Biden announces three nominations to the Federal Reserve

Today, President Biden announced the nomination of Sarah Bloom Raskin to serve as Vice Chair for Supervision of the Board of Governors of the Federal Reserve System and the nomination of Lisa Cook and Philip Jefferson to serve on the Board of Governors of the Federal Reserve System.

Our economy has made enormous progress over the past year, with 6.4 million jobs created and unemployment falling to 3.9% –– four years faster than projected. At the same time, our economy is facing the challenge of price increases that are squeezing families’ budgets.

The Federal Reserve plays a vital role in our economy. The President is confident that the Federal Reserve will act to achieve their dual goals of maximum sustainable employment and price stability and make sure that price increases do not become entrenched over a long term with the independence that they need.

Along with Jerome Powell – who the President has nominated for a second term as Chair of the Board of Governors of the Federal Reserve System – and Dr. Lael Brainard – who was nominated to serve as Vice Chair of the Board of Governors of the Federal Reserve System – President Biden has now nominated a group of five people to serve on the Board of Governors who have the experience, judgment and talent necessary to lead the Federal Reserve at this important moment in our economic recovery.

The Senate has confirmed three of these nominees who have previously served on the Board of Governors – Powell, Brainard, and Raskin. Jefferson started his career as an economist for the Federal Reserve, and both he and Cook have consulted frequently with a number of Federal Reserve Regional Banks. They will bring long overdue diversity to the leadership of the Federal Reserve, including the first Black woman in history to serve on the Board and the fourth Black man to serve on the Board. If all five are confirmed, the Board will be majority women. When we have leaders in the Federal government that reflect the diversity of our country, it results in better outcomes for all Americans. That is especially true in our economy where too many groups historically have been left behind, or left out altogether.

Statement from President Biden

“We are at a moment of historic economic progress alongside unique economic challenges as we work to drive our recovery forward. This is a moment that calls for sound, independent leadership from the Board of Governors at the Federal Reserve. That is why I am proud to nominate Sarah Bloom Raskin, Lisa Cook, and Philip Jefferson, who will bring a breadth of knowledge, experience and expertise to the Board of Governors. Raskin is among the most qualified nominees ever for the position of Vice Chair for Supervision, while Jefferson and Cook are talented economists with decades of experience working on a broad range of economic issues. Together with Chair Powell and Dr. Brainard, who I renominated last month, this group will bring much needed expertise, judgement and leadership to the Federal Reserve while at the same time bringing a diversity of thought and perspective never seen before on the Board of Governors. They will continue the important work of steering us on a path to a strong, sustainable recovery, while making sure that price increases do not become entrenched over the long term. I have full confidence in the strong leadership of this group of nominees, and that they have the experience, judgement, and integrity to lead the Federal Reserve and to help build our economy back better for working families.”

Sarah Bloom Raskin for Vice Chair for Supervision
Sarah Bloom Raskin has served both as the Deputy Secretary of the U.S. Department of the Treasury and as a Governor of the Federal Reserve Board. At Treasury, she oversaw the Treasury Department and its various agencies and departments, pursuing innovative solutions to enhance American’s shared prosperity, the resilience of our country’s critical financial infrastructure, particularly as it related to climate risk and cybersecurity, and the defense of consumer safeguards in the financial marketplace. As a Governor of the Federal Reserve Board, she helped conduct the nation’s monetary policy and promote financial stability. She also served as the Commissioner of Financial Regulation for the State of Maryland, where she and her agency were responsible for regulating Maryland’s financial institutions, including all state-chartered depository institutions, banks, credit unions, mortgage lenders, mortgage servicers, and trust companies, among others. She currently is the Colin W. Brown Distinguished Professor of the Practice of Law at the Duke University School of Law as well as the board of trustees of Amherst College. She received her B.A. in economics from Amherst College (Phi Beta Kappa; magna cum laude), and her J.D. from Harvard Law School.

Lisa Cook for Governor
Lisa D. Cook is a Professor of Economics and International Relations at Michigan State University. She was the first Marshall Scholar from Spelman College and received a second B.A. in Philosophy, Politics, and Economics from Oxford University. She earned a Ph.D. in economics from the University of California, Berkeley with fields in macroeconomics and international economics. She was an adjunct professor at Harvard University’s Kennedy School of Government, Deputy Director for Africa Research at the Center for International Development at Harvard University, and a National Fellow at Stanford University. Among her current research interests are economic growth and development, innovation, financial institutions and markets, and economic history. Dr. Cook is a Research Associate at the National Bureau of Economic Research and is the author of a number of published articles, book chapters, and working papers. She is also on the Board of Editors of the Journal of Economic Literature. She also served at the White House Council of Economic Advisers under President Obama and also had visiting appointments at the National Bureau of Economic Research, the University of Michigan, and the Federal Reserve Banks of New York, Chicago, Minneapolis, and Philadelphia. She serves on the Advisory Boards of the Federal Reserve Bank of Chicago (Academic Advisory Council).

Philip Jefferson for Governor
Philip N. Jefferson is Vice President for Academic Affairs and Dean of Faculty and the Paul B. Freeland Professor of Economics at Davidson College. He serves on the Vassar College Board of Trustees, the Board of Advisors of the Opportunity and Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis and is a past president of the National Economic Association. He is a Faculty Affiliate of the Institute for Research on Poverty at the University of Wisconsin-Madison. His research has appeared in several journals and has been funded by grants from the National Science Foundation. Dr. Jefferson previously served as chair of the Economics department at Swarthmore College, where he was the Centennial Professor of Economics. He was an economist at the Board of Governors of the Federal Reserve System. He held visiting appointments at the Federal Reserve Bank of New York, the University of California at Berkeley, and the Board of Governors of the Federal Reserve System. He served as a director of the Eastern Economic Association and as a member of the governing council of the Inter-university Consortium for Political and Social Research at the University of Michigan. Philip served on the Swarthmore Borough Council, Delaware County, Pennsylvania. He holds a BA in economics from Vassar College and a PhD and a MA in economics from the University of Virginia.

Source: The White House

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CFTC commissioner Dawn Stump addresses regulating binary options trading platforms under old rules….

January 13, 2022

“I want to thank the Chamber of Digital Commerce for inviting me to speak today.  Before beginning, I want to provide the standard disclaimer that the views I express today are my own and not necessarily those of the Commission I am proud to serve upon.

Do any of you have a theme song?  I have several that describe various milestones in my life, and as I reflect on my time at the CFTC, I’m leaning towards I Can Do Hard Things by Jennifer Nettles.[1]  As the song goes, “Sometimes I don’t like it, but that don’t mean I don’t love it.”  I do love my job—not in spite of, but because of, the challenging matters that we tackle (often in the face of difficult circumstances well beyond our comfort zones).

That’s where I would like to start—getting out of our comfort zones and doing hard things.  This is front of mind for me in light of the incredible innovations we are seeing these days in terms of the structure, products, and services being offered in financial markets.  Many—but by no means all—of these innovations arise from developments in financial technology such as the growth of digital assets and decentralized finance (or DeFi).

As financial markets evolve and adapt to new demands, market regulators must not stifle beneficial innovations by clinging rigidly to regulatory approaches of the past that may no longer be fit for purpose.  But by the same token, infrastructure providers who offer the market access to new, innovative services must not dismiss the fact that they may be required to seek and comply with regulatory oversight in order to assure market integrity and customer protection.  It’s time to thoughtfully consider the hard things we all must do to get comfortable with current realities.

So there, I have acknowledged the obvious, but why is this so hard?  Achieving the benefits of innovation in the context of market regulation is tougher than it sounds because we are not starting with a clean slate.  Take, for example, the U.S. derivatives markets regulated by the Commodity Futures Trading Commission.  These markets have, for some time, been characterized by futures and swaps contracts with varying degrees of execution and clearing occurring on centralized venues through intermediaries responsible for brokering and guaranteeing such transactions predominantly for institutional clients.  Recently, though, the pace of technological development and increasing retail interest in these markets is driving new business models that rely less on the traditional centralization of institutional participation via intermediaries, and rather propose to fulfil these functions in a more decentralized way.

These new market innovations are increasingly presenting novel issues that require comprehensive thinking by those of us at the CFTC who regulate the derivatives markets.  I believe that our current approach of relying primarily on enforcement actions to impose penalties on those with novel products and markets for their failure to register with the agency is simply an insufficient response.  I agree that many of the entities in question should be registered with the CFTC for oversight purposes, as we are tasked by Congress to regulate the infrastructure that permits access to swaps and futures—and many of these entities are, in fact, performing that function.  However, we must acknowledge that the infrastructure we oversee is rapidly changing—and our current regulatory regime was not designed to fit the types of services that are evolving to meet the market’s demands.

So, what’s a regulator to do—continue to take enforcement actions against companies that develop products and business models that are outside-the-box, all the while knowing that our existing rules governing the registration and regulation of the traditional market infrastructure are ill-suited to the very thing that has driven their development (i.e. an expansion in the types of participants seeking access to these products and markets, and their preference for less intermediation)?  Certainly, that is the easiest answer: “It’s not our job to tell you how to meet our rules, just figure it out.”  Wait, what?  How do we expect these companies to conform to a system that does not recognize their value add, the demands of their customers, or even perhaps the future of these markets?  What is the goal—to shut down these services, or to encourage those who deliver these services to do so under proper oversight?

I certainly hope it’s the latter.  After all, it is innovation that provides solutions to meet new market demands.  Congress has established a principles-based regime with flexibility to permit adaptation to innovation in the derivatives markets.  And welcoming innovation in those markets historically has been at the heart of what we do at the CFTC.

I believe it is thus incumbent upon the CFTC to bridge the gap between its enforcement and oversight functions by setting more clearly defined regulatory expectations for new, innovative applications in the derivatives market infrastructure.  That is a much taller task as compared to simply enforcing rules on the books beyond their original context.  It’s a tough job—but it is our job—and I am confident in our ability to do hard things.  We cannot be mere bystanders to the fundamental market changes taking place before our eyes, nor should we abdicate the responsibility Congress has given us to “promote responsible innovation and fair competition.”[2]

Adaptation by market regulators, however, should not be viewed by participants as a means to escape regulation.  Quite the contrary, our adaptation to innovation is necessitated by the responsible oversight we owe the marketplace.  As these matters continue to land on the CFTC’s enforcement docket, it is urgent that we provide direction to those who seek to comply with the law.  And then, armed with more clearly defined expectations, the CFTC can better identify those truly bad actors who seek evasion of the rules—and who deserve the full force of robust enforcement action.

In an attempt to start a helpful conversation, I have below identified a non-exhaustive list of areas in which our current rulebook governing infrastructure may require adapting to account for various new innovations taking shape in response to current market demands:

Trading Platforms (Designated Contract Markets and Swap Execution Facilities):  In its recent enforcement action against Polymarket,[3] the CFTC found that an online trading platform offering event-based binary options failed to register as a designated contract market (DCM) or swap execution facility (SEF).  To operate its markets, Polymarket deploys smart contracts, which are hosted on a blockchain.  This was a matter of first impression for the CFTC with respect to a blockchain-based trading platform.  Yet, despite this fundamental difference from the traditional DCM/SEF infrastructure for which the CFTC’s rules were written, the CFTC has not given any public consideration to how such a platform seeking to register as a DCM or SEF would be expected to operate under its existing rules.  

The term “DeFi” is often used to describe some of the protocols relevant in this framework, and some argue DeFi can exist without regulatory oversight—a topic I will leave for another day.  But in a broader sense, I believe that DeFi is spurring innovative functionalities by market infrastructure providers that may improve efficiencies for those seeking the benefit of centralized liquidity (a feature of more traditional and regulated derivatives markets). The really hard thing that requires our attention is this: How do we achieve our regulatory objectives in a manner that still enables infrastructure providers, and their customers, to benefit from these innovations?

Clearinghouses (Derivatives Clearing Organizations):  Beyond trading, difficult questions persist relative to central clearing, which is a key tenet of addressing counterparty credit risks in derivatives markets.  Our clearing rules are designed around a structure where intermediaries stand between clients and clearinghouses as guarantors, and where clients (often institutional) use leverage to increase their exposure.  But we are lately seeing many new retail-focused derivatives clearing organizations (DCOs) that do not use an intermediary model.

To date, we have accommodated this model by imposing conditions such as requiring products to be fully collateralized.  But as we begin to see requests from DCOs to offer leveraged clearing to retail market participants, we would be well-served to clearly define regulatory expectations before enforcing the application of ill-suited rules.  And we must do so in a transparent way in order to fairly encourage competition.  We are well aware that there is a need for such engagement to maintain the safety and soundness of DCOs while at the same time encouraging retail access to the clearing infrastructure.  It’s a difficult task, but we can do hard things.

Brokers and Counterparties (Futures Commission Merchants):  In its recent enforcement action against Kraken,[4] the CFTC found that an online exchange enabling customers to engage in “retail commodity transactions” in digital assets such as Bitcoin operated as an unregistered futures commission merchant (FCM) with respect to those transactions.  This finding begs the question:  If Kraken had sought to register as an FCM, how would it have been expected to operate?  The CFTC has never comprehensively addressed how retail commodity transactions are to be regulated, and many of the CFTC’s rules for traditional FCMs do not fit Kraken’s role as an exchange.[5]  As a result, we are now obligated, in my view, to explain the regulatory parameters such transactions and such non-traditional FCMs are expected to meet—yet, another hard thing the CFTC must tackle.

In conclusion, the key takeaway is that we are at a crossroads that requires everyone to roll up their sleeves and do hard things.  Derivatives infrastructure providers must recognize that while their business models may be novel, they do not operate outside of the regulatory oversight required by U.S. law under the Commodity Exchange Act.  And for its part, the CFTC must urgently consider fine-tuning its rulebook (often a hard and tedious task), because responding to technological developments and ongoing market dynamics primarily through enforcement is neither good for the marketplace nor sustainable for the agency.  We all benefit from clearly defined regulatory expectations that promote compliance and strong enforcement focused on those who blatantly disregard such expectations to the detriment of your markets.” — Dawn Stump


[1] Jennifer Nettles, “I Can Do Hard Things,” I Can Do Hard Things EP (Big Machine Records, LLC 2019).

[2] Section 3(b) of the Commodity Exchange Act, 7 U.S.C. § 5(b) (emphasis added).

[3] In re Blockratize, Inc. d/b/a Polymarket, CFTC Docket No. 22-09 (January 3, 2022).

[4] In re Payward Ventures, Inc. (d/b/a Kraken), CFTC Docket No. 21-20 (September 28, 2021).

[5] See Concurring Statement of Commissioner Dawn D. Stump Regarding Enforcement Action Against Payward Ventures, Inc. (d/b/a Kraken) (September 28, 2021), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement092821b.  See also Concurring Statement by Commissioner Dawn D. Stump Regarding Tether and Bitfinex Settlement (October 15, 2021), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement101521.

Lael Brainard’s testimony before the U.S. Senate: Emphasis on inflation …

Chairman Brown, Ranking Member Toomey, and other members of the Committee, thank you for this opportunity to appear before you. I am greatly honored to be nominated by President Biden to serve as Vice Chair of the Board of Governors of the Federal Reserve System. If confirmed to this position, I look forward to continuing to work with members of this Committee.

We are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades. Over the past year, unemployment has fallen by 2.8 percentage points, and growth is estimated to be around 5 1/2 percent, according to a variety of private forecasts.

But inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task.

When the pandemic struck in 2020, I worked closely alongside Chair Powell and Secretary Mnuchin and many others, with the support of Congress, to calm financial market turmoil and save American jobs and businesses. When markets stabilized, I worked to responsibly wind down the emergency facilities we established. Today the economy is making welcome progress, but the pandemic continues to pose challenges. Our priority is to protect the gains we have made and support a full recovery.

Since 2014, as a member of the Federal Open Market Committee, I have supported monetary policy that is responsive to evolving economic conditions. Our approach helped sustain the longest recovery on record with low inflation and millions of jobs.

More broadly, I have worked to safeguard and grow our economy during the Administrations of five Presidents from both parties. I have worked on the U.S. policy response to every major financial crisis over three decades. I served at the Department of the Treasury as part of the team responsible for supporting America’s recovery from the Global Financial Crisis and responding to the euro-area financial crisis. I served at the White House as part of the team helping to safeguard the American economy from the Asian financial crisis as well as financial crises in Mexico, Brazil, and Russia. In some foreign countries, I saw up close how high inflation hurts workers and families, especially the most vulnerable.

I am committed to pursuing the Federal Reserve’s congressionally mandated goals of price stability and maximum employment and to maintaining the strength and resilience of our financial system. I am committed to the independent and nonpartisan status of the Federal Reserve.

If confirmed, I look forward to supporting Chair Powell in carrying out the responsibilities assigned to the Federal Reserve and in fostering transparent communication and accountability to you and the American people. I will bring a considered and independent voice to our deliberations, drawing on insights from working people, businesses, financial institutions, and communities—large and small—across the country. I will support policies that are in the interests of the American people and based on the law and careful analysis of the evidence.

Before closing, I want to thank my husband and daughters for their steadfast support of my work. And I would like to commend the outstanding efforts of the individuals across the Federal Reserve System who work so hard every day to serve the American public.

Senators, I thank you for this opportunity to appear before you and for considering my nomination. I would be pleased to respond to any questions.

Source: Board of Governors of the Federal Reserve

Biden’s tepid response to inflation numbers should tell traders he has no answer on rising prices …

Political analysis and commentary

This morning’s consumer price index number came in at an unsurprising 7% increase in all prices between December 2020 and December 2021. In a tepid written statement, President Biden expressed contentment with a fall in the energy, natural gas, and gasoline indices. While food prices did increase, their rate of increase was lower in December 2021 than in November 2021. Mr Biden touted his American Rescue Plan, signed in March 2021, as the mechanism containing price increases and a source of the strong economic growth being seen in the United States.

The lack of enthusiasm behind the statement may be due in part to the economy’s growth. Yes, growth in the United States is positive, coming in at 2.3% annualized in the 3rd quarter of 2021. But this rate is approximately one-third of the 2nd quarter 2021 growth rate of 6.7%. When we remove energy and food price increases from CPI, done because of the volatility in those prices, we still get an annualized increase in prices faced by consumers of 5.5%.

Compounding the mixed growth results is the rise in the dollar index. Since Mr Biden’s inauguration, the dollar has increased in strength, rising approximately 4.9% in value between 20 January 2021 and 12 January 2022. Typically this means that foreign nations find it more expensive to purchase dollar-denominated goods and services. Exporters may have to reduce prices which benefits domestic consumers. The increased demand for goods and services domestically, on the other hand, could lead to an increase in prices here at home.

When evaluating the political environment surrounding inflation, traders should be wary of the narrative coming out of the Executive branch as it pertains to policies. Controlling inflation is done by controlling money supply and that feat is the responsibility of the Federal Reserve. The American Rescue Plan is budget legislation. It is fiscal policy that lays out the spending priorities of the federal government. On the flip side, you could make the argument that government, by injecting $1.9 trillion into the economy, is increasing aggregate demand for goods and services. Inflation, however, is not a consumption demand problem. It is a money supply problem, and traders should bear in mind that any narrative surrounding inflation should come from that premise.

In short, traders should take Mr Biden’s assessment of his actions pertaining to inflation with a grain of salt.

Alton Drew

12.01.2022

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CPI: Biden, citing American Rescue Plan, sees headway in reducing inflation.

“Today’s report—which shows a meaningful reduction in headline inflation over last month, with gas prices and food prices falling—demonstrates that we are making progress in slowing the rate of price increases. At the same time, this report underscores that we still have more work to do, with price increases still too high and squeezing family budgets.

Inflation is a global challenge, appearing in virtually every developed nation as it emerges from the pandemic economic slump. America is fortunate that we have one of the fastest growing economies—thanks in part to the American Rescue Plan—which enables us to address price increases and maintain strong, sustainable economic growth. That is my goal and I am focused on reaching it every day.” — President Joseph R. Biden

Retail traders should keep their eyes on the euro-dollar-yuan battle …

Foreign exchange rates of interest …

EUR-USD= 1.1346

EUR-CNY=7.2276

GBP-USD=1.3602

GBP-CNY=8.6651

USD-JPY=115.355

JPY-CNY=0.0552

Source: OANDA

The Morning Takeaway …

The political banter by the United States regarding China is in part driven by the perceived economic necessity to penetrate deeper into the Chinese market thus the rest of Asia. Turning a population in excess of one billion into a consumption machine is American capitalism’s dream. The other part of America’s obsession has to do with what I see as a socio-political incongruity; how dare the Chinese with their communist government and state-capitalist model dare to outdo the United States’ “big tent, we are all in this together, free market, free enterprise” model?

I think stuck in the middle of the battle is the Euro Zone, capital rich, relatively speaking, but energy resource poor. Europe takes a more practical approach to conflicts emanating out of Eurasia unlike the United States which prefers stand outside and throw rocks at the window of a perceived damsel in distress. When the rock throwing fails it then leverages its military prowess and knocks down a few doors. Given its past twenty year record in the Middle East and Central Asia, it should consider changing strategy.

The data …

JPY-CNY

On 13 December 2021, the JPY-CNY=0.0560. The exchange rate on 12 January 2022 at time of writing was 0.0552. The yuan over this 30-day period strengthened slightly against the yen. Compare this to USD-JPY where on 13 December 2021, the rate was at 113.551 versus the 115.335 rate as of 12 January 2022. The yen is weakening against the dollar.

GBP-CNY

On 13 December 2021, GBP-CNY was at 8.4252. By 12 January 2022, the exchange rate increased to 8.6651, indicating weakening of the yuan against the pound. Compare this to the GBP-USD exchange rate on 13 December 2021 which equaled 1.3238. On 12 January 2022, the rate increased to 1.3602, again reflecting a weakening of the dollar against the pound.

EUR-CNY

Lastly, the EUR-CNY=7.1829 on 13 December 2021. By 12 January 2022, the rate increased to 7.2276. The yuan appears to weaken over the 30-day period. Compare this to the EUR-USD on 13 December 2021 of 1.1288. The exchange rate increased to 1.1346, indicating a weakening in the dollar against the euro.

Retail traders should continue paying attention to the political environment that the above economies are being managed in.

Alton Drew

12.01.2022

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No surprises out of Powell’s nomination hearing …

The real economy isn’t supposed to support everyone. It is supposed to employ an optimal number of employees that produce the most income at the least cost for the individuals investing the capital. This is my response to the expected drivel coming out of U.S. Senator Sherrod Brown, Democrat of Ohio, during today’s hearing on the re-nomination of Jerome Powell as chairman of the Board of Governors of the Federal Reserve. Senator Brown in his opening statement expressed his concern that Wall Street banks were enjoying over a decade of high profits while individuals on Main Street were facing the threat of unemployment and rising inflation.

Senator Elizabeth Warren’s line of questioning followed a similar vein to Mr Brown, although the Massachusetts Democrat seemed to go all in on “corporations” versus her usual culprits, the banks. Mr Powell probably determined it was best not to interrupt Mrs Warren by pointing out that the Board of Governors has oversight of banks and not your run-of-the mill corporations. Silence is best. Let her ramble on. Besides, Mrs Warren was likely on a stage of satisfaction having her favorite Fed governor (Lael Brainard) as nominee for the Board’s vice-chair, thus having an embedded check on a “dangerous man” (Warren’s words) in the form of Mr Powell.

If any topic out of the Senate was going to peak trader interest, it would be the topic of inflation. Politically, about a third of the Senate would love to have the ability this election year to say that they did something about inflation, but the Senate along with the House of Representatives, punted away their constitutional power over coin and commerce over a century ago. Although Senator Richard Shelby, Republican of Alabama, and Senator Jack Reed, Democrat of Rhode Island, raised the issue of inflation and the Federal Reserve’s policy timing to address it, none of the senators offered policy recommendations or hinted at legislation designed to mandate requirements for addressing inflation. A number of senators acknowledged the Federal Reserve’s dual statutory mandate of bringing about price stability and generating full employment, but that was the extent of serious discussion on inflation.

In just under 14 hours from this writing, the US Bureau of Labor Statistics will issue its year-over-year estimate on overall inflation. Consensus forecast is at seven percent, relatively in line with last month’s annualized rate of 6.8%. While I don’t do market analysis here, I expect that after the inflation print, the morning will be filled with banter on whether the Federal Reserve will have three rate increases or even four.

Otherwise, Mr Powell will be advanced from the Senate banking committee to the full floor of the Senate where he will likely see his nomination approved. He will likely look more hawkish. He may not have a choice if tomorrow’s number ends up being what we expect.

And as for the usual drivel on the economy and the working man, the inflation number will provide the usual fodder for campaign messaging.

Alton Drew

11.01.2022

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At first blush, what I expect to hear from the Senate banking committee regarding re-appointment of Jerome Powell

Given that President Joe Biden has decided that Jerome Powell is his choice for chairman of the Board of Governors of the Federal Reserve, I expect Mr Powell will garner a sufficient number of votes after today’s re-appointment hearing from Senate Democrats and Senate Republicans for approval for another four-year term. Senator Elizabeth Warren, Democrat of Massachusetts, will likely again make her feelings clear about how dangerous she believes Mr Powell’s bank supervision policies are for the American public. The assertions will make for some C-SPAN TV time drama but that will be about it.

I expect, based in part on his prepared remarks, that Mr Powell will describe a growing economy that has managed to create a strong job market. He is prepared to address the consequences of that growth among which are, in his words, supply and demand imbalances and bottlenecks accompanied by elevated inflation.

Inflation, I suspect, will be today’s hot topic. One-third of the U.S. Senate and all members of the U.S. House of Representatives are up for re-election this November. They want to go home to constituents this campaign season with positive news on when inflation is expected to dissipate. Wage inflation may be noted by Mr Powell where the U.S. Bureau of Labor Statistics reported in its last jobs situation report that non-farm payroll hourly earnings are at $31.31, up $.19 from the November jobs report. With unemployment at 3.9% and the addition of 199,000 non-farm payroll jobs, there is an argument that can be made that the economy is facing a full-employment scenario, thus fueling the probability of increased wage inflation.

For the twelve months ending November 2021, the U.S. experienced 6.8% inflation in all goods and services. Mr Powell had the good political sense to dump the word “transitory” as Americans expect no relief on inflation over the next one to three years as the Federal Reserve Bank of New York reported yesterday.

I would advise retail foreign exchange traders to keep their ears open for hints further refining the timing of the beginning of rate hikes as well as firmer indication as to how many are to be expected. Democratic senators will try to score political brownie points by spinning a narrative about what they can do regarding inflation, including touting support for Mr Biden’s “Build Back Better” bill which, they will argue, expands American transportation and productive capacity, thus alleviating inflationary pressures. Expect Republicans to push back on the Democratic narrative, arguing that Fed tapering of Treasury securities and agency mortgage-backed securities should have started sooner and move at a faster pace.

In reality, the most that the Senate can do for inflation and indirectly to impact the US currency is to move quickly on Mr Powell’s re-appointment, a done deal in my book.

Alton Drew

11.1.2022

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Federal Reserve Bank of New York sees no changes in short-term, long-term inflation …

Short- and Medium-Term Inflation Expectations Unchanged; Job and Income Expectations Strengthen Further

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the December 2021 Survey of Consumer Expectations, which shows that both short- and medium-term inflation expectations were unchanged. Uncertainty and disagreement about future inflation decreased at both the short- and medium-term horizons. Home price expectations rose in December but remained below their May 2021 peak. Households reported increased optimism about their labor market prospects, with earnings growth, job loss, and job finding expectations all improving. Households’ income growth expectations also improved, rising to a new series high.

The main findings from the December 2021 Survey are:

Inflation

  • Median one-year and three-year-ahead inflation expectations both remained unchanged in December at 6.0% and 4.0%, respectively. The Survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at both the one- and three-year horizons.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short- and medium-term horizons, retreating from their series highs recorded in November.
  • Median home price expectations increased to 5.5% from 5.0% in November. The increase was driven by those below age 60 and those who live in the “South” and “West” Census regions.
  • Expectations about year-ahead price changes fell by 3.5 percentage points for the price of gas (to 5.7%), 1.4 percentage points for food prices (to 7.8%), and 1.0 percentage point for the cost of a college education (to 8.1%). The median expected change in the price of medical care and rent remained unchanged at 9.6% and 10.0%, respectively.

Labor Market

  • Median one-year-ahead expected earnings growth increased by 0.2 percentage point in December to 3.0%. The increase was most pronounced for respondents with an annual household income below $50,000.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased by 0.9 percentage point to 35.2%.
  • The mean perceived probability of losing one’s job in the next 12 months decreased by 1.3 percentage points to 11.6%. Similarly, the mean probability of leaving one’s job voluntarily in the next 12 months decreased by 0.3 percentage point to 19.9%.
  • The mean perceived probability of finding a job (if one’s current job was lost) increased to 57.5% from 55.9% in November, its highest level since its pre-COVID reading of 58.7% in February 2020. The increase was driven by respondents at least 40 years old and those without a college degree.

Household Finance

  • The median expected growth in household income increased by 0.2 percentage point to 3.4% in December, a new series high. The increase was most pronounced for respondents with no more than a high school diploma.
  • Median household spending growth expectations declined to 5.5% from a series high of 5.7% in November. The decrease was driven by respondents with household income under $50,000 a year and those with no more than a high school diploma.
  • Perceptions of credit access compared to a year ago slightly improved, with more respondents saying it is easier to obtain credit than one year ago on average. Expectations for future credit availability also improved, with more respondents expecting it will be easier to obtain credit in the year ahead compared to in November.
  • The average perceived probability of missing a minimum debt payment over the next three months increased by 0.3 percentage point to 10.3%. The increase was driven by those with some college education.
  • The median expectation regarding a year-ahead change in taxes (at current income level) decreased by 0.3 percentage point to 4.4%.
  • Median year-ahead expected growth in government debt decreased by 1.6 percentage points to 10.8%, its fifth consecutive monthly decrease.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now decreased by 0.5 percentage point to 28.2% in December.
  • Perceptions about households’ current financial situations compared to a year ago improved slightly. However, more households still reported a worse situation compared to a year ago than reporting an improved situation. Year-ahead expectations about households’ financial situations also improved, with fewer households expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased slightly by 0.2 percentage point to 38.9%.


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.

Contact
Mariah Measey
(347) 978 3071
Mariah.Measey@ny.frb.org

Part of reading the United States’ currency value is reading the underlying shift in its cultural values.

Commentary

The United States is at a crossroads in terms of its culture. A corporate democracy such as this one sees elected officials willing to deficit spend on programs designed to buy votes from an electorate increasingly under stress due to the uncertainty of an economy that may not be able to provide for their wants and needs. According to the Congressional Budget Office (CBO), America’s fiscal year 2021 budget deficit is approximately $3.003 trillion. While estimated revenues totaled $3.842 trillion, FY2021 outlays were estimated at $6.845 trillion. Fiscal year 2020 saw estimated revenues at $3.420 trillion with outlays estimated at $6.552 trillion. The FY2020 deficit was higher than FY2021, coming in at $3.142 trillion.

I would expect the Administration to argue that the last two years saw the federal government increasing its outlays to combat the Covid-19 pandemic, but if we go back 40 years, we find not only expected increases in outlays and revenues, but increases in outlays far outstrip increases in revenues. For example, FY1982 outlays were $.746 trillion compared to FY2021 outlays of $6.845 trillion, amounting to a 818% increase over the 40 year period. The increase in revenues over the same period amounted to 522%, where FY1982 revenues totaled $.618 trillion and FY2021 revenues came in at $3.842 trillion.

In addition, mandatory spending, which is dictated by past law that sets out mandatory requirements for spending on items such as social security, Medicare, and income security programs, increased 1,211% between FY1982 and FY2021. Meanwhile, discretionary spending, where a program is approved during the congressional appropriations process, saw a 407% increase in outlays between FY1982 and FY2021. The programs funded during this process include national defense, transportation, education, and housing.

Democracy is expensive. As politicians carve out “alphabet fiefdoms” ie, BLM, LGBQT+, Latinx, DEI (diversity, equity, inclusion programs) etc., the promises made convert into programs that have to be paid for. Low interest rates over the last decade and a half have accompanied the expansion in spending. Cheap money leads to more spending. For example, according to data from the Federal Reserve, the current prime lending rate is approximately 3.25%. This represents a 70.4% decline in the prime rate since 8 August 1983.

In addition, the rates on Treasury debt issued to fund government programs have been falling steadily since January 2000. According to data from the US Treasury, interest rates reflecting long term composite debt in excess of ten years has fallen from 6.87% in January 2000 to 1.89% in December 2021.

Democracy is expensive, but the current low interest rate environment gives American politicians the impression that democracy is affordable. With every new demand from small but vocal factions along the political spectrum, the wider the interest-rate driven deficit.

I have started to liken a currency to a coupon you get from a fast food restaurant. No matter how deep the discount, the crappier the food, the less valuable the coupon. The US Treasury-Federal Reserve Fast Food Corporation is no different. The current rate of inflation (6.8%) that destroys its spending value compounds the damage from lower rates of return and from increased government spending designed to buy votes while providing little other value to the currency holder.

Alton Drew

9.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.