Joe Biden and the Federal Reserve: The competing inflation fighting narratives …

John Williams, president of the Federal Reserve Bank of New York, today remarked on the state of inflation in the United States and the Board of Governors of the Federal Reserve System’s (“Board” or “Federal Reserve”) efforts to address rising prices throughout American markets for food, energy, other goods and services. 

Mr Williams reminded listeners of the Board’s dual mandate of maintaining stable prices and attaining maximum employment and reiterated that the Board has the monetary tools to address inflation stemming from congestion in the supply chain, China’s recent attempts to combat the surge in new Covid cases, Russia’s invasion of its Eastern European neighbor, Ukraine.

With demand exceeding supply and a tightening labor market, Mr Williams expects monetary actions to cool the demand side of the equation.  The Board has already embarked on cooling down the demand side, first by announcing during its last Federal Open Market Committee meeting (a committee that Mr Williams is a member of) an interbank overnight lending rate range of .75% to 1.00%. 

In order to influence its member banks to borrow excess reserves from each other within this range, the Board will begin unwinding its holdings of US Treasury notes and agency-backed securities on 1 June.  In theory, as more securities hit the market for sale, the price of these securities fall while the interest rates paid on these securities increase.  As interest rates increase, the Board believes the increase will be accompanied by a slow-down in lending by commercial banks and borrowing by businesses and consumers which is expected to result in a less heated economy. 

But as the campaign season heats up in the United States, how well will the Biden-Harris administration manage the political economy during a downturn?  Today, Mr Biden, in remarks addressing inflation, spun a narrative that inflation is the result of Vladimir Putin’s antics in Ukraine and by a federal budget deficit caused by wealthy individual and large corporations’ unwillingness to pay their fair share of taxes. 

Admitting that monetary policy is the purview of the Board of Governors, Mr Biden offered up a fiscal solution contained in his Build Back Better agenda.  Components of the Build Back Better agenda offered in his remarks included investment in renewable energy infrastructure; passing clean energy and electric vehicle tax credits; promulgating fuel regulations that would increase miles per gallon for fossil fuel vehicles; and releasing one million barrels a day from America’s strategic petroleum reserves.

Throughout Mr Biden’s speech, Vladimir Putin’s name was cited repeatedly giving me the impression that remarks were intended to drum up electorate support for continued U.S. and NATO involvement in the Ukraine-Russia conflict versus resolving the inflation issue.  I also get the sense that by early summer, Mr Biden will tie Mr Putin to former president Donald Trump, thereby turning the inflation messaging into a strategic communication that garners more electoral support for the Democratic Party.

As an economic narrative, Mr Biden’s fiscal and legislative policy will depend on a defacto gridlocked Congress.  By keeping attention on Mr Putin and to a lesser extent Mr Trump, Mr Biden hopes Americans do not notice his inability to manage the political economy out of an inflationary mess.

All ears should stay open to what the Federal Reserve says and eyes open to what the consumer does.  While the Board lost credibility by continually repeating that inflation was transitory, it is in a position to take faster and more measurable action via monetary policy as opposed to Mr Biden’s fiscal and legislative agenda.

Alton Drew

10 May 2022

We appreciate your readership and support.  Feel free to donate to us via PayPal or support our advertisers

Reinterpreting the U.S. Constitution: Congress is not the government …

A clearer line of separation between the government of the United States of America and American society is needed and a starting point is a reinterpretation of the U.S. Constitution.  The “democratization” of the American republic and the transition from an agrarian, self-employed society to an industrialized, corporate-capitalist model has incentivized politicians and policy makers to offer to the electorate policy packages marketed as prescriptions for the market failure that ensues when the factors of production are concentrated in fewer hands and the electorate owns and controls less real wealth. 

Public policy packages are expensive as attested to the growth in the U.S. government’s debt load and the number of government agencies that came along with that growth.  Congress is a core architect of packages designed to win and secure electoral support and votes.  Congress has leveraged the public’s perception that Congress is a necessary and integral component of governance when in reality, even as holder of the purse strings, Congress’ governance role is limited and contrived. 

Congress has created a committee structure through which it exercises oversight over the executive and administrative branches; an authority not supported by the written Constitution. Congress has gone beyond its primary responsibility for authorizing the funding of the government into managing American society via a quid-pro-quo with the electorate where Congress passes spending packages that create new programs managed by special interests in return for the vote. This patronage system has Congress and the public believing, under the guise of democracy, that Congress actually governs.

American society having, at least in theory, selected this form of public administration should not be afraid to put Congress back in check. This should begin with changing the narrative around Congress.  Congress is not a part of the government.  It is not a branch of the government.  Congress does not administer a portfolio of public resources.  Congress is at best the body that contains the individual representatives to the government where such representatives represent the primary funders of the government i.e., taxpayers and bondholders.

Democracy and ego have created a body of individuals whose primary mission is to expand their importance and unfortunately their need to expand their self-importance drips into the lives of the individuals in society.

Unfortunately, the electorate itself does not have the discipline to send to Congress representatives willing to limit their duties to adjusting the purse strings or voicing electorate concerns regarding public administration of public resources.  The electorate’s calls from time to time for the Congress to “do something” or “get work done” demonstrates that the electorate is stuck in the narrative that Congress is a governing body. 

More work has to be done to clear that narrative from the subconscious.

Alton Drew

23 April 2022    

We appreciate your readership and support.  Feel free to donate to us via PayPal or support our advertisers.       

The Federal Reserve, U.S. Congress is quiet this week …

All is quiet at the Board of Governors of the Federal Reserve System this week, at least when it comes to communications from the Board’s governors. None of the governors have speeches scheduled this week.

Congress continues its holiday with no hearings scheduled for the U.S. Senate Committee on Banking, Housing, and Urban Affairs until 5 January 2022. The U.S. House Committee on Financial Services has not yet set a calendar for January 2022.

The Federal Reserve Bank of New York has a quiet calendar this week with no events impacting interest rates or foreign exchange scheduled this week. The holidays continue.

Alton Drew

27,12,2021

Elizabeth Warren’s “dangerous man” moment should not impact traders, but traders should determine if she has the votes…

Assuming President Joe Biden nominates Jerome Powell as chairman of the Board of Governors of the Federal Reserve System, Mr Powell will need a simple majority in the U.S. Senate to support his confirmation.  In 2018, Mr Powell was confirmed via a Senate vote of 84-13 which meant that a number of Democrats also voted to support him. Among those dissenting was Elizabeth Warren, Democrat of Massachusetts, who yesterday made it clear that she would not support his nomination in 2022.

Yesterday, during a Senate banking committee hearing, Mrs Warren expressed her belief that Mr Powell is making it too easy for large banks to take on big risks.  “The Fed chair should be like a sentry, standing at the gates, making certain that banks are not loading up on risks that could take down the entire economy,” Warren told Bloomberg News.  Mrs Warren went as far yesterday to mention Archegos Capital, the family office who exposed a number of banks to losses due to bad bets made by the family office.

That Mrs Warren would vehemently express her intent not to support Mr Powell (referencing him as a “dangerous man”) tells me that she has already received signals from the White House that Mr Powell will be nominated by President Biden.  The Secretary of the Treasury, Janet Yellen, has expressed her support for Mr Powell and it is likely that he will garner a large majority of Republican support and the support of a sufficient number of Democrats.  I believe this support will be provided in part to push back against the progressivism in the Congress, particularly in the House of Representatives.

Mrs Warren has not made any compelling arguments regarding the market forces that impact foreign exchange. There has been no discussion from her camp regarding relative income changes, product availability, relative interest rates, or speculation between the U.S. and other countries; market force observations that are of greater importance to traders and central banks.  Such arguments, if substantiated, would have probably swayed support to her position among more senators (maybe), but we will never know.

Mr Biden’s rare smart play will be to nominate Mr Powell thereby providing the interbank market with increased certainty as to monetary policy.  Regarding Mrs Warren, this may be just another “meh” moment.

Alton Drew

29 September 2021

The impact of Build Back Better on the interbank market will be reduced by increasing likelihood Democrats failing to come together on its passage… And Jerome Powell may benefit

According to the Tax Foundation, a public policy think tank, President Biden’s proposed “Build Back Better” plan will generate government revenues of $2.1 trillion over the next ten years.  After accounting for approximately $1 trillion in tax credits for individuals and businesses, the Tax Foundation estimates the US government will net just over $1 trillion in revenues over the ten-year period.  This amount can be whittled down further by accounting for tax revenues recovered from increased compliance activity bringing the estimated bottom-line amount generated to $862 billion.

The economic price for the proposal, according to the Tax Foundation, would be a decrease in long-run gross domestic product by .98%; a reduction in capital stock of 1.84%; a wage rate reduction of .68%; and net loss of 303,000 jobs.

Meanwhile, the Committee for a Responsible Federal Budget, a public policy think tank, estimates that after accounting for offsets and expiration of a number of programs, Mr Biden’s “Build Back Better” plan will require financing of another $2.9 trillion of debt.  The Committee estimates that interest on new debt may be $1.1 trillion by 2031.

Today, the yield on the ten-year Treasury note closed at 1.48%, according to data by Bloomberg, after getting as high as 1.50%.  It is unclear whether the increase in rates accounts for passage tax increases and social welfare spending contained in the “Build Back Better” plan.

The future economic impact from this plan appears to be flat over the next ten years.  A .98 percent reduction in economic growth over ten years is negligible.  So is a loss of 303,000 jobs.  In addition, Speaker Nancy Pelosi is signaling to the progressive wing of the Democratic Party that they may have to settle for a plan that falls short of $3.5 trillion.  If the bill fails in the House, not only is impact a moot concern, but the Democrats and Mr Biden will see a further drop in their political capital where their constituents see them as incapable of delivering on big ideas.

If the package fails, I can see some upside for Jerome Powell, current chairman of the Board of Governors of the Federal Reserve.  Mr Powell’s tenure as chair ends in February 2022.  A failed Biden economic passage brought on by a fractured party may mean that Mr Biden will have to take any opportunity to infuse confidence in the American economy.  So far, the Federal Reserve has been that one constant.  Mr Biden may have no choice, especially going into the mid-term election campaign season, but to re-appoint Mr Powell to another term as head of the Fed.

Alton Drew

27 September 2021  

As of 5:51 pm AST, foreign exchange rates as Congress ponders additional relief …

Pairs Federal Reserve as of 23 December 2020 OANDA as of 23 December 2020 OANDA as of 28 December 2020 
GBP/USD 1.3510 1.3449 1.35603 
USD/CAD 1.2841 1.2872 1.28619 
USD/CNH 6.5400 6.5323 6.51546 
USD/DKK 6.0989 6.1031 6.10186 
EUR/USD 1.2194 1.2185 1.21836 
USD/INR 73.7700 73.7316 73.4122 
USD/MXN 20.0800 20.0878 19.8603 
USD/JPY 103.5200 103.50 103.63 
USD/NOK 8.6307 8.6886 8.62746 
USD/SEK 8.2841 8.3036 8.24517 
USD/CHF .8882 .8886 .89037 

Source: Board of Governors of the Federal Reserve, OANDA

Legal/Political Events Impacting Foreign Exchange Rates

U.S. House considers increasing dollar amount of pandemic relief payments to taxpayers

The U.S. House of Representatives is, at the time of this writing, considering a vote to increase the amount of pandemic relief to individual taxpayers from the current $600 to $2,000. President Trump and House Democrats are aligned on this issue, but the increase is expected to face considerable push back in the Republican controlled U.S. Senate. Mr Trump argued yesterday that the pandemic relief passed by Congress over the weekend contained unnecessary spending and argued that these funds be reallocated to American taxpayers.

Source: U.S. House of Representatives

As of 1:12 pm AST, foreign exchange rates in reaction to Trump signing pandemic relief bill …

Pairs Federal Reserve as of 18 December 2020 OANDA as of 18 December 2020 OANDA as of 28 December 2020 
GBP/USD 1.3497 1.3520 1.35603 
USD/CAD 1.2776 1.2760 1.28619 
USD/CNH 6.5395 6.5197 6.51546 
USD/DKK 6.0798 6.0731 6.10186 
EUR/USD 1.2236 1.2248 1.21836 
USD/INR 73.5300 73.4139 73.4122 
USD/MXN 19.9813 19.8978 19.8603 
USD/JPY 103.3500 103.35 103.63 
USD/NOK 8.5959 8.5878 8.62746 
USD/SEK 8.2786 8.2747 8.24517 
USD/CHF .8850 .8844 .89037 

Legal/Political Event Impacting Foreign Exchange Rates

Trump signs pandemic relief package

Yesterday, President Donald J Trump reluctantly signed into law a $900 billion pandemic relief package with a core provision of a $600 payment to eligible taxpayers. Mr Trump advocated for increasing the payout from $600 to $2,000 for eligible taxpayer. In his statement Mr Trump promised to continue his fight for the increase as the Democratic-controlled House is expected to vote today on increasing the amount. Resistance to an increase is expected in the Republican-controlled Senate.

Foreign exchange rates; Pandemic stimulus bill passes Congress

Pairs Federal Reserve as of 18 December 2020 OANDA as of 21 December 2020 
GBP/USD 1.3497 1.33499 
USD/CAD 1.2776 1.28559 
USD/CNH 6.5395 6.53668 
USD/DKK 6.0798 6.09401 
EUR/USD 1.2236 1.22056 
USD/INR 73.5300 73.7333 
USD/MXN 19.9813 20.1582 
USD/JPY 103.3500 103.4600 
USD/NOK 8.5959 8.6862 
USD/SEK 8.2786 8.2959 
USD/CHF .8850 .8865 
Sources: Federal Reserve and OANDA

Legal/Political news impacting foreign exchange

Congress passes $900 billion relief package

Reuters reporting that the United States Senate has passed a $900 billion coronavirus relief package which includes a one-time $600 payment to eligible American taxpayers. President Donald Trump is expected to sign the legislation later today.

Balkanizing internet regulation is out of step with the uniformity needs of financial technology

Analysis

The eye-catcher ….

In two weeks, state utility regulators will convene in San Antonio, Texas for the National Association of Regulatory Utility Commissioners annual meeting to discuss how they can leverage a recent decision by the United States Court of Appeals-DC Circuit that the Federal Communications Commission cannot preempt state regulation of concerns over consumer access to and privacy on the internet via broadband.

Some states such as California have moved ahead with their own net neutrality laws, hoping to enforce consumer protections by prohibiting internet access providers from lowering traffic speed from certain websites or preventing internet service providers from favoring their own content by blocking a consumer’s access to content that the consumer prefers.

The state-by-state approach problem

The problem with a state-by-state approach for a financial technology firm is the uncertainty that data and capital face when they traverse state borders. Will a content delivery firm tasked with storing and transmitting financial data on behalf of a financial technology firm have to enter into different interconnection agreements per state because of the differing consumer privacy laws encountered in each state?  Will differing requirements on paid prioritization result in financial data traffic slowing down depending on which state border it crosses?

There is an irony that on a global basis, the United States is a staunch proponent of freer cross-border data flows, but would run the risk of subjecting those same data flows to a hodge-podge of regulations that create digital toll roads for financial data traffic.

The changing consumer taste in banking

What federal and state policy makers should be focusing on is ensuring the amount of bandwidth necessary for digital transmission of financial data and capital is available.  Our use of digital banking services will not be shrinking anytime soon.  MediaCom Business cited data in a blog post that 92% of millennials make their choices as to where to bank based on the digital services a bank offers.  Legacy banks hoping to compete with digital upstarts are accepting this type of demand an, as found by consulting firm Accenture, are exploring how best to integrate and deploy technology necessary for meeting this demand.

Recommendation: Seamless versus Balkanization

The supply of digital banking and payment systems services combined with increasing demand for these services means more bandwidth is needed in order to optimize the consumer experience.  State and federal policy makers can facilitate this need for increased bandwidth by focusing policy on ensuring the delivery of this infrastructure.  Coming up with 50 different rules on net neutrality is more distraction than help.

What should be spawned in next month’s NARUC meeting is a recommendation for national legislation on consumer privacy.  Consumer privacy concerns should no longer be leveraged to create 50-plus fiefdoms for net neutrality.  Transmission of information, data, and knowledge should be a seamless experience for consumer and firms that use financial technology to transmit value and capital.