My takeaway of Brainard speech: Fed maintaining steady course. No impact on the interbank markets.

Lael Brainard, a member of the Board of Governors of the Federal Reserve System, recently delivered a speech discussing the Federal Reserve’s policy for achieving a two percent inflation goal. She reiterated the Federal Reserve’s FAIT policy, a strategy that uses a flexible average inflation targeting strategy for achieving two percent inflation. The aim, according to Governor Brainard, is to keep inflation moderately above two percent for some time, allowing the economy to make up for any short falls along the way due to running below the two percent goal.

Governor Brainard would like to see the Federal Reserve focus on achieving full employment particularly for low and moderate income U.S. households. Price inflation has not been as responsive to labor market tightness as it has in the past, The Federal Reserve aims to eliminate shortfalls to maximum employment of human capital.

I didn’t hear anything in Governor Brainard’s comments that would have a direct impact on the interbank markets, whether for foreign exchange or for overnight loans.

Clarida clarifies state of US economy and Fed’s near term policy …

The following is a statement made yesterday by Richard H. Clarida, vice-chairman of the Board of Governors of the Federal Reserve System. Key takeaways from the statement include:

  1. The availability of vaccines brightens the 2021 economic outlook. Downside risk is diminished.
  2. There is still a significant level of uncertainty going into 2021.
  3. Inflation is still running below two percent. Policy will continue pursuit of a two percent anchor.
  4. The Federal Reserve will continue pursuing a fed funds target range of 0-.25%.
  5. The Federal Reserve will continue additional monthly holdings of $80 billion in Treasury securities and $40 billion in agency mortgage backed securities.
  6. There is a difference in “shortfalls in” versus “deviation from” maximum employment.
  7. Anchoring inflation expectation at two percent means achieving an average of two percent inflation over time.

“It is my pleasure to meet virtually with you today at the Council on Foreign Relations.1 I regret that we are not doing this session in person, as we did last year, and I hope the next time I am back, we will be gathering together in New York City again. I look forward to my conversation with Steve Liesman and to your questions, but first, please allow me to offer a few remarks on the economic outlook, Federal Reserve monetary policy, and our new monetary policy framework.

Current Economic Situation and Outlook
In the second quarter of last year, the COVID-19 (coronavirus disease 2019) pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. Economic activity rebounded robustly in the third quarter and has continued to recover in the fourth quarter from its depressed second-quarter level, though the pace of improvement has moderated. Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level, supported in part by federal stimulus payments and expanded unemployment benefits. In contrast, spending on services remains well below pre-pandemic levels, particularly in sectors that typically require people to gather closely, including travel and hospitality. In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained, as many people were able to return to work. Inflation, following large declines in the spring of 2020, picked up over the summer but has leveled out more recently; for those sectors that have been most adversely affected by the pandemic, price increases remain subdued.

While gross domestic product growth in the fourth quarter downshifted from the once-in-a-century 33 percent annualized rate of growth reported in the third quarter, it is clear that since the spring of 2020, the economy has turned out to be more resilient in adapting to the virus, and more responsive to monetary and fiscal policy support, than many predicted. Indeed, it is worth highlighting that in the baseline projections of the Federal Open Market Committee (FOMC) summarized in the latest Summary of Economic Projections (SEP), most of my colleagues and I revised up our outlook for the economy over the medium term, projecting a relatively rapid return to levels of employment and inflation consistent with the Federal Reserve’s statutory mandate as compared with the recovery from the Global Financial Crisis (GFC).2 In particular, the median FOMC participant projects that by the end of 2023—a little less than three years from now—the unemployment rate will have fallen below 4 percent, and PCE (personal consumption expenditures) inflation will have returned to 2 percent. Following the GFC, it took more than eight years for employment and inflation to return to similar mandate-consistent levels.

While the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished. The two new SEP charts that we released for the first time following the December FOMC meeting speak to these issues by providing information on how the risks and uncertainties that surround the modal or baseline projections have evolved over time. While nearly all participants continued to judge that the level of uncertainty about the economic outlook remains elevated, fewer participants saw the balance of risks as weighted to the downside than in September. Although a little more than half of participants judged risks to be broadly balanced for economic activity, a similar number continued to see risks weighted to the downside for inflation.

The Latest FOMC Decision and the New Monetary Policy Framework
At our most recent FOMC meetings, the Committee made important changes to our policy statement that upgraded our forward guidance about the future path of the federal funds rate and asset purchases, and that also provided unprecedented information about our policy reaction function. As announced in the September statement and reiterated in November and December, with inflation running persistently below 2 percent, our policy will aim to achieve inflation outcomes that keep inflation expectations well anchored at our 2 percent longer-run goal.3 We expect to maintain an accommodative stance of monetary policy until these outcomes—as well as our maximum-employment mandate—are achieved. We also expect it will be appropriate to maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.

In addition, in the December statement, we combined our forward guidance for the federal fund rate with enhanced, outcome-based guidance about our asset purchases. We indicated that we will continue to increase our holdings of Treasury securities by at least $80 billion per month and our holdings of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward our maximum-employment and price-stability goals.

The changes to the policy statement that we made over the fall bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August.4 In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC’s estimates of “shortfalls [emphasis added] of employment from its maximum level”—not “deviations.” This language means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels. With regard to our price-stability mandate, while the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate. To this end, the new statement conveys the Committee’s judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it “seeks to achieve inflation that averages 2 percent over time,” and—in the same sentence—that therefore “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” As Chair Powell indicated in his Jackson Hole remarks, we think of our new framework as an evolution from “flexible inflation targeting” to “flexible average inflation targeting.”5 While this new framework represents a robust evolution in our monetary policy strategy, this strategy is in service to the dual-mandate goals of monetary policy assigned to the Federal Reserve by the Congress—maximum employment and price stability—which remain unchanged.6

Concluding Remarks
While our interest rate and balance sheet tools are providing powerful support to the economy and will continue to do so as the recovery progresses, it will take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.” — Richard H. Clarida

Source: Board of Governors of the Federal Reserve

As of 10:44 AST, Fed Funds and Treasury rates

RatesFederal Reserve as of 4 January 2021Bloomberg as of 5 January 2021 10:44 AST
Federal Funds Rate0.090.08
Prime Rate3.253.25
3-month Treasury0.090.07
2-year Treasury0.130.11
10-year Treasury0.930.93
30-year Treasury1.651.67
Source: Board of Governors of the Federal Reserve, Bloomberg

Legal/Political/Regulatory News Impacting Rates

None at this time.

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.

The Federal Reserve keeps rates at near zero

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.”

Source: Board of Governors of the Federal Reserve

Implementation Note issued December 16, 2020

Comparison of foreign exchange rates determined by the Board of Governors of the Federal Reserve System with current market rates.

Federal Reserve as of 4:15 pm 11 December 2020OANDA as of 10:53 am EST 15 December 2020
EUR/USD = 1.2112EUR/USD = 1.21443
GBP/USD = 1.3197GBP/USD = 1.33503
USD/CAD = 1.2767USD/CAD = 1.27548
USD/JPY = 103.880USD/JPY = 103.93

Federal Reserve Board announces it has formally joined the Network of Central Banks and Supervisors for Greening the Financial System, or NGFS, as a member

Press Release

The Federal Reserve Board announced on Tuesday that it has formally joined the Network of Central Banks and Supervisors for Greening the Financial System, or NGFS, as a member. By bringing together central banks and supervisory authorities from around the world, NGFS supports the exchange of ideas, research, and best practices on the development of environment and climate risk management for the financial sector. The Board began participating in NGFS discussions and activities more than a year ago.

“As we develop our understanding of how best to assess the impact of climate change on the financial system, we look forward to continuing and deepening our discussions with our NGFS colleagues from around the world,” said Federal Reserve Board Chair Jerome H. Powell.

For media inquiries, call 202-452-2955

Source: Federal Reserve Bank of New York

Long term yields tick up in anticipation of Powell, Mnuchin testimony …

As of 10:27 am AST 1 December 2020, U.S. Treasury rates and Federal Funds rates are as follows:

3-month: .08%

6-month: .09%

12-month: .10%

2-year: .16%

10-year: .88%

30-year: 1.62%

Fed Funds Rate: 0.08%

Federal Reserve Target: 0.25%

Prime Rate: 3.25%

Source: Bloomberg

Major political/legal events impacting currencies

Today, Steven Mnuchin, Secretary of the U.S. Department of the Treasury, and Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, will testify before the U.S. Senate Committee on Banking, Housing and Urban Affairs.  Questions are expected to seek clarification as to Secretary Mnuchin’s request that remaining funds from the CARES Act be sent back to the Congress’ general fund.  Chairman Powell will reiterate the need for fiscal policy in the face of increasing COVID-19 infections and an economy that is still on the rebound.  

Source: U.S. Senate Committee on Banking, Housing and Urban Affairs

Alleged rift between US Treasury and Federal Reserve a big to do about nothing; 10:04 am AST 20 November 2020, Foreign exchange rates between U.S. and select countries in East Africa, West Africa, the Caribbean, and Asia

As of 10:04 am AST, 20 November 2020:

How to read the chart:

CAD/USD: If you come to the United States with one Canadian dollar (CAD)and wish to sell it for a US dollar (USD), the market price is .76397 USD.

USD/CAD: If you take a US dollar (USD) to Canada and wish to sell it for a Canadian dollar (CAD), the market price is 1.30877 CAD

CAD/USD=0.76397   USD/CAD=1.30877

CNH/USD= 0.15209   USD/CNH=6.57371

EUR/USD= 1.18456   USD/EUR=0.84410

DKK/USD =0.15895    USD/DKK=6.28955

NGN/USD= 0.00261    USD/NGN=379.656

JPY/USD=0.00963     USD/JPY=103.87

INR/USD=0.01348       USD/INR=74.0790

JMD/USD=0.00673     USD/JMD=145.651

GYD/USD=0.00469       USD/GYD= 204.998

GHS/USD=0.17080     USD/GHS= 5.81113

XCD/USD=0.37037        USD/XCD= 2.70

KES/USD = 0.00906       USD/KES= 108.394

Source: OANDA

Major political/legal event in the United States

Yesterday, the U.S. Department of the Treasury released the following:

Today U.S. Treasury Secretary Steven T. Mnuchin sent a letter to Chairman of the Federal Reserve Board of Governors Jerome Powell requesting a 90-day extension of the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), the Money Market Liquidity Facility (MMLF) and the Paycheck Protection Program Liquidity Facility (PPPLF). 

“With respect to the facilities that used CARES Act funding (PMCCF, SMCCF, MLF, MSLP, and TALF), I was personally involved in drafting the relevant part of the legislation and believe the Congressional intent as outlined in Section 4029 was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020. As such, I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds,” said Secretary Steven T. Mnuchin.

“In the unlikely event that it becomes necessary in the future to reestablish any of these facilities, the Federal Reserve can request approval from the Secretary of the Treasury and, upon approval, the facilities can be funded with Core ESF funds, to the extent permitted by law, or additional funds appropriated by Congress. I am deeply honored to have worked on executing these programs and hope that because of our collective actions, Congress will show similar trust in Federal Reserve Chairs and Treasury Secretaries in the future.”

Source: U.S. Department of the Treasury

Foreign ownership of US Treasurys fall in September. Downtick in longer term rates …

As of 9:25 am AST 18 November 2020, U.S. Treasury rates and Federal Funds rates are as follows:

3-month: .08%

6-month: .08%

12-month: .11%

2-year: .17%

10-year: .85%

30-year: 1.59%

Fed Funds Rate: 0.08%

Federal Reserve Target: 0.25%

Prime Rate: 3.25%

Source: Bloomberg

Major political/legal event in the United States

Treasury releases data on foreign investment in the United States

Yesterday, the United States Department of the Treasury reported that “in September of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a net TIC outflow of $79.9 billion.  Of this, net foreign private outflows were $40.3 billion, and net foreign official outflows were $39.6 billion.”  The Treasury International Capital report also noted that there was a decline in foreign investor ownership of Treasury bills in the amount of $30.3 billion in September 2020.