unemployed, the greater the likelihood that their skills will erode and workers will lose attachment to the labor force, permanently damaging the economy's dynamism and potential output.
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By purchasing and holding large amounts of Treasury securities and MBS, we put additional downward pressure on term premiums and so on long-term rates.
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Businesses and households react to lower rates by investing and spending more. Lower rates also support the prices of housing and financial assets such as stocks and bonds.
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The Federal Reserve places great importance on our relations with the Bundesbank. Few such relationships have been as important, over the decades, in promoting financial stability and prosperity around the world.
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Perhaps the greatest challenge for the resolution of a systemic global bank is the possibility that public or private actors in different countries might take local actions that would cause the overall resolution to spin out of control.
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