The dual objective of PEPP  5/7  BIS central bankers' speeches  To enhance the effectiveness of our asset purchases, the PEPP has to be operationalised in a way that it meets the described dual objective. The PEPP is not an interventionist programme where we stand on the sidelines when conditions are calm and enter the market only in times of market disturbances. It rather resembles a two-staged pyramid. At the basis, there is a constant flow of purchases that reaches out to all eligible market segments. In the sovereign space, these purchases are guided by the ECB’s capital key. This is the “stance” element of PEPP. It seeks to create financial conditions that are consistent with our inflation aim. The upper part of the pyramid is its flexibility. This element responds to the challenges posed by the pandemic to market functioning and the smooth transmission of our policy to all parts of the euro area. The first granular breakdown of our PEPP purchases, published last week, highlights this particular aspect of our reaction function. It stresses the three dimensions of flexibility in the PEPP. First, in the sovereign space, monthly purchases in all jurisdictions will exceed the “basis” flow if we observe a general tightening of financial conditions across countries, unusually high volatility or poor liquidity. In this case, we frontload purchases, following the ECB’s capital key. Second, we raise the share of purchases above the capital key in countries facing severe risks of fragmentation.
We are again at a similar junction. A wide array of economic indicators now suggest that growth in the U.S. has picked up and is widely expected to be around 3 percent during the second half of 2014 and in 2015. These forecasts seem quite reasonable to me and are consistent with views I have expressed in the past. Various “headwinds” have been impeding economic activity, but some of these forces have gradually subsided, allowing the substantially improved underlying fundamentals to exert themselves more forcefully. For example, fiscal restraint, which was a big factor last year, has subsided and is likely to disappear altogether next year. Credit availability has also improved, reflecting healthier bank balance sheets and improving job and income prospects for prospective borrowers. In addition, the excess supply of housing built up over the boom of the previous decade has been worked off, and both home prices and rents suggest that the supply of housing is not keeping pace with demand. This has allowed supportive financial market conditions, spurred, in part, by a very accommodative monetary policy, to shine through. As a result, aggregate household net worth has climbed relative to income and consumer balance sheets are healthier. On the business side, financial markets conditions suggest that risk aversion has subsided, leading to some firming in business investment spending. All of these developments help boost the confidence of consumers and businesses that this consensus forecast will in fact unfold.