Tag: finance

Economics-Watching: Estimating the Effects of Monetary Policy: An Ongoing Evolution

New monetary policy tools have lengthened the interval over which policy news is transmitted and processed.

[from the Federal Reserve Bank of Kansas City, 2 October 2025]

by Karlye Dilts Stedman, Amaze Lusompa & Phillip An

Disentangling how the economy responds to a monetary policy decision from its response to macroeconomic conditions at the time of the decision is an ongoing challenge. One popular method researchers use to measure the effect of a monetary policy announcement—high-frequency identification—analyzes the reaction of fast-moving financial variables immediately following the policy announcement, using a time window long enough for markets to respond but not so long that the response is contaminated by other information.

Since high-frequency identification was introduced in the early 2000s, policymakers have introduced tools such as forward guidance and large-scale asset purchases. Karlye Dilts Stedman, Amaze Lusompa, and Phillip An examine how the evolution of monetary policy has changed high-frequency identification and assess whether additional changes might be necessary to better capture the effect of modern monetary policy surprises. Although researchers have continually updated the asset mix used in high-frequency identification over time, they have not updated the measurement window. Because the timing of monetary policy communication has changed significantly in recent years, refining the length of this measurement window may be necessary going forward.

Read the full article [archived PDF].

Digitizing Heritage: Exploring the Transformation of Culture to Data

[from India in Transition by the Center for the Advanced Study of India at the University of Pennsylvania, 1 September 2025]

by Krupa Rajangam & Deborah Sutton

“Oh that. We just took some undergraduate history students on board as interns. They provided the content and it was done.”

The co-founder of a digital heritage initiative promoting interactive user interfaces offered these opening remarks. Speaking at a Delhi-based museum, he had been asked about the information provided to users as they moved their hands across an interactive board, revealing images and narratives relating to the Indian freedom movement. His response clarified that the physical and digital components of such installations—for example, the 3D-modeling software and hardware, scanning equipment and its resolution and the user interface—were more carefully designed and calibrated than the content they provided.

Contemporary cultural heritage (CH) is rife with digital innovation. The COVID pandemic accelerated this transformation as archivists and curators worked to develop content that would reach remote, locked-down audiences. Within significant limits, digital platforms can democratize and facilitate access to materials previously inaccessible. Instead of being physically siloed, digitized material—as data components and not just content on culture—can be reproduced, combined, and circulated infinitely to achieve a reach previously considered impossible. Accessibility and malleability remain one of the great boons of digital formats. But here, we consider the information economy of CH practice as it exists—and not its extraordinary and often hypothetical potential—in two, overlapping realms of digitized CH: for-profit business enterprises and academic side-hustles, related to more mainstream academic research.

In the former, questions of what is shared are often less significant than the appeal of the format. In the latter, innovation is often the result of short-term projects that languish, abandoned after project completion, and rarely find audiences. Our research builds on our individual experiences and the findings of a scoping exercise examining a number of India-based heritage projects conducted in 2021-22. It suggests the need for more careful consideration of the implications of transforming CH materials into forms of data; the change impacts everything from how we understand “originality” to the reliance on for-profit services to deliver heritage material to the public.

As digitized representations of CH and access to such formats become more widespread, are we, as CH practitioners and academics, giving enough thought to how digital technologies are reshaping the nature of CH and its audience? Beyond questions of wider reach, are we sufficiently acknowledging how these changes challenge a continued focus on originality and notions of academy as primary controllers of access to knowledge and its validity, both in research and practice?

Digitizing for Dissemination

In 2019, one of us—Deborah Sutton—developed a software platform, Safarnama, including an app and authored experiences around Delhi’s CH. The project subsequently extended to Karachi. Generating “original” content, such as audio-visual clips and old photos, to be hosted on the app platform, was key to its attractiveness and usefulness, but permissions proved tricky. Some collaborators who were initially keen to contribute content quietly withdrew, likely due to the unfamiliar format and unknown reach. The app format also raised other questions. Would incorporating content from non-digital but published scholarship require authorial permission or only acknowledgement?

In 2020, Krupa Rajangam held a sponsored incubation at the NSRCEL, a business incubator located at the Indian Institute of Management-Bangalore, to develop a web interface that would host geo-locationed stories of marginalized histories by drawing on both historical facts and lived experiences. Corporate mentors remained skeptical of her ability to source “original” content on an ongoing basis, i.e., content that was both authenticated and validated. They repeatedly advised her to focus on the format, user experience, and appeal for “mass markets” so her prototype would find audiences. Both projects equally raised questions over who would consume the content and what constitutes the public or audience.

In a scoping exercise undertaken for the Arts and Humanities Research Council (AHRC), UK, in 2021-22, we explored a number of India-based heritage projects funded by the AHRC in partnership with the Newton Fund and Indian Council for Historical Research, since 2015 (figure 1). We were particularly interested in the digital components, which all projects included, even if only a website.

Our exploratory surveys firmly established the divergence in interpreting both CH and digital technologies, which was not surprising. Some projects defined and treated CH as fixed pre-existing material, to be interpreted and presented to audiences through digital technologies. Others re-framed digital formats of CH as components of data, assembling, manipulating, and representing extant archival and other materials. The rest generated digitized CH, effectively altering its nature. Typically, such projects dealt with more ephemeral or less conventional forms of CH.

Fundamental Transformations

Notions of originality remain central to art, architectural and art historical training, and CH practice. Digitization transforms the access and retrieval value of “original” material in physical archives, such as old maps and letters, much lauded in traditional “analog” scholarship, to use value as data. Once the end-user (audience) accesses this data (whether historical facts or stories), it becomes nothing more than bytes occupying valuable space, to be deleted once consumed rather than stored, making it easy to overlook or disregard the source and its context.

For example, in the Safarnama project, the app contained carefully collected and authenticated narratives on “partition memories” in Delhi and Karachi. However, the bite-sized media format meant that users would only explore content once, as snippets. This realization led the team to develop the software and incorporate the ability to download content, which at least meant that users could collect, organize and store (archive) the assembled media.

Digitization also takes away the materiality of the archive, making it more ephemeral. Non-digital materials through, and into which we render CH can (in endless combinations and cycles) be lost, forgotten, sold, recovered, collected, displayed, and stored. Such capacities of digital files are obvious, but maintaining access depends on varied and dynamic software ecologies for existence and sustained end-user access. Digital files created within one software-architecture can be incompatible with, and therefore rendered obsolete, by another. The ethos of software development is constant change.

In another paper, we examined questions of quantity, quality, and reusability of data related to digitization of building-crafts knowledge alongside CARE and FAIR principles of data management. The principles were proposed and adopted by an international consortium of scholars and industry, the former focused on responsible collection, use, and dissemination of data, especially related to vulnerable people and the latter on sustainable data management.

As an example, one AHRC project experimented with methods to capture detailed 3D images of heritage sites and structures in dynamic crowded environments. They used one set of methods to capture the interiors and another for the exteriors, hoping to merge both together and develop holistic imagery for audiences. This proved impossible at first due to issues of software compatibility. Once that was partially resolved, the new software couldn’t handle the sheer volume of data captured—and it was unclear where and for how long such volumes of data would be stored.

New realms of intellectual property remain fuzzy. While the content on digital platforms is governed by licensing and proprietary legal frameworks, it is often hosted on open platforms, through web repositories such as GitHub. Prima facie, such openness appears to challenge the proprietorial nature of archives and other repositories as keepers of knowledge. However, it raises a host of questions about how to maintain a critical understanding of archives.

Digitization may, and should, transform access but should it obliterate the regimes through which the materials were generated and organized and what’s included or excluded? For example, a local coordinator of one project that engaged with artists commented that digital technologies are typically used to document technical skills as forms of intangible heritage and develop artist encyclopedias, saying that “they are hardly used to interrogate the reality that many ‘traditional’ artists hail from marginalized castes.” Similarly, the local coordinator of another project that engaged with communities living in and around a protected heritage site commented on how digital technologies often end up being used to create a record of heritage structures without any reference to their day-to-day setting.

Any and all digital enterprise in CH, we argue, needs to integrate the ambition to use digital methods to not just present but also counter and interrogate the material, its creation, and purpose. Digital platforms and web- and app-based software are now able to manipulate and re-situate information in unprecedented ways. The novelty of such formats can displace original, provocative, and timely considerations of the material. Often, we are so taken by the visual and structural attributes of these formats, that we accept it at face value and lose sight of the tone and content of heritage as a curated message about the past and the present.

Alongside this, digital augmentations and iterations of CH, including storage, have significant financial and infrastructural implications. The creation and maintenance of digital platforms requires either developing “in-house” digital specialization or, more commonly, reliance on private, for-profit platforms. Paying for external provision introduces complexities. Funders, including the AHRC, struggle to devise guidance or policy in relation to software licensing. However, a persistent challenge to projects, and partnerships between academic and non-academic partners, is devising data and software strategies that subsist beyond the life of the funded-research project. Often, the adverse effects of the paucity of longer-term planning around IP issues, sustainability, and data archiving falls disproportionately on the non-academic stakeholder.

While digitization foregrounds the potential and promise of complete openness and equity, maybe this is lost in practice. Or digitization may merely mark the displacement of one set of ethics with another. There is a need for more careful consideration of the implications, complexities, and risks of taking CH materials out of boxes and off shelves and transforming and generating it into data files, which are, in turn, dependent on digital platforms to provide end-user access. However, the question remains of whether heritage-related disciplines are adequately prepared and willing to confront such new ways of working, which have begun to dislodge some of the privileges extant in current forms of research and practice.

Krupa Rajangam is nearing the end of her tenure as a Fulbright Fellow at the Historic Preservation Department, Weitzman School of Design, University of Pennsylvania. Her permanent designation is Founder-Director, Saythu…linking people and heritage, a professional conservation collective based in Bangalore, India.

Deborah Sutton is a Professor in Modern South Asian History at Lancaster University.

Economics-Watching: Tracking Business Sentiment in the Western United States

[from the Federal Reserve Bank of San Francisco, Economic Letters, 11 August, 2025]

by Hamza Abdelrahman, Luiz Edgard Oliveira and Aditi Poduri

Information the San Francisco Fed collects from businesses and community sources for the Beige Book provides timely insights into economic activity at both the national and regional levels. Two new indexes based on Beige Book questionnaire responses track business sentiment across the western United States. The indexes track data on economic activity and inflation, serving as early indicators of official data releases and helping improve near-term forecasting accuracy. The latest index readings suggest weakening economic growth and intensifying inflationary pressures over the coming months.

The San Francisco Fed serves the 12th District—the largest in the Federal Reserve System, representing nine western states, two territories, and a commonwealth. To better understand and analyze the regional economy, we collect information from a variety of business and community sources to create the San Francisco Fed’s report for the Beige Book. This is compiled with reports from other Districts and published by the Federal Reserve Board of Governors eight times a year. 

Views about the economy from businesses and communities play an important role in shaping economic outcomes. For example, expectations for future inflation can help spur or slow current consumer spending and business investment. Furthermore, economic forecasters rely on models that incorporate both more traditional “hard” quantitative data and “soft” qualitative information on sentiment. Adding these soft measures has been shown to improve the accuracy of economic forecasts (see Shapiro, Moritz, and Wilson 2022 and their cited literature). Among the many sentiment measures available, two popular approaches rely on survey data, as in the University of Michigan’s Surveys of Consumers, or on textual analysis, as in the SF Fed’s Daily News Sentiment Index.

This Economic Letter examines the economic information collected through the SF Fed’s Beige Book questionnaire over the past 10-plus years. We analyze this information by constructing sentiment indexes from the qualitative data and comparing them with quantitative measures of national and regional economic activity and inflation. We introduce two indexes—the SF Fed Business Sentiment Index and the SF Fed Inflation Gauge Index—which track our contacts’ views and expectations for economic growth and inflation, respectively. We find that these new indexes serve as reliable early indicators of official data releases and help improve near-term forecast accuracy. The SF Fed Business Sentiment Index has generally exhibited patterns similar to other recent business and household sentiment indexes, and the SF Fed Inflation Gauge Index has shown a strong uptick in expected inflation. To regularly monitor changes in these two indexes, the San Francisco Fed has launched a new Twelfth District Business Sentiment data page.

Constructing regional sentiment indexes

The San Francisco Fed sends out a Beige Book questionnaire to business and community contacts across the District eight times a year to gather regional information. In addition to answering questions regarding their organizations, respondents share their views on regional and national topics, including economic activity and inflationary pressures.

In two questions, respondents indicate whether they see national output growth and inflation rates increasing, decreasing, or staying stable over the coming year using a standard five-tiered scale. We use these responses since 2014 to formulate two business sentiment indexes, one on economic activity and another on inflation. We assign standard weights to the five-tiered qualitative scale that are symmetrical around zero. For example, we ask if activity is expected to “decrease significantly” = –2, “decrease” = –1, “remain unchanged” = 0, “increase” = 1, or “increase significantly” = 2. We add up the weighted shares of responses for each tier within each index. We then normalize each resulting series by its own average and standard deviation for ease of comparison with traditional economic indicators.

Tracking business sentiment

Figure 1 shows how the SF Fed Business Sentiment Index (blue line), compiled from responses to the question on national economic activity, compares with data on changes in national GDP (green line). We measure national output as the four-quarter change in inflation-adjusted, or real, GDP, normalized by its average and standard deviation so that it is centered around zero and, hence, more directly comparable to the SF Fed Business Sentiment Index. The vertical axis shows how many standard deviations away each observation is from its respective measure’s average from 2014 to mid-2025.

Figure 1
Economic growth versus business sentiment

Notes: Indicators normalized by their respective averages and standard deviations based on data from 2014 to present. Gray bar indicates NBER recession dates. Correlation coefficient is calculated between quarterly versions of both indicators.
Source: Bureau of Economic Analysis, FRBSF Beige Book questionnaire responses, and authors’ calculations.

The SF Fed Business Sentiment Index generally tracks the movements in national GDP over the past decade; a correlation coefficient of +0.63 on a scale of –1 to 1 indicates a moderately strong positive relationship between the two measures. A relatively recent exception started in 2022, when our index began showing a considerable decline relative to the national GDP measure. Respondents across the District were downbeat about economic growth and reported expectations of a sharp decline in consumer spending and overall household financial health following the depletion of pandemic-era savings (Abdelrahman and Oliveira 2023). A similar decline appeared in other measures of business and household sentiment. Nevertheless, overall economic growth continued at a solid pace. This decoupling between sentiment and hard data that began in 2022 was dubbed a “vibecession” (Daly 2024, Scanlon 2022).

Another possible reason for the divergence between national real GDP and our Business Sentiment Index is the influence of the regional economy. Although respondents are asked about their views of national GDP, their responses may be affected by regional outcomes. Thus, our index may also reflect a regional perspective from our business and community contacts.

Figure 2 supports this rationale, showing the SF Fed Business Sentiment Index alongside a measure of regional output growth (gold line). We find that the measures closely track one another, including for 2022 and 2023, with a correlation coefficient of +0.74. We define District real GDP growth as the year-over-year percent change in the total output of the District’s nine states as reported by the Bureau of Economic Analysis (BEA). We normalize the series as described before.

Figure 2
Regional economic growth and business sentiment

Notes: Indicators normalized by their respective averages and standard deviations based on data from 2014 to present. Gray bar indicates NBER recession dates. Correlation coefficient is calculated between quarterly versions of both indicators.
Source: Bureau of Economic Analysis, FRBSF Beige Book questionnaire responses, and authors’ calculations.

Our findings indicate that the SF Fed Business Sentiment Index can serve as an accurate early indicator for national and regional output growth. Since the regional Beige Book questionnaire is collected twice each quarter, it provides particularly timely insights into economic activity during the current quarter. By contrast, the first GDP data release for any given quarter usually arrives a full month after that quarter has ended, and initial data releases for state-level output growth arrive with even more delay.

Over the first half of this year, the SF Fed Business Sentiment Index turned negative, with contacts citing elevated uncertainty about trade policy and downbeat expectations for the labor market. This notable decline is also seen in other measures of household and business sentiment, including national measures, such as the University of Michigan’s Surveys of Consumers, and regional measures, such as the Cleveland Fed’s Survey of Regional Conditions and Expectations and the Dallas Fed’s Texas Business Outlook Surveys.

Gauging business views on inflationary pressures

Our Beige Book questionnaire responses also provide insights into how business and community contacts in the District see national inflation evolving. Figure 3 compares the SF Fed Inflation Gauge Index (blue line) with monthly changes in the year-over-year headline personal consumption expenditures (PCE) inflation rate published by the BEA (green line). We normalize the inflation series and index as discussed earlier.

Figure 3
SF Fed Inflation Gauge Index versus realized inflation

Notes: Green line is the percentage point change in year-over-year headline PCE inflation shown as a 6-month moving average. Indicators normalized by their respective averages and standard deviations based on data from 2014 to present. Gray bar indicates NBER recession dates. Correlation coefficient is calculated between quarterly versions of both indicators.
Source: Bureau of Economic Analysis, FRBSF Beige Book questionnaire responses, and authors’ calculations.

Similar to our business sentiment index, the inflation gauge index is an early indicator for official inflation data releases. The index generally tracks changes in headline PCE inflation over the past decade, with a correlation coefficient of +0.65.

The most recent index results suggest a strong uptick in expected inflation among SF Fed business contacts, with several responses citing trade policy adjustments and inflation being persistently above the Federal Reserve’s 2% target. The recent peak resembles the one in 2018, which followed heightened trade tensions with China. The surge tracks other business and household-based measures of short-term inflation expectations, such as the Atlanta Fed’s Business Inflation Expectations and the New York Fed’s Survey of Consumer Expectations.

Making better projections

Beyond tracking data on national and regional economic conditions, we consider whether our two indexes can help improve one-year-ahead projections of output growth and overall inflation. We run linear regressions on a 2014–2022 data sample and estimate out-of-sample projections for the period starting in the first quarter of 2023. We run this analysis for the three economic measures—national GDP, regional GDP, and inflation—once with our index included on the right-hand side of the regression equation and once without the index. For this analysis, we use versions of the SF Fed Business Sentiment Index and the SF Fed Inflation Gauge Index that have been aggregated quarterly.

Figure 4 compares the out-of-sample projection accuracy of the two iterations. Across all economic measures, incorporating the SF Fed Business Sentiment Index or the SF Fed Inflation Gauge Index in the regression noticeably reduced the forecast errors for the out-of-sample period. This general result appears to hold when we project output growth and inflation one quarter ahead, in line with other studies that incorporate soft data from the Beige Book in short-term projections (Balke and Petersen 2002). The results are also consistent when using a local projections method from Jordà (2005) for one-year-ahead projections of output growth and shorter-term projections of inflation. This further supports the usefulness of our qualitative measures as early indicators of the future economic landscape over the short term.

Figure 4
Forecast errors with and without SF Fed sentiment indexes

Notes: Root mean-squared errors of out-of-sample projections from 2023:Q1 to 2025:Q2 including and excluding the SF Fed Business Sentiment Index (for GDP) and SF Fed Inflation Gauge Index (for inflation).
Source: Bureau of Economic Analysis, FRBSF Beige Book questionnaire responses, and authors’ calculations.

Conclusion

Information collected from businesses and communities through the San Francisco Fed’s regional Beige Book questionnaire can provide valuable insights into the national and regional economies. Sentiment indexes described in this Letter use responses from Twelfth District Beige Book contacts to generally track economic activity and inflation. Our two indexes serve as reliable early indicators of official data, which could help improve near-term forecast accuracy. The SF Fed Business Sentiment Index remained negative for much of 2022 and 2023, possibly reflecting more subdued growth within the District relative to the United States. Meanwhile, the SF Fed Inflation Gauge Index spiked in recent months following adjustments to trade policy.

References

Abdelrahman, Hamza, and Luiz E. Oliveira. 2023. “The Rise and Fall of Pandemic Excess Savings.” FRBSF Economic Letter 2023-11 (May 8).

Balke, Nathan S., and D’Ann Petersen. 2002. “How Well Does the Beige Book Reflect Economic Activity? Evaluating Qualitative Information Quantitatively.” Journal of Money, Credit and Banking 34 (1), pp. 114–136.

Daly, Mary C. 2024. “Fireside Chat with Mary C. Daly at the San Diego County Economic Roundtable.” January 19.

Jordà, Òscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95(1), pp. 161–182.

Scanlon, Kyla. 2022. “The Vibecession: The Self-Fulfilling Prophecy.” Kyla Substack (June 30).

Shapiro, Adam Hale, Moritz Sudhof, and Daniel Wilson. 2022. “Measuring News Sentiment.” Journal of Econometrics 228(2), pp. 221–243.

World-Watching: Minutes of the Monetary Policy Committee — Copom

272nd Meeting – July 29-30, 2025

[from the Central Bank of Brazil, 5 August, 2025]

  1. Update of the economic outlook and the Copom’s scenario1
    1. The global environment is more adverse and uncertain due to the economic policy and economic outlook in the United States, mainly regarding its trade and fiscal policies and their effects.
    2. Therefore, the behavior and the volatility of different asset classes have been impacted, altering global financial conditions. This scenario requires particular caution from emerging market economies amid heightened geopolitical tensions.
    3. Regarding the domestic scenario, the set of indicators on economic activity has shown some moderation in growth, as expected, but the labor market is still showing strength.
    4. In recent releases, headline inflation and measures of underlying inflation remained above the inflation target. Inflation expectations for 2025 and 2026 collected by the Focus survey remained above the inflation target and stand at 5.1% and 4.4%, respectively.
  2. Scenarios and risk analysis
    1. The inflation outlook remains challenging in several dimensions. Copom assessed the international scenario, economic activity, aggregate demand, inflation expectations, and current inflation. Copom then discussed inflation projections and expectations before deliberating on the current decision and future communication.
    2. The global environment is more adverse and uncertain. If, on the one hand, the approval of certain trade agreements, along with recent inflation and economic activity data from the U.S., could suggest a reduction in global uncertainty, on the other hand, the U.S. fiscal policy—and, particularly for Brazil, the U.S. trade policy—make the outlook more uncertain and adverse. The increase of trade tariffs by the U.S. to Brazil has significant sectoral impacts and still uncertain aggregate effects that depend on the unfolding of the next steps in the negotiations and the perception of risk inherent to this process. The Committee is closely monitoring the potential impacts on the real economy and financial assets. The prevailing assessment within the Committee is the increased global outlook uncertainty, and, therefore, Copom should maintain a cautious stance. As usual, the Committee will focus on the transmission mechanisms from the external environment to the domestic inflation dynamics and their impact on the outlook.
    3. The domestic economic activity outlook has indicated a certain moderation in growth, while also presenting mixed data across sectors and indicators.
    4. Overall, some moderation in growth is observed, supporting the scenario outlined by the Committee. This moderation, necessary for the widening of the output gap and the convergence of inflation to the target, is aligned with a contractionary monetary policy. Monthly sectoral surveys and more timely consumption data support a gradual slowdown in growth.
    5. At turning points in the economic cycle, it is natural to observe mixed signals from economic indicators—some leading, others lagging—as well as from comparisons between markets, such as the credit and labor markets.
    6. The credit market, which is more sensitive to financial conditions, has shown clearer moderation. A decline in non-earmarked credit granting and an increase in interest and delinquency rates have been observed. Moreover, regarding household credit, there has been an increase in the household debt–service ratio and a deepening of the negative credit flow—that is, households repaying more debt than taking on. It was emphasized during the discussion that some recent measures, such as private payroll-deducted loans, have had less impact than many market participants expected. Given the implementation agenda in this credit line, as well as the effects of introducing and removing taxes on other credit modalities, the Committee believes it should closely monitor upcoming credit data releases.
    7. In contrast to the credit market, the labor market remains dynamic. Both from the perspective of income—with real gains consistently above productivity—and employment—with a significant decrease in the unemployment rate to historically low levels—the labor market has greatly supported consumption and income.
    8. Thus, the Committee assesses that the signals from demand and economic activity so far suggest that the scenario is unfolding as expected and is consistent with the current monetary policy. The Committee reiterates that the aggregate demand slowdown is an essential element of supply–demand rebalancing in the economy and convergence of inflation to the target.
    9. Fiscal policy has a short-term impact, mainly through stimulating aggregate demand, and a more structural dimension, which has the potential to affect perceptions of debt sustainability and influence the term premium in the yield curve. A fiscal policy that acts counter-cyclically and contributes to reducing the risk premium favors the convergence of inflation to the target. Copom reinforced its view that the slowdown in structural reform efforts and fiscal discipline, the increase in earmarked credit, and uncertainties over the public debt stabilization have the potential to raise the economy’s neutral interest rate, with deleterious impacts on the power of monetary policy and, consequently, on the cost of disinflation in terms of activity. The Committee remained firmly convinced that policies must be predictable, credible, and countercyclical. In particular, the Committee’s discussion once again highlighted the need for harmonious fiscal and monetary policy.
    10. Inflation expectations, as measured by different instruments and obtained from various groups of agents, remained above the inflation target at all horizons, maintaining the adverse inflation outlook. For shorter-term horizons, following the release of the most recent data, there has been a decline in inflation expectations. For longer-term horizons, conversely, there has been no significant change in inflation expectations between Copom meetings, even though measures of breakeven inflation extracted from financial assets have declined. The Committee reaffirmed and renewed its commitment to re-anchoring expectations and to conducting a monetary policy that supports such a movement.
    11. De-anchored inflation expectations is a factor of discomfort shared by all Committee members and must be tamed. Copom highlighted that environments with de-anchored expectations increase the disinflation cost in terms of activity. The scenario of inflation convergence to the target becomes more challenging with de-anchored expectations for longer horizons. When discussing this topic, the main conclusion obtained and shared by all members of Copom was that, in an environment of de-anchored expectations—as currently is the case—greater monetary restriction is required for a longer period than would be otherwise appropriate.
    12. The inflation scenario has continued to show downside surprises in recent periods compared with analysts’ forecasts, but inflation has remained above the target Industrial goods inflation, which has already been showing weaker wholesale price pressures, continued to ease in the more recent period. Food prices also displayed slightly weaker-than-expected dynamics. Finally, services inflation, which has greater inertia, remains above the level required to meet the inflation target, in a context of a positive output gap. Beyond the changes in items, or even short-term oscillations, the core inflation measures have remained above the value consistent with the target achievement for months, corroborating the interpretation that inflation is pressured by demand and requires a contractionary monetary policy for a very prolonged period.
    13. Copom then addressed the projections. In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.552 and evolves according to the purchasing power parity (PPP). The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy tariff flag is assumed to be “green” in December of the years 2025 and 2026.
    14. In the reference scenario, four-quarter inflation projections for 2025 and for 2026 are 4.9% and 3.6%, respectively (Table 1). For the relevant horizon for monetary policy—2027 Q1—the inflation projection based on the reference scenario extracted from the Focus survey remained at 3.4%, above the inflation target.
    15. Regarding the balance of risks, it was assessed that the scenario of greater uncertainty continues to present higher-than-usual upside and downside inflation risks to the inflation outlook. Copom assessed that, among the upside risks for the inflation outlook and inflation expectations, it should be emphasized (i) a more prolonged period of de-anchoring of inflation expectations; (ii) a stronger-than-expected resilience of services inflation due to a more positive output gap; and (iii) a conjunction of internal and external economic policies with a stronger-than-expected inflationary impact, for example, through a persistently more depreciated currency. Among the downside risks, it should be noted (i) a greater-than-projected deceleration of domestic economic activity, impacting the inflation scenario; (ii) a steeper global slowdown stemming from the trade shock and the scenario of heightened uncertainty; and (iii) a reduction in commodity prices with disinflationary effects.
    16. Prospectively, the Committee will continue monitoring the pace of economic activity, which is a fundamental driver of inflation, particularly services inflation; the exchange rate pass-through to inflation, after a process of increased exchange rate volatility; and inflation expectations, which remain de-anchored and are drivers of future inflation behavior. It was emphasized that inflationary vectors remain adverse, such as the economic activity resilience and labor market pressures, de-anchored inflation expectations, and high inflation projections. This scenario prescribes a significantly contractionary monetary policy for a very prolonged period to ensure the convergence of inflation to the target.
  3. Discussion of the conduct of monetary policy
    1. Copom then discussed the conduct of monetary policy, considering the set of projections evaluated, as well as the balance of risks for prospective inflation.
    2. Following a swift and firm interest rate hike cycle, the Committee anticipates, as its monetary policy strategy, continuity of the interruption of the rate hiking cycle to observe the effects of the cycle already implemented. It was emphasized that, once the appropriate interest rate is determined, it should remain at a significantly contractionary level for a very prolonged period due to de-anchored expectations. The Committee emphasizes that it will remain vigilant, that future monetary policy steps can be adjusted and that it will not hesitate to proceed with the rate hiking cycle if appropriate.
  4. Monetary policy decision
    1. The Committee has been closely monitoring with particular attention the announcements regarding the imposition by the U.S. of trade tariffs on Brazil, reinforcing its cautious stance in a scenario of heightened uncertainty. Moreover, it continues to monitor how the developments on the fiscal side impact monetary policy and financial assets. The current scenario continues to be marked by de-anchored inflation expectations, high inflation projections, resilience on economic activity, and labor market pressures. Ensuring the convergence of inflation to the target in an environment with de-anchored expectations requires a significantly contractionary monetary policy for a very prolonged period.
    2. Copom decided to maintain the Selic rate at 15.00% p.a., and judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.
    3. The current scenario, marked by heightened uncertainty, requires a cautious stance in monetary policy. If the expected scenario materializes, the Committee foresees a continuation of the interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts, and then evaluate whether the current interest rate level, assuming it stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target. The Committee emphasizes that it will remain vigilant, that future monetary policy steps can be adjusted and that it will not hesitate to resume the rate hiking cycle if appropriate.
    4. The following members of the Committee voted for this decision: Gabriel Muricca Galípolo (Governor), Ailton de Aquino Santos, Diogo Abry Guillen, Gilneu Francisco Astolfi Vivan, Izabela Moreira Correa, Nilton José Schneider David, Paulo Picchetti, Renato Dias de Brito Gomes, and Rodrigo Alves Teixeira.
Table 1

Inflation projections in the reference scenario
Year-over-year IPCA change (%)

Price Index202520262027 Q1
IPCA4.93.63.4
IPCA market prices5.13.53.3
IPCA administered prices4.44.03.9
Footnotes

1 Unless explicitly stated otherwise, this update considers changes since the June Copom meeting (271st meeting).

2 It corresponds to the rounded value of the average exchange rate observed over the ten working days ending on the last day of the week prior to the Copom meeting, according to the procedure adopted since the 258th meeting.

Meeting information
Date: July 29-30 2025
Place: BCB Headquarters’ meeting rooms on the 8th floor (7/29 and 7/30 on the morning) and 20th floor (7/30 on the afternoon) – Brasilia – DF – Brazil
Starting and ending times:
July 29: 10:07 AM – 11:37 AM; 2:17 PM – 5:51 PM
July 30: 10:10 AM – 11:13 AM; 2:37PM – 6:34 PM
In attendance:
Members of the Copom
Gabriel Muricca Galípolo – Governor
Ailton de Aquino Santos
Diogo Abry Guillen
Gilneu Francisco Astolfi Vivan
Izabela Moreira Correa
Nilton José Schneider David
Paulo Picchetti
Renato Dias de Brito Gomes
Rodrigo Alves Teixeira
Department Heads in charge of technical presentations (attending on July 29 and on the morning of July 30)
André de Oliveira AmanteOpen Market Operations Department
Euler Pereira Gonçalves de MelloResearch Department (also attending on the afternoon of 7/30)
Fábio Martins Trajano de ArrudaDepartment of Banking Operations and Payments System
Luís Guilherme Siciliano PontesInternational Reserves Department
Marcelo Antonio Thomaz de AragãoDepartment of International Affairs
Ricardo SabbadiniDepartment of Economics
Other participants (attending on July 29 and on the morning of July 30)
Alexandre de CarvalhoOffice of Economic Advisor
André Maurício Trindade da RochaHead of the Financial System Monitoring Department
Angelo Jose Mont Alverne DuarteHead of Office of the Deputy Governor for Licensing and Resolution (attending on the mornings of 7/29 and 7/30)
Arnaldo José Giongo GalvãoPress Office Advisor
Cristiano de Oliveira Lopes CozerGeneral Counsel
Edson Broxado de França TeixeiraHead of Office of the Deputy Governor for Supervision
Eduardo José Araújo LimaHead of Office of the Deputy Governor for Economic Policy
Fernando Alberto G. Sampaio C. RochaHead of the Department of Statistics
Isabela Ribeiro Damaso MaiaHead of the Sustainability and International Portfolio Investors Unit (attending on the mornings of 7/29 and 7/30)
Julio Cesar Costa PintoHead of Office of the Governor
Laura Soledad Cutruffo CompariniDeputy Head of the Department of Economics
Leonardo Martins NogueiraHead of Office of the Deputy Governor for Monetary Policy
Marcos Ribeiro de CastroDeputy Head of the Research Department
Mardilson Fernandes QueirozHead of the Financial System Regulation Department
Olavo Lins Romano PereiraDeputy Head of the Department of International Affairs
Renata Modesto BarretoDeputy Head of the Department of Banking Operations and Payments System
Ricardo da Costa MartinelliDeputy Head of the International Reserves Department
Ricardo Eyer HarrisHead of Office of the Deputy Governor for Regulation
Ricardo Franco MouraHead of the Prudential and Foreign Exchange Regulation Department
Rogerio Antonio LuccaExecutive Secretary
Simone Miranda BurelloAdvisor in the Office of the Deputy Governor for Monetary Policy

The members of Copom analyzed the recent performance and prospects for the Brazilian and international economies, under the monetary policy framework, whose objective is to comply with the inflation targets established by the National Monetary Council. This document represents Copom’s best effort to provide an English version of its policy meeting minutes. In case of inconsistency, the Portuguese version prevails.

World-Watching: 272nd Meeting of the Monetary Policy Committee (“Copom”) of the Central Bank of Brazil Press Release

Copom maintains the Selic rate at 15.00% p.a.

[from the Central Bank of Brazil, 30 July, 2025]

​The global environment is more adverse and uncertain due to the economic policy and economic outlook in the United States, mainly regarding its trade and fiscal policies and their effects. Therefore, the behavior and the volatility of different asset classes have been impacted, altering global financial conditions. This scenario requires particular caution from emerging market economies amid heightened geopolitical tensions.

Regarding the domestic scenario, the set of indicators on economic activity has shown some moderation in growth, as expected, but the labor market is still showing strength. In recent releases, headline inflation and measures of underlying inflation remained above the inflation target.

Inflation expectations for 2025 and 2026 collected by the Focus survey remained above the inflation target and stand at 5.1% and 4.4%, respectively. Copom’s inflation projections for the first quarter of 2027, currently the relevant horizon for monetary policy, stand at 3.4% in the reference scenario (Table 1).

The risks to the inflation scenarios, both to the upside and to the downside, continue to be higher than usual. Among the upside risks for the inflation outlook and inflation expectations, it should be emphasized (i) a more prolonged period of de-anchoring of inflation expectations; (ii) a stronger-than-expected resilience of services inflation due to a more positive output gap; and (iii) a conjunction of internal and external economic policies with a stronger-than-expected inflationary impact, for example, through a persistently more depreciated currency. Among the downside risks, it should be noted (i) a greater-than-projected deceleration of domestic economic activity, impacting the inflation scenario; (ii) a steeper global slowdown stemming from the trade shock and the scenario of heightened uncertainty; and (iii) a reduction in commodity prices with disinflationary effects.

The Committee has been closely monitoring the announcements on tariffs by the USA to Brazil, which reinforces its cautious stance in a scenario of heightened uncertainty. Moreover, it continues to monitor how the developments on the fiscal side impact monetary policy and financial assets. The current scenario continues to be marked by de-anchored inflation expectations, high inflation projections, resilience on economic activity and labor market pressures. Ensuring the convergence of inflation to the target in an environment with de-anchored expectations requires a significantly contractionary monetary policy for a very prolonged period.

Copom decided to maintain the Selic rate at 15.00% p.a., and judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.

The current scenario, marked by heightened uncertainty, requires a cautious stance in monetary policy. If the expected scenario materializes, the Committee foresees a continuation of the interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts, and then evaluate whether the current interest rate level, assuming it stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target. The Committee emphasizes that it will remain vigilant, that future monetary policy steps can be adjusted and that it will not hesitate to resume the rate hiking cycle if appropriate.

The following members of the Committee voted for this decision: Gabriel Muricca Galípolo (Governor), Ailton de Aquino Santos, Diogo Abry Guillen, Gilneu Francisco Astolfi Vivan, Izabela Moreira Correa, Nilton José Schneider David, Paulo Picchetti, Renato Dias de Brito Gomes, and Rodrigo Alves Teixeira.

Table 1

Inflation projections in the reference scenario
Year-over-year IPCA change (%)

Price Index202520261st quarter 2027
IPCA4.93.63.4
IPCA market prices5.13.53.3
IPCA administered prices4.44.03.9

In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.55 and evolves according to the purchasing power parity (PPP). The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy tariff flag is assumed to be “green” in December of the years 2025 and 2026. The value for the exchange rate was obtained according to the usual procedure.

Note: This press release represents the Copom’s best effort to provide an English version of its policy statement. In case of any inconsistency, the original version in Portuguese prevails.

Economics-Watching: BRICS Currency Creates Dilemma for the Dollar

by Christopher Whalen, from China Daily

The term “BRICS currency” typically refers to a hypothetical or proposed unified currency for the BRICS grouping. It’s not a single, physical currency currently in use, but rather a concept for a potential future monetary system that some suggest will reduce the dominance of the U.S. dollar in international trade and finance.

Is BRICS currency cooperation about immediate de-dollarization or long-term financial sovereignty? The answer is that BRICS cooperation may include reducing long-term dependence on the dollar as a means of exchange. The dollar is involved in more than half of all trade and 80 percent of all foreign exchange transactions. BRICS currency cooperation aims to gradually reduce the group’s dollar dependency, but challenges remain.

The BRICS concept came about not because the dollar is unsuitable as a means of exchange or unit of account, but rather because of the use of the dollar by Washington as a weapon. As I note in my book, Inflated: Money, Debt and the American Dream, the special role of the dollar in U.S. finance allows the U.S. government to impose harsh compliance and reporting requirements on foreign nationals and institutions. The U.S. is an arbitrary hegemon and does not follow reciprocity with other countries.

The global role of the dollar is an anomaly, the byproduct of two world wars had left the other antagonists broke by the time the Bretton Woods Agreement was signed in July 1944.

Choosing the fiat paper dollar as the default global reserve currency more than seven decades ago reflected the fact that the United States was one of the victors and possessed the wealth that gave Washington unchallenged economic leadership. Prior to World War I, the United Kingdom’s pound sterling was the global standard, but importantly, this paper currency was backed by gold — the only money that is not debt. The dollar, too, was backed by gold — until 1933, when the Franklin Roosevelt administration confiscated gold in private hands to prevent his government from collapsing.

Pound notes started to circulate in England in 1694, shortly after the establishment of the Bank of England. The paper pound helped to fuel the expansion of the British Empire, in large part because the only competing form of money was physical gold. When Britain and other nations left the gold standard in the 1930s, it was due to the deflation caused by the Great Depression rather than a deliberate choice.

The 19th-century rule attributed to English journalist and businessman Walter Bagehot says that in times of crisis, lend freely at a high rate against good collateral. Yet since the currency devaluation and gold seizures of 1933, fiat currencies and below-market interest rates have been the rule. In a global scheme in which the government occupies the prime position, the operative term remains “financial repression”, whereby governments control markets and artificially suppress rates of return on debt. For this reason, the dollar is losing its role as a store of value to gold.

The fact that the dollar continues to trade strongly versus other currencies reflects the reality that as the main means of exchange globally, the dollar cannot be easily replaced. One reason for this continued support for the dollar is that the trade in petroleum and other commodities is so large that it requires an equally large currency to accommodate it. Also, neither the Europeans nor the Japanese, the only two possible alternatives, are willing to risk the external deficits or inflation that the U.S. suffers as the host for the global currency.

What global currency will replace the fiat paper dollar? None. As this article is being written, gold is the second-largest reserve asset for central banks after the dollar. “The initiation in 2002 of the Shanghai Gold Exchange was of great strategic significance, both for gold and the global monetary system,” notes veteran gold fund manager Henry Smyth in an interview in The Institutional Risk Analyst. “Now it is completely clear what happened.”

Smyth and many other observers see the creation of the SGE in 2002 as the return of gold to the international monetary system. But while gold is growing in importance as a reserve asset for many countries, it does not mean that the role of the dollar as a global means of exchange or unit of account is about to change.

The dollar will remain the dominant asset. And even then, displacing the dollar will require a major change in the international monetary system, a change that is already underway.

The author is the chairman of Whalen Global Advisors LLC in New York and the author of Inflated: Money, Debt and the American Dream published by Wiley Global (2025).

Economics-Watching: Kuwait’s Banking Sector Posts Solid Credit Growth in October

[from NBK Group’s Economic Research Department, 21 November, 2024]

Kuwait: Solid credit growth in October driven by household credit. Domestic credit increased by a solid 0.4% in October, driving up YTD growth to 2.9% (3.2% y/y). The recovery in household credit continued, with growth in October at a solid 0.5%, resulting in a YTD increase of 2.4%. While y/y growth in household credit remains a limited 2.3%, annualized growth over the past four months is a stronger 4.7%. Business credit inched up by 0.2% in October, pushing YTD growth to 3.6% (2.9% y/y). Industry and trade drove business credit growth in October while construction and trade are the fastest growing YTD at 17% and 8%, respectively. In contrast, the oil/gas sector continued its downtrend, deepening the YTD decrease to 13%. Excluding the oil/gas sector, growth in business credit would increase to a relatively good 5% YTD. Looking ahead, the last couple of months of the year (especially December) are usually the weakest for business credit, likely due to increased repayments and write-offs, but it will not be surprising if the recovery in household credit is generally sustained, especially given the commencement of the interest rate-cutting cycle. Meanwhile, driven by a plunge in the volatile public-institution deposits, resident deposits decreased in October, resulting in YTD growth of 2.4% (4.2% y/y). Private-sector deposits inched up in October driving up YTD growth to 4.5% compared with 10% for government deposits while public-institution deposits are a big drag (-14%). Within private-sector KD deposits, CASA showed further signs of stabilization as there was no decrease for the third straight month while the YTD drawdown is a limited 1%.

Chart 1: Kuwait credit growth

(% y/y)

Source: Central Bank of Kuwait (CBK)
Chart 2: UK inflation

(%)

Source: Haver

Egypt: IMF concludes mission for fourth review, sees external risks. The IMF concluded its visit to Egypt after spending close to 2 weeks, holding several in-person meetings with the Egyptian authorities, private sector, and other stakeholders. The IMF released a statement mentioning that the current ongoing geopolitical tensions in the region in addition to an increasing number of refugees have affected the external sector (Suez Canal receipts down by 70%) and put severe pressure on the fiscal front. The Fund acknowledged the Central Bank of Egypt’s commitment to unify the exchange rate, maintain the flexible exchange rate regime, and keep inflation on a firm downward trend over the medium term by substantially tightening monetary policy. It also highlighted that continued policy discipline was also a key to containing fiscal risks, especially those related to the energy sector. The Fund, as always, re-iterated the need for promoting the private sector mainly through an enhanced tax system and accelerating divestment plans of the state firms. Finally, it also said that the discussions would continue over the coming days to finalize the agreement on the remaining policies and reform plans. However, the release did not provide any clear hints about the conclusion on the government’s earlier request to push the timeline of some of the subsidy moves.

Oman: IMF completes article IV with a strong outlook for the economy in 2025. Oman’s economy continued to expand with growth reaching 1.9% in the first half of 2024 (versus 1.2% in 2023), despite being weighed down by OPEC+ mandated oil production cuts as non-oil GDP grew a stronger 3.8% y/y in H1 (versus 1.8% in 2023). The fiscal and current account balances remain in a comfortable situation evident by a decline in public sector debt and the recent rating upgrade to investment grade. The Fund expects Oman’s economic growth to see a strong rebound in 2025, supported by higher oil production. It also believes that fiscal and current account balances will remain in surplus but at lower levels. Key risks to the outlook stem from oil price volatility and intensifying geopolitical tensions. The IMF also mentioned that further efforts are needed to raise nonhydrocarbon revenues through more tax policy measures and the phasing out of untargeted subsidies which should help in freeing up resources to finance growth under the government’s diversification agenda.

UK: Inflation rises more than forecast, reinforcing BoE’s caution on rate cuts. UK CPI inflation increased to 2.3% y/y in October from 1.7% the previous month, slightly above the market and the Bank of England’s forecast of 2.2%. On a monthly basis too, inflation rose to 0.6%, a seven-month high, from September’s no change. The steep rise was mainly driven by an almost 10% rise in the household energy price cap effective from October. Core inflation also accelerated to 3.3% y/y (0.4% m/m) from 3.2% (0.1% m/m). While goods prices continued to fall (-0.3% y/y), service prices rose at a faster rate of 5% from 4.9%. Recently, the Bank of England had cautioned about inflation quickening next year (projecting a peak rate of 2.8% in Q3 2025), citing the impact of higher insurance contributions and rising minimum wages as outlined in the latest government budget. Therefore, with inflation rising above forecast, the bank will likely slow the pace of monetary easing after delivering two interest rate cuts of 25 bps earlier, with markets now seeing only two additional cuts by the end of 2025.

Eurozone: ECB warns of fiscal and growth risks in its latest Financial Stability Review [archived PDF]. In its most recent Financial Stability Review (November) [archived PDF], the European Central Bank warned that elevated debt and fiscal deficit levels and anemic long-term growth could expose sovereign debt vulnerabilities in the region, stoking concerns of a repeat of the 2011 sovereign debt crisis. Maturing debt being rolled over at much higher borrowing rates raising debt service costs poses risks to countries with little fiscal space and leaves certain governments exposed to market fluctuations. The bank also emphasized the risks of high equity valuations, low liquidity and a greater concentration of exposure among non-banks. Moreover, it sees current geopolitical uncertainties and the possibility of more trade tensions as heightening risks. The Eurozone’s current government debt-to-GDP ratio stands at 88%, but the underlying data suggest a much more precarious situation with Greece, Italy, and France’s ratios at 164%, 137% and 112%. Recently, concerns about France’s high fiscal deficit (around 5.9% of GDP) and elevated debt levels saw yields on the country’s bonds rise steeply, widening the spread gap with German bonds to the highest level in over a decade.

Stock marketsIndexDaily Change (%)YTD Change (%)
Regional
Abu Dhabi (ADI)9,405-0.23-1.80
Bahrain (ASI)2,043-0.373.62
Dubai (DFMGI)4,7610.6117.26
Egypt (EGX 30)30,588-0.33 23.18
GCC (S&P GCC 40)7090.09-0.52
Kuwait (All Share)7,353-0.087.86
KSA (TASI)11,868-0.07-0.83
Oman (MSM 30)4,6090.002.10
Qatar (QE Index)10,4380.12-3.62
International
CSI 3003,9860.2216.17
DAX19,005-0.2913.45
DJIA43,4080.3215.17
Eurostoxx 504,730-0.454.60
FTSE 1008,085-0.174.55
Nikkei 22538,352-0.1614.61
S&P 5005,9170.0024.05
3m interbank rates%Daily Change (bps)YTD Change (bps)
Bahrain5.86-1.29-66.34
Kuwait3.940.00-37.50
Qatar6.000.00-25.00
UAE4.433.81-89.96
Saudi5.50-4.75-73.14
SOFR4.52-0.09-81.13
Bond yields%Daily Change (bps)YTD Change (bps)
Regional
Abu Dhabi 20274.665.0033.9
Oman 20275.496.0033.0
Qatar 20264.686.0016.1
Kuwait 20274.693.0035.0
Saudi 20284.961.0043.9
International 10-year
US Treasury4.411.7755.3
German Bund2.340.3531.2
UK Gilt4.472.6093.0
Japanese Gov’t Bond1.071.045.4
Exchange ratesRateDaily Change (%)YTD Change (%)
KWD per USD0.310.04-0.05
KWD per EUR0.32-0.46-1.98
USD per EUR1.05-0.49-4.47
JPY per USD155.430.5010.19
USD per GBP1.27-0.25-0.62
EGP per USD49.670.3461.00
Commodities$/unitDaily Change (%)YTD Change (%)
Brent crude72.81-0.68-5.49
KEC73.780.74-7.26
WTI68.87-0.75-3.88
Gold2,648.20.8028.40

Disclaimer: While every care has been taken in preparing this publication, National Bank of Kuwait accepts no liability whatsoever for any direct or consequential losses arising from its use. Daily Economic Update is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and previous issues can be found in the “News & Insight / Economic Reports” section of the National Bank of Kuwait’s web site. Please visit their web site, nbk.com, for other bank publications.

Navigating through Sources

Consciousness and the Novel: Connected Essays by the famous British novelist David Lodge is a classic work published by Harvard in 2004.

In this Lodge book, the author mentions a famous British society-watcher, Charles Masterman. In 1909, Masterman published his best-known study, The Condition of England, which tells us that England at that time experienced a greater inflow of migrants into London than in previous centuries taken together.

[Charles Frederick Gurney Masterman PC MP (24 October 1873 – 17 November 1927) was a British radical Liberal Party politician, intellectual and man of letters. He worked closely with such Liberal leaders as David Lloyd George and Winston Churchill in designing social welfare projects, including the National Insurance Act 1911. During the First World War, he played a central role in the main government propaganda agency.]

We then notice that one recurrent topic in various movie versions of the E. M. Forster novel Howards End (1910, set in those years) is the “horrifying” trend where great mansions and stately estates (Howards End and Wickham Place, say, in the novel) are all being demolished and replaced by ugly “flats.”

There must be, one thinks, a direct link between all the massive migrations into London at the time and all the proliferating flats at the “expense” of beautiful and historical villas. (This “demolish” trend is also part of the story of the classic novel A Handful of Dust by Evelyn Waugh, 1934)

In the predecessor to Downton Abbey called Upstairs, Downstairs, the story ends in 1930 with a sign outside the great “house” at Eaton Place offering flats coming soon, as the demand for housing (think of San Francisco today) is so massive that sellers can make a fortune selling out to developers, move into one of the flats being created, and live off the sale for the rest of their lives and “duck” the higher “Lloyd George taxes.” (In Downton Abbey, the dowager played by Maggie Smith repeatedly lashes out at Prime Minister Lloyd George as a kind of financial traitor.)

We see from this simple example how students should learn to “jump” between books and movies and TV miniseries to get a stronger focus on what’s being depicted on screens and pages and not just “swim along” at the surface level without any “drilling down.”

Education is largely the struggle or habit where students learn to bring pattern and structure out of “chaos,” thus giving narratives some overall shape.

This reminds one of the opening lines of Beryl Markham’s 1942 Africa memoir:

“How is it possible to bring order out of memory? I should like to begin at the beginning, patiently, like a weaver at his loom. I should like to say, ‘This is the place to start; there can be no other.’ ”

from West with the Night by Beryl Markham

This is a similar impetus: to bring order out of memory or others’ memories in books and movies from various times and places.

Economics-Watching: “Doing Nothing” Is Still Doing a Lot

[from the Federal Reserve Bank of Philadelphia, speech by Patrick T. Harker President and Chief Executive Officer at the National Association of Corporate Directors Webinar, Philadelphia, PA (Virtual)]

Good afternoon, everyone.

I appreciate that you’re all giving up part of the end of your workday for us to be together, if only virtually.

My thanks to my good friend, Rick Mroz, for that welcome and introduction.

I do believe we’re going to have a productive session. But just so you all know, as much as I enjoy speaking and providing my outlook, I enjoy a good conversation even more.

So, first, let’s take a few minutes so I can give you my perspective on where we are headed, and then I will be more than happy to take questions and hear what’s on your minds.

But before we get into any of that, I must begin with the standard Fed disclaimer: The views I express today are my own and do not necessarily reflect those of anyone else on the Federal Open Market Committee (FOMC) or in the Federal Reserve System.

Put simply, this is one of those times where the operative words are, “Pat said,” not “the Fed said.”

Now, to begin, I’m going to first address the two topics that I get asked about most often: interest rates and inflation. And I would guess they are the topics front and center in many of your minds as well.

After the FOMC’s last policy rate hike in July, I went on record with my view that, if economic and financial conditions evolved roughly as I expected they would, we could hold rates where they are. And I am pleased that, so far, economic and financial conditions are evolving as I expected, if not perhaps even a tad better.

Let’s look at the current dynamics. There is a steady, if slow, disinflation under way. Labor markets are coming into better balance. And, all the while, economic activity has remained resilient.

Given this, I remain today where I found myself after July’s meeting: Absent a stark turnabout in the data and in what I hear from contacts, I believe that we are at the point where we can hold rates where they are.

In barely more than a year, we increased the policy rate by more than 5 percentage points and to its highest level in more than two decades — 11 rate hikes in a span of 12 meetings prior to September. We not only did a lot, but we did it very fast.

We also turned around our balance sheet policy — and we will continue to tighten financial conditions by shrinking the balance sheet.

The workings of the economy cannot be rushed, and it will take some time for the full impact of the higher rates to be felt. In fact, I have heard a plea from countless contacts, asking to give them some time to absorb the work we have already done.

I agree with them. I am sure policy rates are restrictive, and, as long they remain so, we will steadily press down on inflation and bring markets into a better balance.

Holding rates steady will let monetary policy do its work. By doing nothing, we are still doing something. And I would argue we are doing quite a lot.

Headline PCE inflation remained elevated in August at 3.5 percent year over year, but it is down 3 percentage points from this time last year. About half of that drop is due to the volatile components of energy and food that, while basic necessities, they are typically excluded by economists in the so-called core inflation rate to give a more accurate assessment of the pace of disinflation and its likely path forward.

Well, core PCE inflation has also shown clear signs of progress, and the August monthly reading was its smallest month-over-month increase since 2020.

So, yes, a steady disinflation is under way, and I expect it to continue. My projection is that inflation will drop below 3 percent in 2024 and level out at our 2 percent target thereafter.

However, there can be challenges in assessing the trends in disinflation. For example, September’s CPI report came out modestly on the upside, driven by energy and housing.

Let me be clear about two things. First, we will not tolerate a reacceleration in prices. But second, I do not want to overreact to the normal month-to-month variability of prices. And for all the fancy techniques, the best way to separate a signal from noise remains to average data over several months. Of course, to do so, you need several months of data to start with, which, in turn, demands that, yes, we remain data-dependent but patient and cautious with the data.

Turning to the jobs picture, I do anticipate national unemployment to end the year at about 4 percent — just slightly above where we are now — and to increase slowly over the next year to peak at around 4.5 percent before heading back toward 4 percent in 2025. That is a rate in line with what economists call the natural rate of unemployment, or the theoretical level in which labor market conditions support stable inflation at 2 percent.

Now, that said, as you know, there are many factors that play into the calculation of the unemployment rate. For instance, we’ve seen recent months where, even as the economy added more jobs, the unemployment rate increased because more workers moved off the sidelines and back into the labor force. There are many other dynamics at play, too, such as technological changes or public policy issues, like child care or immigration, which directly impact employment.

And beyond the hard data, I also have to balance the soft data. For example, in my discussions with employers throughout the Third District, I hear that given how hard they’ve worked to find the workers they currently have, they are doing all they can to hold onto them.

So, to sum up the labor picture, let me say, simply, I do not expect mass layoffs.

I do expect GDP gains to continue through the end of 2023, before pulling back slightly in 2024. But even as I foresee the rate of GDP growth moderating, I do not see it contracting. And, again, to put it simply, I do not anticipate a recession.

Look, this economy has been nothing if not unpredictable. It has proven itself unwilling to stick to traditional modeling and seems determined to not only bend some rules in one place, but to make up its own in another. However, as frustratingly unpredictable as it has been, it continues to move along.

And this has led me to the following thought: What has fundamentally changed in the economy from, say, 2018 or 2019? In 2018, inflation averaged 2 percent almost to the decimal point and was actually below target in 2019. Unemployment averaged below 4 percent for both years and was as low as 3.5 percent — both nationwide and in our respective states — while policy rates peaked below 2.5 percent.

Now, I’m not saying we’re going to be able to exactly replicate the prepandemic economy, but it is hard to find fundamental differences. Surely, I cannot and will not minimize the immense impacts of the pandemic on our lives and our families, nor the fact that for so many, the new normal still does not feel normal. From the cold lens of economics, I do not see underlying fundamental changes. I could also be wrong, and, trust me, that would not be the first time this economy has made me rethink some of the classic models. We just won’t know for sure until we have more data to look at over time.

And then, of course, there are the economic uncertainties — both national and global — against which we also must contend. The ongoing auto worker strike, among other labor actions. The restart of student loan payments. The potential of a government shutdown. Fast-changing events in response to the tragic attacks against Israel. Russia’s ongoing war against Ukraine. Each and every one deserves a close watch.

These are the broad economic signals we are picking up at the Philadelphia Fed, but I would note that the regional ones we follow are also pointing us forward.

First, while in the Philadelphia Fed’s most recent business outlook surveys, which survey manufacturing and nonmanufacturing firms in the Third District, month-over-month activity declined, the six-month outlooks for each remain optimistic for growth.

And we also publish a monthly summary metric of economic activity, the State Coincident Indexes. In New Jersey, the index is up slightly year over year through August, which shows generally positive conditions. However, the three-month number from June through August was down, and while both payroll employment and average hours worked in manufacturing increased during that time, so did the unemployment rate — though a good part of that increase can be explained as more residents moved back into the labor force.

And for those of you joining us from the western side of the Delaware River, Pennsylvania’s coincident index is up more than 4 percent year over year through August and 1.7 percent since June. Payroll employment was up, and the unemployment rate was down; however, the number of average hours worked in manufacturing decreased.

There are also promising signs in both states in terms of business formation. The number of applications, specifically, for high-propensity businesses — those expected to turn into firms with payroll — are remaining elevated compared with pre-pandemic levels. Again, a promising sign.

So, it is against this full backdrop that I have concluded that now is the time at which the policy rate can remain steady. But I can hear you ask: “How long will rates need to stay high.” Well, I simply cannot say at this moment. My forecasts are based on what we know as of late 2023. As time goes by, as adjustments are completed, and as we have more data and insights on the underlying trends, I may need to adjust my forecasts, and with them my time frames.

I can tell you three things about my views on future policy. First, I expect rates will need to stay high for a while.

Second, the data and what I hear from contacts and outreach will signal to me when the time comes to adjust policy either way. I really do not expect it, but if inflation were to rebound, I know I would not hesitate to support further rate increases as our objective to return inflation to target is, simply, not negotiable.

Third, I believe that a resolute, but patient, monetary policy stance will allow us to achieve the soft landing that we all wish for our economy.

Before I conclude and turn things over to Rick to kick off our Q&A, I do want to spend a moment on a topic that he and I recently discussed, and it’s something about which I know there is generally great interest: fintech. In fact, I understand there is discussion about NACD hosting a conference on fintech.

Well, last month, we at the Philadelphia Fed hosted our Seventh Annual Fintech Conference, which brought business and thought leaders together at the Bank for two days of real in-depth discussions. And I am extraordinarily proud of the fact that the Philadelphia Fed’s conference has emerged as one of the premier conferences on fintech, anywhere. Not that it’s a competition.

I had the pleasure of opening this year’s conference, which always puts a focus on shifts in the fintech landscape. Much of this year’s conference centered around developments in digital currencies and crypto — and, believe me, some of the discussions were a little, shall we say, “spirited.” However, my overarching point to attendees was the following: Regardless of one’s views, whether in favor of or against such currencies, our reality requires us to move from thinking in terms of “what if” to thinking about “what next.”

In many ways, we’re beyond the stage of thinking about crypto and digital currency and into the stage of having them as reality — just as AI has moved from being the stuff of science fiction to the stuff of everyday life. What is needed now is critical thinking about what is next. And we at the Federal Reserve, both here in Philadelphia and System-wide, are focused on being part of this discussion.

We are also focused on providing not just thought leadership but actionable leadership. For example, the Fed rolled out our new FedNow instant payment service platform in July. With FedNow, we will have a more nimble and responsive banking system.

To be sure, FedNow is not the first instant payment system — other systems, whether operated by individual banks or through third parties, have been operational for some time. But by allowing banks to interact with each other quickly and efficiently to ensure one customer’s payment becomes another’s deposit, we are fulfilling our role in providing a fair and equitable payment system.

Another area where the Fed is assuming a mantle of leadership is in quantum computing, or QC, which has the potential to revolutionize security and problem-solving methodologies throughout the banking and financial services industry. But that upside also comes with a real downside risk, should other not-so-friendly actors co-opt QC for their own purposes.

Right now, individual institutions and other central banks globally are expanding their own research in QC. But just as these institutions look to the Fed for economic leadership, so, too, are they looking to us for technological leadership. So, I am especially proud that this System-wide effort is being led from right here at the Philadelphia Fed.

I could go on and talk about fintech for much longer. After all, I’m actually an engineer more than I am an economist. But I know that Rick is interested in starting our conversation, and I am sure that many of you are ready to participate.

But one last thought on fintech — my answers today aren’t going to be generated by ChatGPT.

On that note, Rick, thanks for allowing me the time to set up our discussion, and let’s start with the Q&A.

[archived PDF of the above speech]