Georgia has to decide who can guide its state political economy through a rough patch of inflation

Raphael Bostic, president and chief executive officer of the Federal Reserve Bank of Atlanta, recently released a video reiterating the Board of Governors of the Federal Reserve System’s policy of achieving an inflation rate of two percent. President Bostic defined inflation as an imbalance between aggregate demand for goods and services and aggregate supply of the same.  Achieving the two percent inflation rate during a “soft landing” is achievable but will be rough, according to the Atlanta Fed president.  A soft landing is defined by Investopedia as a moderate economic slowdown following a period of growth.  Central banks line up on their economies’ runways hoping for a soft landing while raising interest rates for the purpose of curbing inflation.

The Board of Governors uses a number of monetary policy tools to curb inflation including changing its target range for the federal funds rate; buying and selling securities; changing the reserve requirements for its member banks; changing the amount of interest it charges at its discount window for loans to its member banks; and changing the amount of interest it pays on commercial bank excess reserves held at the system’s twelve federal reserve banks.

Mr Bostic also noted an apparent imbalance in the United States’ labor markets where only 60% of available and open jobs have been filled.  There is where I think about the state of Georgia’s management of the political economy.

The role of government is to act as a transfer agent between taxpayers and bondholders.  Government taxes the spread between a taxpayer’s work efforts and what the taxpayer yields from those efforts.  Government takes its cut and passes on the rest to its bondholders.  As a people manager, government creates narratives to encourage more yield and implements policies to encourage or support actions that create that yield.

State governments are less incubators of democracy and more incubators of tax-generating activities.

In the case of Georgia, bond holders and bond traders should not only keep their ears open to narrative spun by Georgia’s gubernatorial candidates, but keep their eyes open when reading the policies proposed by the candidates.  How well do their proposals lend to the need for yield creation?  Are their proposals designed solely to tug at heart strings or can proposals be tied to activities that ultimately increase yield from taxpayers that can ultimately be transferred to bond holders?

Followers of state elections rarely if ever tie state government policies to national dollar and monetary policies.  I think bond holders and bond traders should start looking at state and federal governance of the American political economy to best understand how well the United States is doing on generating yield.          

 Alton Drew

25 May 2022

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Is it time for the Federal Reserve to pursue a single mandate?

12 USC 221 of the Federal Reserve Act provides four main purposes for the Act:

  • To establish Federal reserve banks;
  • To furnish an elastic currency;
  • To afford the means for rediscounting commercial paper; and
  • To establish a more effective supervision of banking in the United States.

The legislation provides statutory support for the Federal Reserve System’s objective of regulating the United States’ money supply.  Specifically, under 12 USC 225a, the Federal Reserve System’s monetary policy objective is to:

“[M]aintain long run growth of monetary and credit aggregates, commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Among the tools the Federal Reserve System uses to achieve its monetary policy goals are the usual suspects: open market operations; the discount window and discount rate; reserve requirements; and interest on reserve balances.

Over the next several days I will be addressing the monetary policy and legal questions, “What factors does maximum employment address?” and “What factors do stable prices address?”

The media when reporting on maximum employment often references the unemployment rate for labor, while referencing the consumer price index when addressing the achievement of stable prices.  My issue is, why is labor the be all and end all of the full employment issue?

If the Federal Reserve’s goal is to maintain long run growth of money and credit that is commensurate with the economy’s long run potential to increase production, shouldn’t the Federal Reserve System consider or assess the full employment of America’s productive capacity beyond labor? 

The media gives productive capacity a secondary thought and its lack of emphasis on productive capacity does not, in my opinion, keep the trading and merchant community fully informed on how well the economy is actually doing.

I would make the same argument for prices as well.  The Federal Reserve System’s narrative is that too much inflation is bad and it has to be contained.  But is that narrative truly in line with the expectations behind wealth accumulation?  Is it line with creating in consumers a necessary illusion of wealth that results from inflated home prices? 

Growth in asset values gives the average American the impression that her wealth is increasing.  She wants to use her house as an automatic teller machine but can’t do that if rising interest rates slow down demand for her house resulting in a decrease in her value.  Is monetary policy helping her achieve that balance?

It is clearer at this point to see a more direct connection between the Federal Reserve System’s influence on the interbank market for excess reserves and interest rates versus pursuing a four percent unemployment rate (historical full labor employment) via its monetary tools.  For that reason, should not the Federal Reserve focus solely on interest rates?

Could a single mandate may be better for traders who need as clear an assessment of the markets as possible?  Maybe. Maybe not. Let’s explore.

Alton Drew

18 May 2022

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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

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Michael Held Resigns from the New York Fed

Central Bank News

April 07, 2022

NEW YORK—The Federal Reserve Bank of New York today announced that Michael Held has decided to step down from his role as General Counsel and Head of the Legal Group. He will be leaving the Bank in June 2022 and in the interim will move to an advisor role to help facilitate a smooth transition. YoonHi Greene and James Bergin, both Deputy General Counsel, will co-lead the group until a successor is named.

“For two and a half decades, Mike has been a dedicated public servant whose efforts have had a meaningful impact supporting the New York Fed’s mission,” said John C. Williams, President and Chief Executive Officer of the New York Fed. “With sound judgment and deep expertise, Mike has leveraged his leadership skills to better the work that we do and how we do it. I want to thank him for his impressive career and the legacy that he leaves behind.”

As General Counsel, Mr. Held has been a member of the Bank’s Executive Committee and has served as Deputy General Counsel of the Federal Open Market Committee.

“It has been an honor to work with such a talented and committed group of central bankers,” said Mr. Held. “I count myself lucky to have had the privilege to be part of this incredible team for as long as I have.”

During his tenure, Mr. Held advised the Bank’s senior leaders on a wide range of matters, including regulation and supervision of financial institutions, anti-money laundering and OFAC, corporate investigations, corporate governance and ethics, director responsibilities, and litigation. In addition, he developed the New York Fed’s first pro bono program and was an executive sponsor of the Financial Institutions Culture & Conduct initiative. He previously served as the Bank’s Corporate Secretary and has been a Deputy General Counsel in the Legal Group. Mr. Held joined the New York Fed in 1998 as a staff attorney.

The New York Fed will soon launch a search for Mr. Held’s successor.

Suzanne Elio
(212) 720-6449

Betsy Bourassa
(212) 720-6885

Source: Federal Reserve Bank of New York

Federal Open Market Committee News Scan …

Board of Governors of the Federal Reserve System, Jerome Powell. Recently, Fed Board chair Jerome Powell addressed price stability and the monetary policy rate response to it. “The latest FOMC statement also indicates that the Committee expects to begin reducing the size of our balance sheet at a coming meeting. I believe that these policy actions and those to come will help bring inflation down near 2 percent over the next 3 years.” See speech here.

Board of Governors of the Federal Reserve System, Christopher J Waller. Recently, Governor Christopher J. Waller gave a speech discussing the role of monetary policy in combating rising rent costs and house prices.  “Based on various measures of asking rents, some recent research suggests that the rate of rent inflation in the CPI will double in 2022.3 If so, rent as a component of inflation will accelerate, which has implications for monetary policy.” See speech here.

Federal Reserve Bank of St. Louis, Jim Bullard. “St. Louis Fed President Jim Bullard discussed the upside surprise on inflation in recent months and the Fed’s response. He spoke at the Asian Investment Conference in an interview that was recorded March 22.” See video and article here.

The Federal Open Market Committee (FOMC) is responsible for open market operations, one of the three primary monetary policy tools that are used to influence the federal funds rate. Open market operations involve the sale and purchase of securities by a central bank in the open market. The federal funds rate is the overnight rate that a member bank charges to another member bank when lending excess reserves.

While Powell’s hawkishness is the move in the right direction, it doesn’t negate the need to get rid of the Federal Reserve

On 21 March 2022, Jerome Powell, chairman pro tempore of the Board of Governors of the Federal Reserve, made comments about labor markets, inflation, and reduction in the balance sheet of the Federal Reserve System. Mr Powell acknowledged that the labor market is tight and that nominal wages are rising, particularly at the lower end of the wage distribution.  Given what he noted as the severe imbalance of supply and demand in the labor market, Mr Powell wants to use the Federal Reserve System’s monetary policy tools to moderate the growth in demand for labor.

Analysts and investors have been raising concerns about the Federal Reserve’s balance sheet.  Mr Powell noted in his comments that reducing the Federal Reserve System’s balance sheet could bring inflation to near two percent over the next three years.

The economy, according to Mr Powell, is in a position to handle tighter monetary policy and he stated his willingness to see the interbank overnight (fed funds) rate increase by more than 25 basis points at the next Federal Open Market Committee meeting.

I appreciate the hawkishness for one reason.  It pushes back on the desire by political factions to weaponize the fed funds rate.  The effective fed funds rate, a volume-weighted median of transactions level data collected from banks, has increased over four times from its long-term rate of .08% to a current 0.33%.  The fed funds rate is the overnight rate that banks charge each other for lending and borrowing excess reserves.  The rate sits near the middle of the .25% to .50% range recommended by the FOMC.

On its face, the recent effective funds rate may incentivize banks to seek returns from the interbank market versus purchasing Treasurys.  For example, the yield per day on a one-year Treasury bill is .00442% versus an overnight fed funds rate of 0.33%.  Putting those excess reserves into the bond market would call for much higher yields which in turn would call for a fall in asset prices and clamping down on the rise in prices.

The Federal Reserve System has at its disposal a number of monetary policy tools to nudge banks to the overnight trading range including open market operations; the discount window and discount rate; reserve requirements; interest on reserves; reverse repurchase agreements; and liquidity swaps, to name a few.

Even with its tools and noble statutory mandate of pursuing stable prices and full employment, the Federal Reserve System still represents Congress’ abdication of its responsibility for coining money and regulating its value. Yes, Congress can authorize the mechanisms it deems necessary for meeting this statutory duty, but where the taxpayer/consumer/electorate is seeing an erosion of her spending and saving power, might it be time for Congress to reassert its statutory duty versus allowing the Federal Reserve System to act as a coordinator of bank cartel activity?

Alton Drew


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The Federal Reserve System’s message to American society: Start investing in more productive economic activity

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. 

Alton Drew


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Federal Reserve News Scan: Federal Reserve today releases data on commercial paper, foreign exchange, and interest rates

Board of Governors

At 1:00pm today, the Board of Governors of the Federal Reserve (the Board) releases data on commercial paper.  At 4:15pm, the Board releases data on foreign exchange rates and interest rates.

Commercial paper refers to short term, unsecured debt typically maturing between one days to 90 days.  It is often issued at a discount, without paying coupons, and matures at face value. See current rates on commercial paper here.

Selected interest rate data includes data on the effective federal funds rate, commercial paper, bank prime loan, discount window primary credit, and U.S. government securities.  See current rates here.

The currency is political …

Last week Senator Pat Toomey, Republican of Pennsylvania, made three recommendations designed to reduce the politicization of the Federal Reserve System.  First, Senator Toomey recommends that the twelve Federal Reserve banks that are overseen by the Board of Governors of the Federal Reserve System be subject to the Freedom of Information Act.  FOIA, 5 U.S.C. § 552, requires the full or partial disclosure of previously unreleased information and documents controlled by a U.S. government agency upon request.

The problem here is that FOIA is applicable to the United States government.  While the Board of Governors is an independent government agency, the twelve reserve banks are not.  The twelve reserve banks are individually incorporated and their stock is owned by commercial member banks that are in one of the twelve federal reserve districts.  Subjecting the twelve banks to FOIA given the current structure of the Federal Reserve System would be difficult and likely create a constitutional slippery slope for other private organizations.

Mr Toomey wants to further challenge the independence of the twelve federal reserve banks by requiring that their bank presidents be nominated by the U.S. president and confirmed by the U.S. Senate.  If Mr Toomey wants to maintain the Federal Reserve as a non-politicized entity, subjecting federal reserve bank presidents that head private organizations to a political appointment and selection process does not appear in line with keeping the Federal Reserve System non-political.  Whether subtle or blatant, a federal reserve bank president will give political actors a little more listening time than they would to other citizens.

The third recommendation appears to be the most extreme.  Mr Toomey recommends either shrinking the number of banks down from the current twelve to five with the remaining five bank presidents becoming permanent voting members of the Federal Open Market Committee, or eliminating the twelve federal reserve banks altogether.

The FOMC’s primary responsibility is the development of U.S. monetary policy, including setting the federal funds rate, the interbank overnight rate at which commercial member banks exchange with each other their reserves on deposit with the Federal Reserve.  The FOMC is made up of the seven Federal Reserve governors, the president of the Federal Reserve Bank of New York, and four other federal reserve bank presidents serving a one-year term on a rotating basis.

The twelve federal reserve banks serve as an informational conduit from their respective districts to the Board of Governors. Would Mr Toomey’s recommendation not serve to eliminate an information channel from local communities to the FOMC while further centralizing and immersing the Federal Reserve into national political influence?

So far, I see no legislative threats on the horizon to the current Federal Reserve System structure.  Mr Toomey’s recommendation, however, is another example that currency is political.

Alton Drew 08.03.2022

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While awaiting Jerome Powell’s appearance before the Senate, some thoughts on partisanship and policy rates…

The only interest that the Republican and Democratic parties have in monetary policy are how best to weaponize interest rates to justify reckless spending and oppressive taxes. Low interest rates allow the U.S. Treasury to issue bonds in return for cash that is less expensive to service. The Federal Reserve Bank of New York places these IOUs into the market where commercial banks and other accredited market participants buy these IOUs and hold them in their portfolios as collateral in order to support their own future borrowing needs.

Democrats would like to see the interbank, overnight lending rate stay low. A low overnight rate incentivizes banks to lend money in the credit markets, theoretically putting credit and capital into the hands of end users who can deploy that money into productive and non-productive use. Of course, not all this cheap money goes into the hands of entrepreneurs but also into the hands of end-use consumers that want to leverage a trip to The Bahamas now and pay for it later out of their future income. In addition, Democrats can create and subsidize programs aimed at meeting short term electorate needs i.e. stimulus, or subsidize larger projects like renewable energy, which may assist some consumers but is really aimed at Democratic donors in the energy industry that may need R&D and other funding to aid their industry’s development.

Republicans, for all their smaller government rhetoric, don’t get off the hook. Although increased rates could help their banking industry constituents increase their income, low interest rates means corporations can get the cheap financing that enables business expansion.

The battle between Democrats and Republicans boils down to which constituency benefits the most from government’s overall need to expand.

During today’s Senate hearing where Federal Reserve chairman Jerome Powell presents the Fed’s semi-annual monetary policy report, you will notice that none of the banking committee members will call for an abolishment of the central bank. As much as elected and central bank officials reiterate the Federal Reserve’s political independence, the reality is that the Federal Reserve operates in a political environment, navigating that channel between both sides of the political spectrum. All one has to do is look at its increasing foray into social issues including climate change and racial equality in credit access to see that the Federal Reserve is influenced by the political climate.

Both sides of the aisle during today’s hearing will wail on about the obvious elephant in the room: inflation. If the Democratically-controlled Senate and House are so concerned about inflation, then they should not oppose a decline in the demand of the M2 money supply caused by an increase in the use of alternative currencies that transfer economic energy between autonomous individuals. The increase in money supply is the result, in part, of politicized demand which encourages low cost money which in turn moves toward low return, unproductive activity. Just go on the internet and you see plenty of examples.

The best inflation fighter in the short term is the use of alternative currencies for payments. Increasing the supply and use of alternatives decreases demand for a central bank’s credit-fiat currency.

Alton Drew


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