The implied productivity performance of the UK economy has, in fact, remained poor – according to the official statistics, output simply doesn’t appear to be growing fast enough to support the employment growth recorded as well as generate the rapidly rising real incomes one would like to see. Something has to give. I hope that it will be that output grows faster – either through upwards revisions to recent growth rates or faster growth in future. If, on the other hand, the UK economy uses up all its spare capacity, without having had a substantial rise in real national income, then we should all be disappointed. The weakness in productivity growth has been well documented, but a convincing explanation remains elusive. There are many plausible explanations of factors which could have contributed to the weakness, but each explains only a small part of the whole puzzle. I don’t have time to get into that debate today, but we do offer a variety of candidate explanations in recent Inflation Reports. One better feature of the current situation is that price pressures seem to be subsiding, not growing. Despite good rates of employment growth, there is no sign of nominal wages overreacting to general tightness in the labour market. Other price pressures also appear to be easing somewhat.
Crucially, they are ex officio members of the Alternative Reference Rates Committee (ARRC), the private sector group convened to guide the transition away from LIBOR. And of course the Secured Overnight Financing Rate (SOFR), the ARRC’s selected replacement for U.S. dollar LIBOR, reflects transactions that finance U.S. Treasury securities. Before I go any further, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. Market Conditions I’ll start with recent developments in money markets. Conditions in funding markets became highly volatile early last week, with secured lending rates moving higher on Monday and rising sharply on Tuesday. We had expected a number of factors—including quarterly corporate tax payments and the settlement of Treasury auctions—to put upward pressure on funding rates. However, the size of the reaction in repo rates, the spillover to unsecured markets such as federal funds, and the emergence of strains in market functioning were outside of recent experience. For example, in April and June of this year, sizable payment flows led to relatively muted movements in secured lending rates and small movements in unsecured rates. As had been done ahead of prior dates with anticipated significant funding pressures, on Friday, September 13, the Markets team at the New York Fed, and others in the Federal Reserve System put in place a plan for increased monitoring of money markets.