Tag: Israel

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]

Movies and Chemistry: Keeping the Enchantment of Education

Several movies give you an “enchanting” back door or window into chemistry so that you can “beat” the tediousness of regular education and come into the field and its topics via these movies:

I.

The Man in the White Suit is a 1951 British comedy classic with Alec Guinness as a genius research chemist. He fiddles with his flasks and polymer and textile chemistry experiments until he invents a fabric that shows no wear and tear “forever.” This would seem like a great boon to humanity in its clothing needs but the chemist (“Sidney Stratton”) finds that both labor and management reject his discovery violently as it threatens jobs and profits. Textile or fabric polymer chemistry is at the heart of the plot.

Cry Terror! is a taut 1958 crime thriller movie with James Mason and Rod Steiger. The plot involves the terrorist threat of exploding a domestic airliner with a hidden RDX cache (a TNT successor) unless the demanded payment is made.

RDX was used by both sides in World War II. The U.S. produced about 15,000 long tons per month during WWII and Germany about 7,000 long tons per month. RDX had the major advantages of possessing greater explosive force than TNT, used in World War I and requiring no additional raw materials for its manufacture.

Semtex is a general-purpose plastic explosive containing RDX and PETN. It is used in commercial blasting, demolition, and in certain military applications.

A Semtex bomb was used in the Pan Am Flight 103 (known also as the Lockerbie) bombing in 1988. A belt laden with 700 g (1.5 lb) of RDX explosives tucked under the dress of the assassin was used in the assassination of former Indian prime minister Rajiv Gandhi in 1991.

The 1993 Bombay bombings used RDX placed into several vehicles as bombs. RDX was the main component used for the 2006 Mumbai train bombings and the Jaipur bombings in 2008. It also is believed to be the explosive used in the 2010 Moscow Metro bombings.

Traces of RDX were found on pieces of wreckage from 1999 Russian apartment bombings and 2004 Russian aircraft bombings. Further reports on the bombs used in the 1999 apartment bombings indicated that while RDX was not a part of the main charge, each bomb contained plastic explosive used as a booster charge.

Ahmed Ressam, the al-Qaeda Millennium Bomber, used a small quantity of RDX as one of the components in the bomb that he prepared to detonate in Los Angeles International Airport on New Year’s Eve 1999-2000; the bomb could have produced a blast forty times greater than that of a devastating car bomb.

In July 2012, the Kenyan government arrested two Iranian nationals and charged them with illegal possession of 15 kilograms (33 pounds) of RDX. According to the Kenyan Police, the Iranians planned to use the RDX for “attacks on Israeli, U.S., UK and Saudi Arabian targets.”

RDX was used in the assassination of Lebanese Prime Minister Rafic Hariri on February 14, 2005.

In the 2019 Pulwama attack in India, 250 kg of high-grade RDX was used by Jaish-e-Mohammed. The attack resulted in the deaths of 44 Central Reserve Police Force personnel as well as the attacker.

Semtex was developed and manufactured in Czechoslovakia, originally under the name B 1 and then under the “Semtex” designation since 1964, labeled as SEMTEX 1A, since 1967 as SEMTEX H, and since 1987 as SEMTEX 10. Originally developed for Czechoslovak military use and export, Semtex eventually became popular with paramilitary groups and rebels or terrorists because prior to 2000 it was extremely difficult to detect, as in the case of Pan Am Flight 103.

The Russian apartment bombings were a series of explosions that hit four apartment blocks in the Russian cities of Buynaksk, Moscow and Volgodonsk in September 1999, killing more than 300, injuring more than 1,000, and spreading fear across the country. The bombings, together with the Invasion of Dagestan, triggered the Second Chechen War. The handling of the crisis by Vladimir Putin, who was prime minister at the time, boosted his popularity greatly and helped him attain the presidency within a few months.

The blasts hit Buynaksk on 4 September and in Moscow on 9 and 13 September. On 13 September, Russian Duma speaker Gennadiy Seleznyov made an announcement in the Duma about receiving a report that another bombing had just happened in the city of Volgodonsk. A bombing did indeed happen in Volgodonsk, but only three days later, on 16 September. Chechen militants were blamed for the bombings, but denied responsibility, along with Chechen president Aslan Maskhadov.

A suspicious device resembling those used in the bombings was found and defused in an apartment block in the Russian city of Ryazan on 22 September. On 23 September, Vladimir Putin praised the vigilance of the inhabitants of Ryazan and ordered the air bombing of Grozny, which marked the beginning of the Second Chechen War. Three FSB agents who had planted the devices at Ryazan were arrested by the local police, with the devices containing a sugar-like substance resembling RDX.

II.

The movie Khartoum (1966) has General Charles Gordon traveling to Sudan in 1884 to quell the “mad mullah” the Mahdi. (Osama bin Laden of his day).
At the train station where General Gordon starts his trip, there’s a railway ad sign that promotes the use of “Wright’s Coal Tar Soap.”

This gives us a sign of the rise of the modern chemical industry.

III.

Think of “Sherlock Holmes” in terms of all the movies and TV series or the original stories and books:

Holmes has to explain to Watson how he survived the assassination attempt on him by Moriarty, “the Napoleon of Crime” who threw him off the Reichenbach Falls. Holmes explains that he faked Moriarty out and clung to a bush or something and was (obviously) not killed.

Holmes tells Watson what he does when he returns to civilization and travels and studies for some three years:

“I then passed through Persia, looking in at Mecca, and paid a short but interesting visit to the Khalifa at Khartoum, the results of which I communicated to the Foreign Office. Returning to France, I spent some months in a research into the coal-tar derivatives, which I conducted in a laboratory at Montpellier, in the south of France.”

The context implies the year 1894.

There is clear evidence that Mr. Holmes was deeply involved in the research of coal-tar derivatives as early as 1889 when the events of the Copper Beeches matter were transpiring.

We are told that on an evening in 1889, Mr. Holmes was seated in 221B Baker Street at the deal table loaded with retorts and test tubes. He was settling down to one of those all-night chemical researches in which he frequently indulged.

The research work was interrupted by a message of distress from Violet Hunter. Watson found that there was a train the next morning, and Holmes tells Watson:

“That will do very nicely. Then perhaps I had better postpone my analysis of the acetones as we may need to be at our best in the morning.”

It is clear that Holmes was engaged in coal-tar research long before his visit to Montpellier in the south of France.

The quotation from the Copper Beeches story refers to acetones, not to coal-tar derivatives.

“In the fractional distillation of coal-tar, the distillate separates into five distinct groups or layers, depending upon the stage of the process and the amount of heat applied. Category-one of the five includes benzene, toluene, xylenes and cumenes.

Acetones [dimethelketone-CH3COCH3] may be derived from the oxidation of cumene. And cumene [isopropylbenzene-C6H5C(CH3)2] is derived by distillation from the coal-tar naphtha fractions.”

Cumenes are derived from coal-tar, and acetones are derived from cumenes. Thus, a study of the acetones is, necessarily, research into coal-tar derivatives.

The rise of chemical engineering and organic chemistry are at the heart of the Sherlock Holmes stories.

Thus we can “climb” into chemistry via these books and movies and keep a feeling of enchantment as a kind of educational “shoehorn.”

India and the Russia-Ukraine War: The Paradox of Military Dependence, Traditional Loyalty and Strategic Autonomy

[from India in Transition, published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania, by Arndt Michael]

India, long-established as the world’s most populous democracy, has been quite instrumental over the years in assisting various countries dealing with democratic struggles. This support has included a blend of bilateral and multilateral initiatives, and especially economic development projects. Yet, India’s recent attitude toward the Russian attack on Ukraine and its concomitant behavior in the United Nations Security Council (as a non-permanent member) seems to contradict its support of democracy. By abstaining, rather than explicitly voting in favor of UN resolutions condemning Russian aggression at the beginning of the war, India angered several UN member-countries.

In order to substantiate its abstention from voting, India felt compelled to issue a so-called “Explanation of Vote” (EoV). In it, India asked for a “return to the path of diplomacy” and an immediate cessation of “violence and hostilities.” Crucially, India stated in the EoV that “the contemporary global order has been built on the UN Charter, international law, and respect for the sovereignty and territorial integrity of states…all member states need to honor these principles in finding a constructive way forward. Dialogue is the only answer to settling differences and disputes, however daunting that may appear at this moment.” 

While these statements and the call for dialogue are in accordance with India’s professed stance toward the relevance and objectives enshrined in the UN Charter, the discrepancy between rhetoric and practice is still conspicuous. At first glance, a “good” relationship with Russia seems to be more significant than the expectations of the world-community as represented in the United Nations. And, more importantly, by abstaining, India seemingly violated one of its central foreign and strategic policies: to always strive for strategic autonomy.

However, from a strategic perspective, India is precisely replicating what it did when the Soviet Union invaded Afghanistan. For India, its own national security is at stake, as well as its current and future geostrategic influence in Asia and the world. The military dependence that currently exists between India and Russia is nothing short of gigantic and has created a dangerous conundrum. Since the “Indo–Soviet Treaty of Peace, Friendship and Cooperation” was signed in 1971, defense agreements and long-term supply contracts have been in place. And while India and Russia have shared a strategic relationship since October 2000, this was upgraded in December 2020 to a “Special and Privileged Strategic Partnership.” 

Although there was a marked reduction of Russian imports in past years, official data from the Stockholm International Peace Research Institute (SIPRI) reveal that between 1996-2015, the Russian proportion of Indian military imports was almost 70 percent, and between 2016-20 it still hovered around 49 percent. In fact, 70 percent of all Indian military equipment currently in use has been directly produced in Russia, was manufactured with the majority of parts coming from Russia, or licensed by Russia. In 2020, this included the majority of Indian tanks, the only aircraft carrier (the INS Vikramaditya, a heavily modified Kiev-class aircraft carrier) with all of its combat aircraft MiG-29s, six frigates, four destroyers and the only nuclear-powered submarine. Additionally, eight out of fourteen Indian Navy submarines belong to the Russian Kilo-class. The Indian Air Force flies Sukhoi Su-30MKIs and Mil Mi-17s, which, respectively, constitute the largest share of the combat aircraft and utility helicopters, in addition to Russian tanker planes. India also just recently purchased the S-400 missile system.

Even though India has begun to reorient itself militarily toward other countries—the U.S., Israel, France and Italy—and has substituted foreign imports by slowly developing its own capabilities, a large number of new Indo-Russian projects are in the conceptual or implementation stages. In December 2021, in the frame of the so-called “2+2 Dialogue” (foreign and defense ministers), India and Russia began a new phase in their military–technological cooperation. Incidentally, India has used this very format for furthering cooperation in strategic, security and intelligence issues with four of its key strategic partners: Australia, the U.S., Japan and the newly added Russia. Russia and India agreed upon a further deepening of mutual military relations for ten years (until 2031). What is new is that next to the traditional purchase of Russian weapons systems, many common research projects and the development of new weapons systems—with their production taking place equally in both countries—have been agreed upon. This production includes new frigates, helicopters, submarines, cruise missiles and even Kalashnikovs. 

The depth of this mutual engagement, and especially India’s dependence, highlights a huge dilemma that might not only have drastic strategic consequences, but also long-lasting regional repercussions. The worldwide sanctions issued against Russia aim at the Russian economy and military. When it comes to the procurement of such crucial components as microchips or airline parts, Russia is soon expected to face shortages, essentially crippling its capacity to repair, construct, or have spare parts available (let alone construct new equipment). Unless other countries, such as China, circumvent international sanctions and step-in, the expected Russian inability to take care of its own military will have a spill-over effect. Russia is unlikely to be able to fulfill its contractual obligations toward India, and the lack of spare parts also has the potential to cripple India’s own military with regards to the Russian weapons equipment. The procurement agreements and common projects are, hence, all in jeopardy and India, now more than ever, depends on Russian goodwill. 

Next to military dependence, there are other concomitant effects in the economic and political sphere that influence Indian voting behavior. The worldwide sanctions have already led to dramatic increases in oil and gas prices, with India relying on imports of up to 80 percent. India will, therefore, have to pay much more for such crucial imports. Military imports from other countries aimed at substituting Russian equipment will also be much more expensive. All of this deals the Indian economy another blow—an economy that has been especially hit hard by the COVID-19 pandemic. And politically, Indian hegemony in South Asia has been markedly under pressure, in no small part because of the China–Pakistan axis. In the eyes of India, this axis poses a serious threat to an already highly volatile Indo–Pakistan relationship. In addition, the Indo–China relationship reached a new low in May 2020 when Chinese infrastructure projects along the Himalayan borderlands led to fighting and the killing of soldiers. In addition, the Chinese claims to the South China Sea are categorically disputed by India. Chinese overtures toward Sri Lanka, the Maldives, and especially Pakistan in the frame of the Road Initiative are also regarded with growing discontent, as India claims that China is following a policy of encircling India.

In its 75th year of independence, India is following a classic realpolitik in trying not to alienate Russia while pledging rhetorical support for Ukraine. The contradictory consequence is that Russia has now offered more discounted oil, gas, and investments, while at the same time, the UK has suggested its military relationship with India could be upgraded—and has offered weapons made in the UK. For the Indian political establishment, India cannot forgo Russian support, militarily or as a producer of cheap oil and gas. Going forward, India’s military will need to protect its national security and project Indian influence and power well beyond its borders.

Arndt Michael is a Lecturer in the Department of Political Science, University of Freiburg (Germany), author of the multi-award-winning book India’s Foreign Policy and Regional Multilateralism (Palgrave Macmillan, 2013), and co-editor of Indien Verstehen (Understanding India, Springer, 2016). His articles have been published in Asian Security, Cambridge Review of International Affairs, Harvard Asia Quarterly, India Quarterly and India Review.