Good day. Federal Reserve Vice Chairman Richard Clarida said the central bank needed to be more skeptical of models predicting higher inflation when setting interest-rate policy, given the weak response of inflation to lower levels of unemployment over the past decade. Meanwhile, Atlanta Fed leader Raphael Bostic said he is concerned about declining fiscal aid: “The end of those supports brings risks to the economy that we need to be mindful of.”

Now on to today’s news and analysis.

Federal Reserve Vice Chairman Richard Clarida said the central bank would resume discussions at its meeting in two weeks over how it could refine its guidance about plans to keep interest rates lower for longer. Mr. Clarida offered little specifics about what changes might be considered or when they might be unveiled, saying he didn’t want to prejudge the outcome of upcoming discussions. The Fed’s next policy meeting is Sept. 15-16.

The Reserve Bank of Australia is maintaining the policy position it first established in March to combat the sharp economic downturn brought on by the Covid-19 pandemic.

RBA Gov. Philip Lowe on Tuesday reaffirmed the central bank’s 0.25% target for the yield on three-year government bonds, adding that he still expects interest rates to remain ultralow for some time. The official cash rate was held at a record-low 0.25%.

China's central bank said Monday that it would make interbank repo rates by depository institutions a key reference for setting prices in the nation's financial market, in its latest move toward interest-rate reform. The PBOC also said it would encourage financial institutions to use the new reference rates in setting interest rates for certificates of deposits in the nation's interbank markets.

12 p.m.: European Central Bank’s Lane speaks on panel during Central Bank Research Association online meeting
1 p.m.: Fed’s Brainard speaks on monetary policy framework review during virtual meeting
9:30 p.m.: Bank of Japan’s Wakatabe speaks during webcast with business leaders

9 a.m.: Bank of England’s Bailey, Ramsden and Vlieghe speak at Treasury Committee hearing on economic impact of the coronavirus at Parliament
10 a.m.: New York Fed’s Williams speaks on Covid-19 during webinar
10 a.m.: Cleveland Fed’s Mester speaks on U.S. outlook and monetary policy during online seminar
10:30 a.m.: Bank of England’s Broadbent gives speech at Central Bank Research Association online meeting
11:30 a.m.: Bank of England’s Haldane chairs panel at Central Bank Research Association online meeting
2 p.m.: U.S. Federal Reserve releases beige book report on U.S. economic conditions
2 p.m.: Minneapolis Fed’s Kashkari speaks online about lack of Black financial regulators

The coronavirus pandemic’s brutal impact on the U.S. labor market, hitting lower income workers hardest, has distorted wage gain data, a new paper from the Federal Reserve Bank of San Francisco says. The paper, co-authored by bank president Mary Daly, says that "high wage growth captured in aggregate measures should not be seen as indicative of a recovering or a strong labor market." The authors conclude that "in the wake of the virus, evaluations of the labor market must rely on a dashboard of indicators, rather than any single measure, to paint a complete picture of the losses and the recovery." The paper builds on the Fed's move away from looking at a few measures to divine how tight or loose the job market is. That shift was amplified by last week's shift in the Fed’s overall monetary policy framework, which noted that it has become more difficult to tell how tight the job market is and when a falling unemployment rate might spark inflation.

                                                                                              —By Michael S. Derby

• A private gauge of China’s manufacturing activity rose to its highest level in nearly a decade last month. The Caixin China purchasing managers index, which is weighted toward small, private manufacturers, rose to 53.1 in August from 52.8 in July. (Dow Jones Newswires)
• South Korea’s government has proposed an 8.5% national budget increase for next year, signaling it would continue to step up stimulus to pull Asia’s fourth-largest economy from the pandemic-induced slowdown.
• Canada will extend financing for small and mid-sized firms. To date, over 700,000 such loans have been issued, for a total of C$29 billion in credit disbursed. (DJN)
• Factory activity in Texas expanded at a slower pace in August as the state grappled with high Covid-19 infection rates, according to the Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey, whose production index slipped to 13.1 from 16.1 in July, breaking three consecutive months of improvement. (DJN)

This newsletter is compiled by James Christie in San Francisco and Ed Ballard in London. 

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