The implicit agreement between the United States government and American society is that the United States government will maintain a financial and resource management infrastructure that facilitates a taxpayer’s ability to find opportunities to create income. As the underwriter for the United States government, the Board of Governors of the Federal Reserve System has a mandate to pursue stable prices for goods, services, and assets and full employment of labor. The Board of Governors via its Federal Open Market Committee (FOMC) employs a number of monetary policy tools to achieve this mandate with a federal funds target rate serving as indicia for how well its tools are working.
Yesterday, the Board of Governors raised this target rate to a range of .25% to .50%; in other words, an overnight rate that the Board of Governors would like to see its member commercial depository institutions lend to reach other the excess reserves they hold at their district federal reserve banks. The problem here is that at this printing, the Board of Governors has reduced to zero the amount of reserves a depository institution is required to keep at its respective federal reserve district bank. Traders would have to look at other indicia to determine how well Board of Governors policy is doing in pursuing the federal funds target rate.
For example, traders should be looking at changes in the discount window rates that the federal reserve district banks are charging to lend money to their commercial member banks. Traders should also look at changes in central bank liquidity swaps or changes in rates for federal reserve district bank lending facilities such as the term deposit facility or overnight reverse repurchase agreement facilities. These are some of the monetary policy tools that the Board of Governors and its 12 federal reserve banks use to move rates toward their federal funds target and thus control the money supply.
As rates increase, American society will be put on notice. I expect an increase in market discipline as banks and other investors seek out opportunities to increase returns on capital. Lots of capital has gone into non-productive endeavors such as the tools and platforms riding the internet. Amazon may have made purchasing goods and services more efficient, but can we say that Twitter and Instagram have raised American productivity and provided any societal solutions that lead to greater employment? As the Board of Governors tackles inflation with its monetary tools, interest rates will start ticking up and entrepreneurial gimmicks that provide nothing in terms of increased yield, employment, or solutions will be and should be shunned or abandoned.
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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.