Interbank Market News Scan: Federal Reserve monetary policy is political policy; Reserve Bank of India has way to go before rate increase …

Today’s Takeaway …

Monetary policy is used to sell a narrative that the domestic economy is generating jobs and income and that the electorate should continue to support it. The Federal Reserve’s pursuit of its statutory mandate to provide stable prices and full employment underlies the political narrative of a vibrant economy creating jobs and income. A democratic government has an interest in ensuring that food and energy prices modestly increase and that a labor market exists where anyone looking for employment can find a job.

The data today does not give the electorate too much confidence in the economy. Last Friday, data from the U.S. Bureau of Labor Statistics’ jobs situation report showed unemployment hovering around four percent. The labor market saw an additional 467,000 non-farm payroll hires in January. On the down side, the BLS’ consumer price index showed that between December 2020 and December 2021, consumer prices increased 7% while the employment cost index showed wages for civilian employees rose 4.5% over the same period. Wage increases are not keeping up with inflation.

Should the electorate expect help from the Federal Reserve? I don’t think so. As much as the Federal Reserve touts its political independence, the reality is that the institution makes monetary policy decisions in a demanding political climate that does not take into account the needs of most of the electorate. A near zero interest rate climate makes it easier for government to borrow funding for vote-buying projects such as stimulus payments to individuals and small businesses or providing subsidies for the purchase of solar panels or other renewable energy apparatus. On the other hand, conservative elements of government would like the Federal Reserve to pursue a sound money policy where the supply of money is reduced, rates increased, inflation tempered, and the value of the currency is enhanced.

No matter if monetary policy favors progressive spending projects or supports rate increasing measures, Federal Reserve actions in the end are intended to create a stable money supply system. The monetary system distributes the currency to the electorate in the form of loans and is successful when the electorate can borrow money, enter into transactions and spend currency on goods and services, and repay loans at interest, providing the banking system with income. Contrary to the calls for the heads of bankers, a healthy banking system that delivers access to credit will keep the electorate happy and contribute to the validity of the political economy.

Traders should read the room regarding the electorate’s attitude toward government spending and the decisions of the central bank. While “electoral sentiment” is not a leading economic indicator traders pay attention to, traders should be mindful of the interplay between elected official’s desire to placate constituents with spending and the Federal Reserve’s desire to accommodate political spending.

Alton Drew

Interbank, Reserve Bank of India. “Government of Maharashtra has declared February 7, 2022 as a public holiday under Section 25 of the Negotiable Instruments Act, 1881. There will be no transactions and settlements in Government securities (primary and secondary), foreign exchange, money markets and Rupee Interest Rate Derivatives on February 7, 2022. Settlement of all outstanding transactions will accordingly get postponed to the next working day i.e., February 8, 2022.

Transactions under Liquidity Adjustment Facility (LAF) Fixed rate Reverse Repo and MSF operations, for which the second leg settlement date was February 7, 2022 will now mature on the next working day i.e., February 8, 2022. Further, the daily LAF Fixed rate Reverse Repo and MSF windows will be available as usual on February 7, 2022.” Source: Reserve Bank of India

Interbank, Reserve Bank of India. “Faced with relatively low inflation amid a global surge, the Reserve Bank of India will still wait at least a few more months before it joins other central banks in raising interest rates following the pandemic, a Reuters poll found.” See article here. Source: CNA

Interbank, CBDC, Federal Reserve. “The U.S. is gingerly considering whether to adopt a digital version of its currency, one better suited for today’s increasingly cashless world, ushering in what could be one of the dollar’s most fundamental transformations.” See article here. Source: WABE

6 February 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.