Two years ago today, President Biden signed the historic and bipartisan CHIPS and Science Act into law investing nearly $53 billion in funding to bring semiconductor supply chains back to the U.S, create jobs, support American innovation, and protect our national security.
To date, the Commerce Department has announced over $30 billion in proposed CHIPS private sector investments spanning 23 projects in 15 states. These projects include 16 new semiconductor manufacturing facilities and are expected to create over 115,000 manufacturing and construction jobs across the country. Commerce is on track to allocate all remaining funds with CHIPS grantees by the end of 2024.
“As a result of the CHIPS and Science Act, we’ve made huge strides over the past two years in implementing the program and amassing private sector interest and enthusiasm,” said Commerce Secretary Gina Raimondo. “Under the leadership of President Biden and Vice President Harris, we’re creating good-paying jobs and bringing semiconductor manufacturing back to the United States.”
With these CHIPS investments, America will be home to all five of the world’s leading-edge logic and DRAM semiconductor manufacturers. No other economy in the world has more than two. As a result, the U.S. is expected to manufacture nearly 30 percent of the world’s leading-edge chips by 2032 – up from zero percent when President Biden and Vice President Harris took office.
CHIPS—or semiconductors—power our lives, including everything in America including smartphones, new cars, and medical devices. They are essential building blocks of the technologies that will shape our future, including artificial intelligence, biotechnology, and clean energy.
Through the President’s Investing in America Agenda, the Biden-Harris Administration is building an economy that brings innovation and opportunity to all hardworking American families.
See today’s White House fact sheet for more information on achievements over the past two years by the Commerce Department and other Federal agencies.
Also, see the CHIPS for America two-year progress report: https://lnkd.in/eJUdHsAG.
Visit CHIPS.gov to learn more about CHIPS for America.
 
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NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the July 2024 Survey of Consumer Expectations, which shows that inflation expectations were stable at the short- and longer-term horizons, but fell sharply at the medium-term horizon to a new series low. Labor market expectations were mixed, with respondents expecting lower earnings growth and a lower likelihood of finding a new job within three months if they were laid off. Delinquency expectations continued their upward trend in July and have risen to the highest level since April 2020.
The main findings from the July 2024 Survey are:
Inflation

Median one- and five-year-ahead inflation expectations were unchanged in July at 3.0% and 2.8%, respectively. Conversely, median three-year-ahead inflation expectations declined sharply by 0.6 percentage point to 2.3%, hitting a series low since the survey’s inception in June 2013. This decline was most pronounced for respondents with a high-school education or less and those with annual household income under $50,000. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at the one- and five-year-ahead horizons and was unchanged at the three-year-ahead horizon.
Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—was unchanged at all three horizons.
Median home price growth expectations was unchanged at 3.0% in July.
Year-ahead commodity price expectations declined by 0.8 percentage point for gas to 3.5% and 0.1 percentage point for food to 4.7%, but rose by 0.2 percentage point for the cost of medical care to 7.6%, 1.9 percentage points for the cost of college education to 7.2%, and 0.6 percentage point for rent to 7.1%.

Labor Market

Median one-year-ahead expected earnings growth declined by 0.3 percentage point to 2.7% in July. The series has been moving within a narrow range of 2.7-3.0% since January 2024.
Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased by 1.0 percentage point to 36.6%, remaining below its 12-month trailing average of 37.7%.
The mean perceived probability of losing one’s job in the next 12 months decreased by 0.5 percentage point to 14.3%. The mean probability of leaving one’s job voluntarily in the next 12 months increased by 0.2 percentage point to 20.7%, the measure’s highest reading since February 2023.
The mean perceived probability of finding a job (if one’s current job was lost) decreased by 0.9 percentage point to 52.5%.

Household Finance

The median expected growth in household income was unchanged at 3.0% in Jul. This series has been moving in a narrow band between 2.9% and 3.3% since January 2023.
Median household spending growth expectations fell by 0.2 percentage point to 4.9%, the measure’s lowest reading since April 2021.
Perceptions of credit access compared to a year ago deteriorated in July, with the share of households reporting it is harder to obtain credit than one year ago increasing. However, expectations for future credit availability improved in July, with the share of respondents expecting it will be harder to obtain credit in the year-ahead decreasing.
The average perceived probability of missing a minimum debt payment over the next three months increased by 1.0 percentage point to 13.3%, the measure’s highest reading since April 2020. The increase was most pronounced for those with an annual income below $50,000 and those with a high school degree or less education.
The median expectation regarding a year-ahead change in taxes (at current income level) declined by 0.3 percentage point to 4.0%.
Median year-ahead expected growth in government debt was unchanged at 9.3% in July.
The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months decreased by 0.2 percentage point to 25.1%.
Perceptions about households’ current financial situations compared to a year ago improved slightly in July, with the share of households reporting a better situation compared to a year ago rising. Conversely, year-ahead expectations about households’ financial situations deteriorated in July, with the share of households expecting a worse financial situation in one year from now rising.
The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 0.1 percentage point to 39.3%.

About the Survey of Consumer Expectations (SCE)

The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy.
The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows us to observe the changes in expectations and behavior of the same individuals over time. For further information on the SCE, please refer to an overview of the survey methodology here, the interactive chart guide, and the survey questionnaire.

For more information, please contact:

Connor Munsch, NEW YORK FEDERAL RESERVE

 
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On 1 August 2024, the European Artificial Intelligence Act (AI Act) enters into force. The Act aims to foster responsible artificial intelligence development and deployment in the EU.
Proposed by the Commission in April 2021 and agreed by the European Parliament and the Council in December 2023, the AI Act addresses potential risks to citizens’ health, safety, and fundamental rights. It provides developers and deployers with clear requirements and obligations regarding specific uses of AI while reducing administrative and financial burdens for businesses.
The AI Act introduces a uniform framework across all EU countries, based on a forward-looking definition of AI and a risk-based approach:

Minimal risk: most AI systems such as spam filters and AI-enabled video games face no obligation under the AI Act, but companies can voluntarily adopt additional codes of conduct.
Specific transparency risk: systems like chatbots must clearly inform users that they are interacting with a machine, while certain AI-generated content must be labelled as such.
High risk: high-risk AI systems such as AI-based medical software or AI systems used for recruitment must comply with strict requirements, including risk-mitigation systems, high-quality of data sets, clear user information, human oversight, etc.
Unacceptable risk: for example, AI systems that allow “social scoring” by governments or companies are considered a clear threat to people’s fundamental rights and are therefore banned.

The EU aspires to be the global leader in safe AI. By developing a strong regulatory framework based on human rights and fundamental values, the EU can develop an AI ecosystem that benefits everyone. This means better healthcare, safer and cleaner transport, and improved public services for citizens. It brings innovative products and services, particularly in energy, security, and healthcare, as well as higher productivity and more efficient manufacturing for businesses, while governments can benefit from cheaper and more sustainable services such as transport, energy and waste management.
Recently, the Commission has launched a consultation on a Code of Practice for providers of general-purpose Artificial Intelligence (GPAI) models. This Code, foreseen by the AI Act, will address critical areas such as transparency, copyright-related rules, and risk management. GPAI providers with operations in the EU, businesses, civil society representatives, rights holders and academic experts are invited to submit their views and findings, which will feed into the Commission’s upcoming draft of the Code of Practice on GPAI models.
The provisions on GPAI will enter into application in 12 months. The Commission expects to finalise the Code of Practice by April 2025. In addition, the feedback from the consultation will also inform the work of the AI Office, which will supervise the implementation and enforcement of the AI Act rules on GPAI.
 
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Blog post by Stefan Gebauer, Thomas McGregor and Julian Schumacher | Central banks choose their words very carefully. And rightly so – policy makers’ wording can move markets and, eventually, the economy. This ECB Blog post shows how unexpected changes in communication influence growth and inflation.
Central banks need to communicate clearly. This helps the public understand the rationale behind monetary policy decisions and shape market expectations. Their statements sometimes provide explicit forward guidance on the future direction of monetary policy. These statements also reveal how decision-makers assess the economy, which in turn influences public expectations of how the central banks may react in the future. Can central bankers’ choice of words – the communication tone – influence the economy? In this blog, we show that the tone of ECB monetary policy communication indeed affects macroeconomic outcomes in the euro area.
 
Measuring the tone of communication
Our analysis is based on a central bank communication measure described in an earlier post. A natural language processing algorithm quantifies the tone of the Governing Council’s policy communication, specifically the ECB’s monetary policy statements (MPS) and press conference transcripts, which include journalists’ questions and the President’s answers. These texts are broken down into individual messages on specific topics, to which we assign numerical scores measuring their tone.
The algorithm is based on a set of dictionaries. First, the individual messages communicated during the press conference are categorised by topic distinguishing between monetary policy, the economic outlook, and inflation. Next, these messages are quantified both in terms of the direction and strength of the sentiment of the communication. For instance, the phrase “most measures of underlying inflation declined further” scores -1 (dovish), whereas a wording like “underlying inflation has fallen rapidly” would produce a score of -1.5 (even more dovish), with the index ranging from -2 to +2.
The resulting sentiment scores co-move closely with “hard” measures of related macroeconomic and financial variables (Chart 1). Changes in the inflation tone tend to lead changes in the 1y1y ILS forward rates – a common indicator for inflation expectations. Similarly, changes in the economic tone tend to lead GDP growth, suggesting that the sentiment contained in the ECB’s official communication is more than just a reflection of realised data. In addition, the tone of communication on monetary policy co-moves closely with market-based monetary policy expectations, as expressed in the 1y OIS rate. The exceptions here are during periods when the central bank applies forward guidance, as was the case for the ECB between July 2013 and mid-2022.
Chart 1
Co-movement of sentiment scores on inflation, the economy and monetary policy with macroeconomic data
(left hand scale in all panels: index; right hand scale in left and right panels: percentage points, right hand scale in middle panel: quarter on quarter percent change)

Sources: Refinitiv, Eurostat, and ECB calculations.
Notes: The charts show the evolution of the inflation, economic and monetary policy tone from the press conference transcripts following monetary policy decisions by the Governing Council (left hand axis) against the 1-year inflation linked swap (ILS) rate 1-year from now, the quarter-on-quarter GDP growth rate and the 1-year overnight indexed swap (OIS) rate (right hand scales).
Latest observations are 3 May 2024 for the 1-year ILS, 30 March 2024 for HDP and 11 April 2024 for the inflation and economic tone indices.
However, we cannot simply relate changes in the sentiment scores to future economic outcomes: causality can run in both directions. Changes in policy sentiment are affected by the Governing Council’s monetary policy decisions which are influenced by the economic outlook in the first place.
The monetary policy sentiment index measures the tone of central bank communication on monetary policy, with an increase in the index signalling a more “hawkish” tone and a decrease in the index signalling a more “dovish” tone. That causality can run both ways is also true here: We know that central bank communication typically follows economic data. Therefore, changes in the monetary policy tone could simply reflect a shift in communication caused by changes in economic conditions. In such a case, the updated communication should not come as a surprise to the public and should have little effect on the economic decisions taken by households and firms.
 
Identifying unexpected changes to communication
But the tone of communication can also offer new insights into the direction of monetary policy itself. What happens when changes in communication on monetary policy come as a surprise to the public? To answer this question, we construct a measure of the extent to which central bank communication contains surprises, i.e. changes in the policy tone that are independent of both current and expected macroeconomic conditions.
We use two steps to isolate what we call “monetary policy communication shocks” from the monetary policy communication tone that the public expects. The first step is to measure the extent to which changes in the monetary policy tone are driven by changes in the Eurosystem’s inflation and growth projections that were available at a given Governing Council meeting. We also check if changes in the output and inflation sentiment indices discussed above matter. What’s left over are changes in the monetary policy communication tone that are plausibly independent of the revelation of the Governing Council’s information about the economic outlook and inflation. One could think of nuances in the Governing Council’s interpretation of data, or of situations in which the Governing Council draws different policy conclusions from the data than the average observer.
Even these residual changes in the monetary policy tone may, however, already be anticipated by the public. This can happen, for example, if Governing Council members express their opinions on monetary policy in public between policy meetings, or if the public already internalises how the ECB adapts its language to data releases. The second step is, therefore, to restrict the communication surprises to those in which the financial market reaction shows a pattern that is in line with a monetary policy shock, as outlined in the work of Jarociński and Karadi (2020). For instance, a hawkish shift in the policy tone would need to coincide with a drop in stock prices to be classified as a hawkish policy communication shock. A dovish shift in communication would need to occur alongside a rise in stock prices to count as a dovish policy communication shock. For the intraday financial market reaction to Governing Council meetings, we use the database of Altavilla et al. (2019).
 
How communication shocks affect the economy
Having identified these monetary policy communication shocks, we then estimate their dynamic effects on output and prices using the local projection method (Jordà, 2005). We control for macroeconomic and financial variables and estimate the model for both standard monetary policy shocks as typically identified in the literature and policy communication shocks. Standard monetary policy shocks reflect any surprise in the actual decision on interest rates, rather than unexpected changes in the surrounding communication. For instance, if the Governing Council were to raise rates by 25 bps and the public expected only 10 bps, that would spell a standard interest rate shock of 15bps. We estimate the model on a monthly frequency for the period from January 2002 to February 2020. For the latest data points, we allow the forward horizons to capture the evolution of the dependent variable up to January 2024.
The results indicate that surprises in central bank communication significantly affect prices and real activity. A surprise hawkish shift in monetary policy communication (positive shock) leads to a significant and sizable decrease in inflation and economic activity. Chart 2 shows how output and prices respond to surprise changes in monetary policy-related communication and interest rates. The shocks are scaled to make “large” changes in communication and interest rates comparable, and we show the impact of the respective shocks on output and prices at different horizons.
We confirm the standard result that interest rates shocks have large impacts on the economy. In addition, we find that communications shocks matter too. Their effect is smaller, but still significant. Also, the main impact on the economy is reached later for communication shocks. For instance, we see real economic activity, measured as industrial production, decline by 2.3% two years after a hawkish communication shock. That effect compares to a decline of approximately 3.5% for an interest rate shock which is already playing out one year later. On inflation, a hawkish communication shock is associated with a 0.1 percent decline after two years; that compares to an almost 0.9 percent decline for an interest rate shock.
One reason for the delayed effects of communication shocks could be that observers need more time to internalise changes in central bank communication on monetary policy and to factor them into economic decision making. Changes in interest rates are directly observable and differences from market expectations are clear. A related question is whether communication shocks lead to changes in policy rates in the future. It turns out that futures markets for interest rates have a relatively muted response to our communication shocks, meaning that these shocks do not necessarily give a clear signal as to the future direction of policy rates.
Chart 2
Response of key macroeconomic variables to policy rate and communication shocks
(percentage change of output and inflation in response to tightening policy rate and communication shocks over the period Jan 2002 to Jan 2020).

Sources: Eurostat and ECB staff calculations.
Notes: Charts show the responses of industrial production and the HICP to both tightening policy rate and communication shocks, estimated using local projections (LP). The controls include: one lag of the respective response variable, the euro area unemployment rate, the ECB’s Composite Indicator of Systemic Stress (CISS) in financial markets, the commodity price index (all in log-levels), as well as the level of the economic outlook, inflation and monetary policy topic tone indicators, the 3-month OIS rate, a 10-year GDP-weighted synthetic sovereign bond yield, and the USD/EUR exchange rate. In each model, we control for the interest rate and communication shocks, respectively, as well as the “central bank information shocks” derived by Jarociński and Karadi (2020). All controls, except the response variables, enter the model contemporaneously. Finally, we add forward dummies (that enter at the t+h horizon) for the pandemic and the war in Ukraine. The pandemic period is defined as lasting from March 2020 to December 2021 while the war period is from March 2022 onwards. The policy rate shock, as well as the responses, are standardised such that a tightening communication shock results in a 25 bps increase in the 3-month overnight indexed swap (OIS) at peak. The units of the response variables are percentage changes. The communication shock is scaled such that it matches the size of the maximum absolute communication shock observed since the start of the COVID-19 pandemic. The maximum surprise change in the topic tone indicator was observed for the March 2022 meeting, where the continuation/acceleration of the APP rundown announcement possibly triggered a large hawkish surprise in communication.
Regression sample: Jan 2002 to Feb 2020.
Latest observation for the dependent variable taken up in forward regressions is Jan 2024.
Our finding that communication shocks are affecting macroeconomic outcomes imply that central banks need to communicate clearly and carefully weigh their messages to minimise the risk of unintended surprises. Since our results confirm that central bank communication can be a potent policy tool, it should be used in a measured way to avoid ad-hoc surprises.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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Abstract
Rising trade tensions, a spate of trade-inhibiting policy measures and a weakening of multilateral institutions have sparked a growing concern about the potential implications of global trade fragmentation. Yet, empirical evidence that geopolitical considerations are already materially affecting trade flows is scant. In this study, we quantify the impact of geopolitical tensions on trade of manufacturing goods over the period 2012-2022 in a structural gravity framework. To capture the influence of geopolitical tensions, we use a measure of geopolitical distance based on the UN General Assembly voting. The econometric analysis offers robust evidence that geopolitical distance has become a trade friction and its impact has steadily increased over time. Our results suggest that a 10% increase in geopolitical distance, like the observed increase in the US-China distance since 2018, is associated with a reduction in trade by about 2%. Our findings also highlight a differential and stronger impact on advanced economies and the emergence of friend-shoring.
Read entire paper here.
 
 
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Campaigning across Europe ahead of this year’s European elections was a reminder of what makes our Union what it is. Almost 500 million people with such disparate cultures, complex histories and differing perspectives all coming together at the same time to articulate their wish for an entire Union of 27 countries. In casting their vote they also help to build a shared European identity – all of this bound together by our rich and varied cultural tapestry. This is Europe’s greatest strength. It makes Europe more than a construct or a project. Europe is our home: unique in design and united in diversity.
From the record number of first-time voters to those who have voted in every European election, people expressed hopes and aspirations for a healthier and more prosperous future. But they also pointed to the fact that we are in an era of anxiety and uncertainty. Europeans have real doubts and concerns about the instabilities and insecurities we face – from the cost of living, housing and doing business to the way issues such as migration are handled. From our security at home to the wars in Ukraine and the Middle East. They also worry that Europe is often not fast enough; that it can be either too distant or too burdensome.
All of these expectations and concerns are real, legitimate and must be responded to. For that reason, I believe it is essential that the democratic centre in Europe holds. But if that centre is to hold it must live up to the scale of the concerns and the challenges that people face in their lives. Failure to do so would fuel resentment and polarisation and leave a fertile ground for those who peddle simplistic solutions but in reality want to destabilise our societies.
This is the backdrop to what is an era of profound change – for our society and our security, our planet and our economy. The speed of change can be destabilising and, for some, can lead to a sense of loss for the world as it used to be and a worry for the world as it will be.
All of this – coupled with the fallout from elections and events in a more contested world – has created a turbulent and potentially seismic period for Europe. The risks are real, the responsibilities serious.
Europe now faces a clear choice.
A choice to either face up to the uncertain world around us alone. Or to unite our societies and unite around our values.
A choice to be dependent, to let the divisions weaken us. Or to be bold in our ambition and sovereign in our action, working with our partners around the world.
A choice to ignore new realities or the speed of change. Or to be clear-eyed about the world and threats around us as they really are.
A choice to let the extremists and appeasers prevail. Or to ensure our democratic forces stay strong.
My view is that our era’s greatest challenges – from security to climate change to competitiveness – can only be solved through joint action. Our threats are too great to tackle individually. Our opportunities too big to grasp alone.
Against this backdrop, I believe Europe must choose its best option: Union.
This is based on a deep conviction that it is only Europe that can live up to our generational challenges in this unstable world – whether supporting Ukraine for as long as it takes, protecting our planet, ensuring social fairness, defending democracy, supporting livelihoods, industries and farmers, or leading on the tech breakthroughs that will shape the world for the rest of this century.
In the last five years, Europe has shown what it can achieve when it does it together. When it is fast and uses its size and power – as we did when securing vaccines for every Member State at the same time. When it is bold and ambitious – as we were with on the twin green and digital transitions and our recovery plan, NextGenerationEU. When it is united – as we have been in support of Ukraine, freedom and democracy at the darkest and most difficult of times.
It is time for Europe to step up collectively once again.
This is a shared responsibility for all European voters, but also for all those flying the European flag, from Kyiv to Chisinau, Tbilisi and across the Western Balkans – as well as those calling for a European future in the streets of towns and cities across our Union and continent. We must prepare for that future – by supporting all candidates in their merits-based journey to our Union, and by preparing our Union for the future with essential reforms.
The Union that we choose cannot be boiled down to a binary question of more or less Europe. For these times, we need a Union that is faster and simpler, more focused and more united, more supportive of people and companies. We need a Union that acts where it has added value and where we all mobilise together with a clear goal and a collective mission – EU institutions, national and regional governments, private sector, social partners, citizens and civil society.
We have achieved a lot together in the last five years, from the European Green Deal to NextGenerationEU, the Pact on Migration and Asylum and the implementation of the European Pillar of Social Rights. We must and will stay the course on all of our goals, including those set out in the European Green Deal.
Our focus must now be on implementing what we have agreed, working closely with all stakeholders and focusing on our big challenges. This is why I want to define a set of focused and collective objectives for 2030 and beyond, with clear targets and outcomes in these priority areas.
Defence and security. Sustainable prosperity and competitiveness. Democracy and social fairness. Leading in the world and delivering in Europe.
The Political Guidelines are our plan for European strength and unity. The priorities set out here draw on my consultations and on the common ideas discussed with the democratic forces in the European Parliament, and also on the European Council’s Strategic Agenda for 2024-2029. They are not an exhaustive work programme but aim to steer our common work.
The next five years will define Europe’s place in the world for the next five decades. It will decide whether we shape our own future or let it be shaped by events or by others.
In a world of adversity and uncertainty, I believe Europe must choose to stick together and dare to think and act big. To live up to the legacy of our past, to deliver for the present, and to prepare a stronger Union for the future.
This is the driving force behind these guidelines and all that I want to work on with the European Parliament and the Member States in the next five years.
 
Read entire statement here.
 
 
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Blog post by Svetla Daskalova, Federico Maria Ferrara, Pedro Formoso da Silva, Pamina Karl and Thomas Vlassopoulos | Repo markets are vital for banks to source liquidity and securities. They also represent an essential link in the monetary policy transmission chain. While the Eurosystem is in the process of reducing its market footprint, repo markets are going through a phase of change. The ECB Blog looks at dynamics in this market.
Monetary policy and repo markets are closely connected. The removal of monetary policy accommodation and the ongoing reduction of the Eurosystem’s footprint in financial markets set in motion some forces with countervailing effects on euro area repo markets. In this blog post, we identify these opposite forces and how they have influenced the dynamics in this market segment. In doing so, we take stock of the recent past to reflect on the growing importance of repo markets as a channel for liquidity redistribution, and outline the challenges for repo markets that lie ahead in this respect.
But first, what is a repo? “Repo” is short for “repurchase agreement”, which is a transaction where one market participant sells a security to another one, with an agreement to repurchase it later. Therefore, repos can offer a secured way to borrow and deposit cash for banks and other financial intermediaries, or a means to obtain a specific security. Moreover, repo markets are of critical importance for the smooth functioning of the government bond market, as they provide the financing for bond investments and help market participants source specific securities. Disruptions in repo markets can propagate to secondary government bond markets, affecting market liquidity and banks’ funding conditions. Thus, dysfunction in repo markets can have an adverse effect on the broader financial system and impede the smooth transmission of monetary policy.
How has the reduction of the Eurosystem’s footprint in government bond markets supported repo market functioning?
As repo markets play such a crucial role, it is worth checking how they have coped with the reduction of the Eurosystem’s footprint in euro area government bond markets.
Since 2022, the Eurosystem has made significant headway towards reducing its presence in government bond markets. The early repayments of the Targeted Longer-Term Refinancing Operations (TLTROs) in Q4 2022, after the decision to change their pricing, set this process in motion. With the repayments of more than EUR 2 trillion of outstanding TLTROs, almost 60% of the collateral previously mobilised with the Eurosystem in exchange for these funds has returned to the market. Especially in Q4 2022, significant volumes of government bonds that were previously tied up as collateral have made their way back into repo markets (collateral worth almost EUR 300 bn by now). After this initial phase, the amount of government bonds released has, however, remained stable, and other marketable but also non-marketable securities were demobilised instead (Chart 1, LHS).
This initial step of TLTRO repayments was followed by the decision to start a gradual run-off of the asset purchase portfolio (APP) in March 2023 and to reduce the holdings of the pandemic emergency purchase portfolio (PEPP) as of July 2024. These decisions made a significant contribution to shrinking the Eurosystem’s footprint in euro area government bond markets, which was further supported by an increase in net issuance (Chart 1, RHS).
Chart 1
LHS: Eurosystem collateral released since the TLTRO III repayments in November 2022 (LHS axis: EUR trillion; RHS axis: %) RHS: Contributors to the reduction in Eurosystem footprint in euro area government bond markets, November 2022 – June 2024 (%)

Sources: Eurosystem, CSDB, ECB calculations.Notes: The purple line in the LHS chart reports the ratio of released collateral to total credit repaid. The RHS chart displays the share of factors contributing to the reduction of the Eurosystem’s footprint in euro area government bond markets. It considers the change of total nominal amount of euro area government bonds outstanding, Eurosystem’s outright holdings and mobilised collateral since November 2022. Outright holdings are euro area government bonds held by the Eurosystem via purchase programmes, adjusted with euro area government bonds lent back via the Securities Lending against cash programme. Mobilised collateral includes euro area government bonds mobilised as collateral for open market operations.Latest observation: 30 June 2024.
Before the extensive scaling back of the Eurosystem’s market presence, repo markets experienced some difficulties. In 2022, the proper functioning of repo markets was hindered by the scarcity of high-quality assets like highly-rated government bonds.[2] This threatened to delay the transmission of monetary policy in the early stages of the tightening cycle. The improved availability of collateral since then has helped to significantly alleviate such shortages of assets and played a positive role in ensuring a much quicker alignment of repo rates to changes in policy rates.
Dynamics in government deposits and link to repo markets
In addition to the reduction of the Eurosystem’s presence in euro area government bond markets, some other balance sheet dynamics have also had a bearing on repo markets. A case in point was non-monetary policy deposits – i.e., deposits placed with the Eurosystem by euro area governments and official-sector entities outside the euro area. The negative interest rate environment had prompted an increase in such deposits since 2014.[3] During the COVID-19 pandemic, many euro area debt management offices also built large cash buffers to mitigate cash flow volatility and funding risk in view of the heightened macroeconomic uncertainty and the large fiscal commitments made. Non-monetary policy deposits reached more than €1,000 billion during the pandemic (Chart 2).
As long as the movements in and out of these deposits were gradual and smooth, their size was less of a concern. However, at the beginning of the Eurosystem’s path to monetary policy normalisation, when the policy rate moved back into positive territory, the zero-percent ceiling on non-monetary policy deposits risked catalysing abrupt and sizeable outflows from the Eurosystem’s accounts into euro area repo markets. Such concerns affected the pass-through of the ECB’s policy rate hikes to repo markets in September 2022.
Chart 2
Non-monetary policy deposits: government deposits and deposits of official-sector entities outside the euro area (EUR billion)
Source: Eurosystem.Notes: Temporary suspension of 0% ceiling for remuneration was announced on 8 September 2022 (green vertical line). New ceiling remuneration was announced on 7 Feb 2023 (black vertical line). New ceiling remuneration was implemented on 1 May 2023 (red vertical line).Latest observation: 30 June 2024.
In the face of potential adverse effects on market functioning, the Eurosystem took action to ensure the smooth transmission of monetary policy. First, in September 2022, the Governing Council decided to temporarily remove the interest rate ceiling of zero percent for the remuneration of government deposits held with the Eurosystem, which incentivised governments to keep liquidity on the Eurosystem’s accounts for longer. Later, in February 2023, the Governing Council announced a new ceiling for the remuneration of euro area government deposits, set at the €STR minus 20 basis points. The remuneration of deposits held by foreign central banks was also adjusted accordingly. These changes came into effect on 1 May 2023.[4]
The aim of these adjustments was to encourage a gradual and orderly reduction of non-monetary policy deposits, thus minimising the risk of potential adverse effects on market functioning. As a result, non-monetary policy deposits have been on a declining trend since the end of summer 2022, and there were no significant disruptions in repo markets triggered by these outflows (Chart 2).
Modest effects from changes in the remuneration of minimum reserves
The speed and extent of the rise in policy rates has been the hallmark of the process of departing from the ECB’s previously very accommodative stance. However, this rate increase, coupled with an abundance of remunerated reserves, prompted the need for the Governing Council to assess whether it could achieve the same outcomes in terms of policy stance and transmission at a reduced cost for the Eurosystem. The outcome of this assessment was the decision announced in July 2023 to stop remunerating minimum reserves as of September 2023.[5]
When taking this decision, the Governing Council was cognisant that one of the possible reactions to the change could be that banks would reduce the reserve base for minimum reserve calculations through balance sheet optimisation strategies. Instead of accepting unsecured deposits, they could switch to secured deposits or FX swaps – instruments that are not included in the calculation of the reserve base. Such strategies could exert pressures on money markets including repo markets, especially on the days when minimum reserve requirements (MRR) are calculated.
Chart 3
Month-end volumes of overnight transactions (LHS, EUR bn) and rate change (RHS, basis points) in secured money markets
Source: MMSR, ECB calculations.Notes: Averages refer to month-ends (excluding quarter-ends) and quarter-ends (excluding year-ends) over the period January 2022 to June 2023, i.e., before the remuneration of minimum reserve requirements (MRR) was reduced from deposit facility rate (DFR) to 0%. Repo volumes and rates refer to 1-day transactions of MMSR reporting agents’ cash borrowing volumes against all euro area government bond collateral.Latest observation: 30 June 2024.
So far, the minimum reserve reporting dates since July 2023 did see slightly higher volumes in repo markets compared to averages seen since 2022 (Chart 3, LHS). However, there was no noticeable price impact, in the context of the overall easing of collateral scarcity. Thus, any additional flows into the repo market were well absorbed (Chart 3, RHS) and the repo market impact of the change in minimum reserve remuneration has been modest.
Are repo markets at the cusp of a transformation?
Overall, we have witnessed an easing of asset scarcity and improved repo market functioning in 2023 and 2024. Yet, given the still high excess liquidity in the euro area, the nature of the repo market remains fundamentally unchanged for the time being, as it continues to be dominated by the intention to source collateral. Looking ahead, the challenge will be whether repo markets can successfully transition to a new paradigm in which they are an efficient and effective vehicle for distributing liquidity in the euro area. This is particularly pertinent as the Eurosystem dials down its presence in funding markets and excess liquidity is being reabsorbed.
Chart 4
Outstanding volumes of liquidity-motivated repo transactions (EUR billion)
Sources: ECB, SFTD, BrokerTec, Eurex, MTS, ECB calculations.Notes: Chart displays liquidity-motivated (general collateral, GC) repo volumes based on BrokerTec/MTS one-day repo transactions and on Eurex GC pooling trades as reported in Securities Financing Transactions Data (SFTD). Calculations are based on a single-counting approach.Latest observation: 30 June 2024.
Although it is still early days, there are some tentative signs that such a transformation of repo markets may already be underway. This is shown, for instance, by the considerable rise in activity of liquidity-motivated transactions on major European trading platforms (Chart 4), which went hand-in-hand with the reduction of excess liquidity in the system.
 
Conclusion
As the Eurosystem dials down its footprint, markets need to rise up to the challenge of providing viable and effective alternatives. For banks, this means preparing to tap multiple and alternative sources of liquidity, including some that have not been used for a long time. As a result, going forward, repo markets will have to prove their ability to efficiently redistribute liquidity to all corners of the financial system.

We are grateful to Benjamin Hartung, Katja Hettler, Annette Kamps, Benoit Nguyen, and Rita Fernandes Vitorino Besugo for their contribution to this blog post.
Several factors contributed to the scarcity of high-quality collateral in repo markets. First, the increase and volatility in yields of government bonds, amid the sharp repricing of interest rate expectations. This lowered government bonds’ value and simultaneously increased demand for these high-quality assets in repo markets. Second, the substantial holdings of government bonds of the Eurosystem reduced the amount of high-quality assets available to market participants.
Until September 2022 the relevant legal framework foresaw a remuneration ceiling for non-monetary policy deposits of zero percent if the deposit facility rate (DFR) was zero percent or higher. In the presence of a negative DFR, however, their remuneration was linked either to DFR or to €STR and, therefore, was more attractive compared to the situation under positive rates.
Following a comprehensive review of the remuneration of the different types of non-monetary policy deposits, the Eurosystem confirmed on 16 April 2024 the remuneration ceiling for euro area government deposits and most other non-monetary policy deposits.
In October 2022 the Governing Council decided to reduce the remuneration of minimum reserves from the rate on the Main Refinancing Operations (MRO) to the Deposit Facility Rate (DFR), while leaving the actual minimum reserves’ ratio unchanged at 1%.

 
 
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Long periods of slow economic growth can cause a jump in inequality. But a balanced set of policies can stave off that outcome.
Blog post by Kristalina Georgieva, Managing Director of the IMF | The global economy is stuck in low gear, which could deal a major blow to the fight against poverty and inequality.
Group of Twenty finance ministers and central-bank governors gathering this week in Rio de Janeiro face a sobering outlook. As the IMF’s latest World Economic Outlook update shows, global growth is expected to reach 3.2 percent this year and 3.3 percent in 2025, well below the 3.8 percent average from the turn of the century until the pandemic. Meanwhile, our medium-term growth projections continue to languish at their lowest in decades.
To be sure, the global economy has shown encouraging resilience to a succession of shocks. The world didn’t slip into recession, as some predicted when central banks around the world raised interest rates to contain inflation.
Yet, as we move beyond the crisis years of the pandemic, we need to prevent the world from falling into a prolonged period of anemic growth that entrenches poverty and inequality.
The pandemic already set back the fight. Extreme poverty increased after decades of decline, while global hunger surged and the long-term decline in inequality across countries stalled.
New IMF analysis suggests periods of stagnation lasting four years or more tend to push up income inequality within countries by almost 20 percent—considerably higher than the increase due to outright recession.
During periods of stagnation, sluggish job creation and wage growth increase structural unemployment and reduce the share of a country’s income flowing to workers. Together with limited fiscal space, these forces tend to widen the gap between those at the top and bottom of the income ladder.

In other words, the longer we’re stuck in a world of low growth, the more unequal that world would become. That in itself would be a setback to the progress we’ve made in recent decades. And as we have seen, rising inequality can foster discontent with economic integration and technological advancements.
It is therefore timely that Brazil has made fighting inequality, poverty and hunger a priority of its G20 presidency. With the right policies, we can still escape a low-growth, rising-inequality trap, while working to reduce poverty and hunger. Let me highlight three priority policy areas.
Gearing Up Inclusive Growth
First, we need to address the underlying problem of slow growth. Most of the decline in growth in recent decades has been driven by a slump in productivity. A big reason for the slump is that labor and capital aren’t flowing to the most dynamic firms.
But a smart mix of reforms could jumpstart medium-term growth. Measures to promote competition and improve access to finance could get resources flowing more efficiently, boosting productivity. Meanwhile, bringing more people into the labor force, such as women, could counter the drag on growth from aging populations.
We must also not forget the role that open trade has played as an engine of growth and jobs. In the last 40 years, real income per capita has doubled globally, while more than a billion emerged from extreme poverty. Over that same period, trade as a share of gross domestic product increased by half. It’s true that not everyone benefited from trade, which is why we must do more to ensure the gains are shared fairly. But to close off our economies would be a mistake.
Making Fiscal Policies People-Focused
Second, we must do more to ensure that fiscal policies support the most vulnerable members of society.
The challenge is that many economies are facing severe fiscal pressures. In developing countries, debt-servicing costs are taking up a bigger share of tax revenue at a time when they are tackling a growing list of spending demands, from investments in infrastructure to the cost of adapting to climate change. A gradual and people-focused fiscal effort can alleviate fiscal risks while limiting any negative impact on growth and inequality, including by raising revenue, improving governance, and protecting social programs.
There is much scope for developing countries to raise more revenue through tax reforms—as much as 9 percent of GDP, according to our research. Yet it is crucial to take a progressive approach, which means making sure those who can afford to pay more taxes contribute their fair share. Taxing capital income and property, for example, offer a relatively progressive way to raise more tax revenue.

Regardless of the strategy, people need to have confidence that the taxes they pay will be used to deliver public services—not enrich those in power. Governance improvements, such as to increase transparency and reduce corruption, must also be part of the equation.
At the same time, social-spending programs can make a big difference to inequality, including through school meals, unemployment insurance, and pensions. These should be protected. Well-targeted cash-transfer programs—such as Brazil’s Bolsa Familia—can support the vulnerable.
Our research shows that strong redistributive policies in a growing G20 economy—such as social-spending programs and public investment in education—can reduce inequality between 1.5 and 5 times more than weaker policies.
Strengthening the Global Backstop
Finally, we need a strong global financial safety net for countries that need support. With that goal in mind, the IMF is working on a package of reforms to our lending framework.
To continue to serve the needs of our most vulnerable members, we are reviewing our concessional lending instrument for low-income countries, the Poverty Reduction and Growth Trust. With demand expected to exceed pre-pandemic levels, it is vital that our membership comes together to ensure the PRGT is adequately resourced and its long-term finances are put on a sustainable footing.
We are also taking a close look at our surcharge policy for the first time in nearly a decade. The review aims to ensure we can continue to provide financing at affordable rates to members who need our support.
Last year our members gave us a strong vote of confidence by agreeing to increase our permanent quota resources, allowing us to maintain our lending capacity. I am counting on G20 members to now ratify the increase.
One of the lessons of recent history has been that we must not ignore those left behind by economic and technological progress—be they individuals within a country, or entire nations struggling to close the gap. But with the right policies, and by working together, we can build a prosperous and equitable world for all.

 
Full post can be found here

Compliments of the IMF
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The Organisation for Economic Co-operation and Development (OECD) announced a pilot phase to monitor the application of the Hiroshima Process International Code of Conduct for Organisations Developing Advanced AI Systems. This initiative will test a reporting framework intended to gather information about how organisations developing advanced artificial intelligence (AI) systems align with the Actions of the Code of Conduct and is a significant milestone under the G7’s ongoing commitment to promoting safe, secure and trustworthy development, deployment and use of advanced AI systems.
The G7 Hiroshima AI Process, launched in May 2023, delivered a Comprehensive Policy Framework that included several elements: the OECD’s report Towards a G7 Common Understanding of Generative AI, International Guiding Principles for All AI Actors and for Organisations Developing Advanced AI Systems, the International Code of Conduct for Organisations Developing Advanced AI Systems, and project-based co-operation on AI. Under Italy’s current G7 Presidency, G7 members have focused on advancing these outcomes.
The pilot phase of the reporting framework, available until 6 September 2024, marks a critical first step towards establishing a robust monitoring mechanism for the Code of Conduct as called for by G7 Leaders. The draft reporting framework was designed with input from leading AI developers across G7 countries and supported by the G7 under the Italian Presidency. It includes a set of questions based on the Code of Conduct’s 11 Actions. A finalised reporting framework will facilitate transparency and comparability around measures to mitigate risks of advanced AI systems and contribute to identifying and disseminating good practices.
Organisations developing advanced AI systems are welcome to participate in the pilot. Responses provided during this period will be used to refine and improve the reporting framework, with the aim of launching a final version later this year. A common framework could improve the comparability of information available to the public and simplify reporting for organisations operating in multiple jurisdictions.
The OECD has been at the forefront of AI policy making since 2016. The OECD Recommendation on AI, adopted in 2019 as the first intergovernmental standard on AI and updated in 2024, serves as a global reference for AI policy. The OECD has a track record for global intergovernmental collaboration on an equal footing to tackle challenging public policy issues that transcend national borders.
Media queries should be directed to Reemt Seibel in the OECD Media Office (+33 1 45 24 97 00).

Working with over 100 countries, the OECD is a global policy forum that promotes policies to preserve individual liberty and improve the economic and social well-being of people around the world.

 
 
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Thank you very much, dear Roberta,
Good afternoon to everyone,
I guess you have heard my speech, and you might have read the Political Guidelines. So you can imagine that this is a very emotional and special moment for me now. I just want to make three very short remarks before moving on to your questions.
The first one is a more personal remark. I cannot begin without expressing how grateful I am for the trust and the confidence of the majority of the European Parliament. 401 votes in favour – you will recall that last time, it was 8 votes above the necessary majority. This time it is 41, so this is much better. This sends a strong message of confidence. I think it is also recognition for the hard work that we carried out together in the last five years in the last mandate. We have spared no effort. We have navigated the most troubled waters that our Union has ever faced. And we have kept the course on our long-term European goals. I also want to thank you, Roberta, the Group leaders of the democratic forces in the Parliament and all the MEPs for the excellent cooperation including during the last mandate but also for the very substantial exchanges we have had over the past two weeks – after the elections and over the past two weeks. I think this is a very good foundation for the next five years. And I think this was tangible in the debate today.
Second, I want to highlight that I was very happy to have the opportunity to carry out a real, pan-European electoral campaign. As you know, it brought me from Helsinki to Lisbon, from Bucharest to Rome and many different places. I engaged with people from all walks of life. And I enjoyed taking part in the series of TV debates that we had with the other candidates. I think this makes our European democracy much more vibrant.
And finally, let me walk you briefly through the next steps. I will now focus on building my team of Commissioners for the next five years. In the coming weeks, I will ask Leaders to put forward their candidates. I will – as I did last time – write a letter and ask for the proposal of a man and a woman as candidate. The only exception is, like last time, when there is an incumbent Commissioner who stays. And then, I will interview the candidates as of mid-August, and I want to pick the best-prepared candidates who share the European commitment. Once again, I will aim for an equal share of men and women at the College table. The new team will get ready to successfully pass the Parliament hearings. And then I will again seek the confirmation of this House.
Thank you very much.
For more information, please contact:

Eric Mamer, Chief Spokesperson
Arianna Podesta, Deputy Chief Spokesperson

 
 
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