Interbank Market News Scan: American consumers expect decrease in inflation headwinds over the next three years.

February 14, 2022

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the January 2022 Survey of Consumer Expectations, which shows a decrease in short- and medium-term inflation expectations. Median home price expectations, however, increased above its 2021 average. Labor, income, and spending expectations were all largely stable in January.

The Federal Reserve Bank of New York also issued an accompanying Liberty Street Economics blog post on how consumers’ inflation expectations have responded to inflation during the pandemic.

The main findings from the January 2022 Survey are:

Inflation

  • Median one-year-ahead inflation expectations decreased to 5.8% in January from 6.0% in December. This is the first decline in short-term inflation expectations since October 2020. Similarly, median three-year ahead inflation expectations decreased by 0.5 percentage point to 3.5%. The decline in medium-term inflation expectations was broad-based across age, education, and income groups and is the largest one month decline in the measure since the inception of the survey in 2013. Both measures of inflation expectations, however, remain elevated compared to their pre-COVID-19 readings. Our measures of disagreement across respondents (the difference between the 75th and 25th percentiles of inflation expectations) increased at the short-term horizon, but decreased at the medium-term horizon.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—remained unchanged at the one-year horizon and decreased slightly at the three-year horizon. Both measures remain well above their pre-pandemic February 2020 readings.
  • Median year-ahead home price change expectations increased to 6.0% from 5.5%, above its 2021 average of 5.4%. The increase was most pronounced among respondents with no more than a high school education and those who live in the “West” and “Northeast” Census regions.
  • The commodity price change expectations elicited in the survey all declined in January. The expectations about year-ahead price changes for food, rent, gas, and medical care all declined by 0.1 percentage point to 7.7%, 9.8%, 5.6%, and 9.5%, respectively. The median one-year ahead expected change in the cost of a college education decreased by 0.7 percentage points to 7.3%.

Labor Market

  • Median one-year-ahead expected earnings growth was unchanged at 3.0% in January and remains above its 2021 average of 2.6%.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 0.7 percentage point to 35.9%.
  • The mean perceived probability of losing one’s job in the next 12 months remains unchanged at 11.6%, well below its pre-pandemic reading of 13.8% in February 2020. The mean probability of leaving one’s job voluntarily in the next 12 months decreased to 19.3% in January, from 19.9%.
  • The mean perceived probability of finding a job (if one’s current job was lost) declined to 55.6% in January from 57.5%, but remains well above its 12-month trailing average of 53.5%.

Household Finance

  • The median expected growth in household income fell by 0.1 percentage point to 3.3% in January, but remains above its trailing 12-month average of 2.9%.
  • Median year-ahead household spending growth expectations remained unchanged at 5.5%, substantially above its pre-pandemic level.
  • Perceptions of credit access compared to a year ago deteriorated slightly in January, with more respondents finding it harder to obtain credit now than a year ago. Expectations for future credit availability deteriorated slightly as well with more respondents expecting it will be harder to obtain credit in the year ahead.
  • The average perceived probability of missing a minimum debt payment over the next three months decreased by 0.3 percentage point to 10.0%, which is slightly below the 12-month trailing average of 10.1%.
  • The median expectation regarding a year-ahead change in taxes (at current income level) was unchanged at 4.4%. 
  • Median year-ahead expected growth in government debt increased by 0.3 percentage point to 11.1%, which is the second lowest reading since December 2020.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now increased to 30.5% in January, from 28.2%. This is the highest reading of the series since May 2019.  
  • Perceptions about households’ current financial situations compared to a year ago improved slightly, with fewer respondents reporting being financially worse off than they were a year ago. Respondents were slightly more pessimistic about their household’s financial situation in the year ahead, with more respondents expecting their financial situation to deteriorate a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased by 0.4 percentage point to 38.5%.

About the Survey of Consumer Expectations (SCE)

The Survey of Consumer Expectations (SCE) contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy. 

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows us to observe the changes in expectations and behavior of the same individuals over time. For further information on the SCE, please refer to an overview of the survey methodology here, the interactive chart guide, and the survey questionnaire.

Contact
Mariah Measey
(347) 978-3071
Mariah.Measey@ny.frb.org 

Source: Federal Reserve Bank of New York

Treasury, Federal Reserve did not intervene in foreign exchange markets during 4th quarter 2021

NEW YORK—The Federal Reserve and U.S. Treasury did not intervene in foreign exchange markets during the October – December 2021 quarter, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.

The U.S. dollar, as measured by the Federal Reserve Board’s broad trade-weighted dollar index, appreciated 0.6 percent in the fourth quarter of 2021. The move primarily reflected U.S. dollar appreciation against the Japanese yen and the euro as U.S. shorter-dated yields rose relative to yields in the euro area and Japan following the Federal Reserve’s signaling of a faster-than-anticipated withdrawal of policy accommodation. Broad U.S. dollar appreciation was limited by positive risk sentiment late in the quarter as concerns over the economic growth impact of a new COVID-19 variant waned, as well as strength in some emerging market currencies as many emerging market central banks continued to increase their policy rates. The U.S. dollar appreciated 3.4 percent against the Japanese yen and 1.9 percent against the euro, while depreciating 2 percent against the Swiss franc, 1.4 percent against the Chinese renminbi, 0.5 percent against the Mexican peso, and 0.4 percent against the British pound.

The report was presented by Lorie Logan, executive vice president of the Federal Reserve Bank of New York and the Federal Open Market Committee’s manager for the System Open Market Account, on behalf of the Treasury and the Federal Reserve System.

The full report is available on the New York Fed’s website.

Source: Federal Reserve Bank of New York

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

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@gmail.com.

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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.

Interbank market news scan: Federal Reserve lists principles for reducing its balance sheet; foreign exchange rates of interest …

Interbank, Federal Reserve. The Board of Governors of the Federal Reserve reiterated that its primary policy tool for managing the money supply, maintaining stable prices, and pursuing maximum employment is the federal funds rate, the interbank, overnight rate banks apply when lending reserves to each other. The Board will reduce its balance sheet of assets after its initial raising of the federal funds rate which markets expect to occur in March 2022. Legal advisors should keep this in mind when reviewing or counseling clients on foreign exchange contracts. To see the Board’s release, follow this link.

Interbank, US Dollar. Analysts are expecting further slippage in the euro versus the dollar given the Board of Governors of the Federal Reserve’s decision last Wednesday on interbank overnight lending rates (the federal funds rate). Analysts are seeing the EUR/USD falling to support levels as low as 1.10. Legal advisors should keep this in mind when advising clients on foreign exchange contracts. To see this article, follow this link.

Interbank, SONIA. As banks transition from LIBOR to alternative interest rate benchmarks, here is a discussion on implications from and an update on the status on making the change from LIBOR.

Interbank, European Central Bank. The ECB issues a statement on historically low number of counterfeit banknotes. Approximately 347,000 banknotes were withdrawn from circulation. To see this article, follow this link.

Foreign exchange rates of interest to Atlanta’s immigrant community

EUR/USD=1.1180

GBP/USD=1.3406

USD/MXN=20.7530

USD/GTQ=7.5208

USD/NGN=414.8790

USD/GHS=6.1895

USD/VND=22,633.9000

USD/JPY=115.0500

USD/INR=75.1226

USD/BTC=0.00003

USD/ETH=0.00041

Source: OANDA

Interbank market news scan: BIS releases paper on virtual banking; forex rates of interest to Atlanta; Ethereum strengthens slightly

Bank of International Settlements. Today, the Bank of International Settlements released a paper on virtual banking providing insights on the use of information capital as a substitute for tangible capital. The paper argues that information capital, comprised of an enterprise’s or individual’s digital data footprint, can be used as collateral for obtaining credit, thus increasing access to credit by small and medium businesses and low income individuals.

While the paper uses the Hong Kong market as a case study, I believe that if US-based banks and fintechs embarked on the same initiative, the following legal issues may arise. Can information capital be used as collateral when borrowing for the purpose of purchasing foreign currencies? Does the use of information capital raise discrimination issues where biases are embeded in the artificial intelligence programming? Are existing laws sufficient for protecting enterprise or individual data privacy where such data is encompassed in information capital used as collateral?

The link to the BIS paper can be found here.

Federal Reserve Bank of New York. Yesterday after the Board of Governors of the Federal Reserve announced that it would hold its interbank rate for overnight lending between 0 and .25%, the Federal Reserve Bank of New York announced that the reserve bank’s Open Market Trading Desk would increase its System Open Market Account holding of Treasury securities by at least $20 billion per month and its agency mortgage-backed securities by at least $10 billion per month. This reduced level of purchasing (down from a combined high of $120 billion per month at the beginning of the pandemic) will commence on 14 February 2022.

The link to the New York Fed’s announcement can be found here.

Interbank Market, Pakistan. The rupee held steady against the dollar at Rs176.98 but has been depreciating in value since 1 July 2021. See link to article here.

Foreign exchange rates as of 10:00 am EDT

EUR/USD=1.1282

GBP/USD=1.3500

USD/MXN=20.6258

USD/GTQ=7.5060

USD/NGN=414.7010

USD/GHS=6.1790

USD/VND=22,632.2000

USD/JPY=114.1900

USD/INR=74.8041

USD/BTC=0.00003

USD/ETH=0.00039

Source: OANDA

Federal Reserve continues reduction of monthly asset purchases, maintains interbank rate at current level, and no clear indication of a March rate hike…

“Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of 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 continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve’s ongoing purchases and holdings of securities will continue to 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; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.”

Implementation Note issued January 26, 2022Last Update: January 26, 2022

Source: Board of Governors of the Federal Reserve System

Federal Reserve shares its position on central bank digital currencies …

The Federal Reserve Board on Thursday released a discussion paper that examines the pros and cons of a potential U.S. central bank digital currency, or CBDC. It invites comment from the public and is the first step in a discussion of whether and how a CBDC could improve the safe and effective domestic payments system. The paper does not favor any policy outcome.

“We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States,” Federal Reserve Chair Jerome H. Powell said.

The paper summarizes the current state of the domestic payments system and discusses the different types of digital payment methods and assets that have emerged in recent years, including stablecoins and other cryptocurrencies. It concludes by examining the potential benefits and risks of a CBDC, and identifies specific policy considerations.

Consumers and businesses have long held and transferred money in digital forms, via bank accounts, online transactions, or payment apps. The forms of money used in those transactions are liabilities of private entities, such as commercial banks. Conversely, a CBDC would be a liability of a central bank, like the Federal Reserve.

While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides. They include how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment. Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance. The paper discusses these and other factors in more detail.

To fully evaluate a potential CBDC, the Board’s paper asks for public comment on more than 20 questions. Comments will be accepted for 120 days and can be submitted here.

For media inquiries, please email media@frb.gov or call 202-452-2955.

Source: Board of Governors of the Federal Reserve System

Biden announces three nominations to the Federal Reserve

Today, President Biden announced the nomination of Sarah Bloom Raskin to serve as Vice Chair for Supervision of the Board of Governors of the Federal Reserve System and the nomination of Lisa Cook and Philip Jefferson to serve on the Board of Governors of the Federal Reserve System.

Our economy has made enormous progress over the past year, with 6.4 million jobs created and unemployment falling to 3.9% –– four years faster than projected. At the same time, our economy is facing the challenge of price increases that are squeezing families’ budgets.

The Federal Reserve plays a vital role in our economy. The President is confident that the Federal Reserve will act to achieve their dual goals of maximum sustainable employment and price stability and make sure that price increases do not become entrenched over a long term with the independence that they need.

Along with Jerome Powell – who the President has nominated for a second term as Chair of the Board of Governors of the Federal Reserve System – and Dr. Lael Brainard – who was nominated to serve as Vice Chair of the Board of Governors of the Federal Reserve System – President Biden has now nominated a group of five people to serve on the Board of Governors who have the experience, judgment and talent necessary to lead the Federal Reserve at this important moment in our economic recovery.

The Senate has confirmed three of these nominees who have previously served on the Board of Governors – Powell, Brainard, and Raskin. Jefferson started his career as an economist for the Federal Reserve, and both he and Cook have consulted frequently with a number of Federal Reserve Regional Banks. They will bring long overdue diversity to the leadership of the Federal Reserve, including the first Black woman in history to serve on the Board and the fourth Black man to serve on the Board. If all five are confirmed, the Board will be majority women. When we have leaders in the Federal government that reflect the diversity of our country, it results in better outcomes for all Americans. That is especially true in our economy where too many groups historically have been left behind, or left out altogether.

Statement from President Biden

“We are at a moment of historic economic progress alongside unique economic challenges as we work to drive our recovery forward. This is a moment that calls for sound, independent leadership from the Board of Governors at the Federal Reserve. That is why I am proud to nominate Sarah Bloom Raskin, Lisa Cook, and Philip Jefferson, who will bring a breadth of knowledge, experience and expertise to the Board of Governors. Raskin is among the most qualified nominees ever for the position of Vice Chair for Supervision, while Jefferson and Cook are talented economists with decades of experience working on a broad range of economic issues. Together with Chair Powell and Dr. Brainard, who I renominated last month, this group will bring much needed expertise, judgement and leadership to the Federal Reserve while at the same time bringing a diversity of thought and perspective never seen before on the Board of Governors. They will continue the important work of steering us on a path to a strong, sustainable recovery, while making sure that price increases do not become entrenched over the long term. I have full confidence in the strong leadership of this group of nominees, and that they have the experience, judgement, and integrity to lead the Federal Reserve and to help build our economy back better for working families.”

Sarah Bloom Raskin for Vice Chair for Supervision
Sarah Bloom Raskin has served both as the Deputy Secretary of the U.S. Department of the Treasury and as a Governor of the Federal Reserve Board. At Treasury, she oversaw the Treasury Department and its various agencies and departments, pursuing innovative solutions to enhance American’s shared prosperity, the resilience of our country’s critical financial infrastructure, particularly as it related to climate risk and cybersecurity, and the defense of consumer safeguards in the financial marketplace. As a Governor of the Federal Reserve Board, she helped conduct the nation’s monetary policy and promote financial stability. She also served as the Commissioner of Financial Regulation for the State of Maryland, where she and her agency were responsible for regulating Maryland’s financial institutions, including all state-chartered depository institutions, banks, credit unions, mortgage lenders, mortgage servicers, and trust companies, among others. She currently is the Colin W. Brown Distinguished Professor of the Practice of Law at the Duke University School of Law as well as the board of trustees of Amherst College. She received her B.A. in economics from Amherst College (Phi Beta Kappa; magna cum laude), and her J.D. from Harvard Law School.

Lisa Cook for Governor
Lisa D. Cook is a Professor of Economics and International Relations at Michigan State University. She was the first Marshall Scholar from Spelman College and received a second B.A. in Philosophy, Politics, and Economics from Oxford University. She earned a Ph.D. in economics from the University of California, Berkeley with fields in macroeconomics and international economics. She was an adjunct professor at Harvard University’s Kennedy School of Government, Deputy Director for Africa Research at the Center for International Development at Harvard University, and a National Fellow at Stanford University. Among her current research interests are economic growth and development, innovation, financial institutions and markets, and economic history. Dr. Cook is a Research Associate at the National Bureau of Economic Research and is the author of a number of published articles, book chapters, and working papers. She is also on the Board of Editors of the Journal of Economic Literature. She also served at the White House Council of Economic Advisers under President Obama and also had visiting appointments at the National Bureau of Economic Research, the University of Michigan, and the Federal Reserve Banks of New York, Chicago, Minneapolis, and Philadelphia. She serves on the Advisory Boards of the Federal Reserve Bank of Chicago (Academic Advisory Council).

Philip Jefferson for Governor
Philip N. Jefferson is Vice President for Academic Affairs and Dean of Faculty and the Paul B. Freeland Professor of Economics at Davidson College. He serves on the Vassar College Board of Trustees, the Board of Advisors of the Opportunity and Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis and is a past president of the National Economic Association. He is a Faculty Affiliate of the Institute for Research on Poverty at the University of Wisconsin-Madison. His research has appeared in several journals and has been funded by grants from the National Science Foundation. Dr. Jefferson previously served as chair of the Economics department at Swarthmore College, where he was the Centennial Professor of Economics. He was an economist at the Board of Governors of the Federal Reserve System. He held visiting appointments at the Federal Reserve Bank of New York, the University of California at Berkeley, and the Board of Governors of the Federal Reserve System. He served as a director of the Eastern Economic Association and as a member of the governing council of the Inter-university Consortium for Political and Social Research at the University of Michigan. Philip served on the Swarthmore Borough Council, Delaware County, Pennsylvania. He holds a BA in economics from Vassar College and a PhD and a MA in economics from the University of Virginia.

Source: The White House

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@gmail.com.

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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.

No surprises out of Powell’s nomination hearing …

The real economy isn’t supposed to support everyone. It is supposed to employ an optimal number of employees that produce the most income at the least cost for the individuals investing the capital. This is my response to the expected drivel coming out of U.S. Senator Sherrod Brown, Democrat of Ohio, during today’s hearing on the re-nomination of Jerome Powell as chairman of the Board of Governors of the Federal Reserve. Senator Brown in his opening statement expressed his concern that Wall Street banks were enjoying over a decade of high profits while individuals on Main Street were facing the threat of unemployment and rising inflation.

Senator Elizabeth Warren’s line of questioning followed a similar vein to Mr Brown, although the Massachusetts Democrat seemed to go all in on “corporations” versus her usual culprits, the banks. Mr Powell probably determined it was best not to interrupt Mrs Warren by pointing out that the Board of Governors has oversight of banks and not your run-of-the mill corporations. Silence is best. Let her ramble on. Besides, Mrs Warren was likely on a stage of satisfaction having her favorite Fed governor (Lael Brainard) as nominee for the Board’s vice-chair, thus having an embedded check on a “dangerous man” (Warren’s words) in the form of Mr Powell.

If any topic out of the Senate was going to peak trader interest, it would be the topic of inflation. Politically, about a third of the Senate would love to have the ability this election year to say that they did something about inflation, but the Senate along with the House of Representatives, punted away their constitutional power over coin and commerce over a century ago. Although Senator Richard Shelby, Republican of Alabama, and Senator Jack Reed, Democrat of Rhode Island, raised the issue of inflation and the Federal Reserve’s policy timing to address it, none of the senators offered policy recommendations or hinted at legislation designed to mandate requirements for addressing inflation. A number of senators acknowledged the Federal Reserve’s dual statutory mandate of bringing about price stability and generating full employment, but that was the extent of serious discussion on inflation.

In just under 14 hours from this writing, the US Bureau of Labor Statistics will issue its year-over-year estimate on overall inflation. Consensus forecast is at seven percent, relatively in line with last month’s annualized rate of 6.8%. While I don’t do market analysis here, I expect that after the inflation print, the morning will be filled with banter on whether the Federal Reserve will have three rate increases or even four.

Otherwise, Mr Powell will be advanced from the Senate banking committee to the full floor of the Senate where he will likely see his nomination approved. He will likely look more hawkish. He may not have a choice if tomorrow’s number ends up being what we expect.

And as for the usual drivel on the economy and the working man, the inflation number will provide the usual fodder for campaign messaging.

Alton Drew

11.01.2022

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At first blush, what I expect to hear from the Senate banking committee regarding re-appointment of Jerome Powell

Given that President Joe Biden has decided that Jerome Powell is his choice for chairman of the Board of Governors of the Federal Reserve, I expect Mr Powell will garner a sufficient number of votes after today’s re-appointment hearing from Senate Democrats and Senate Republicans for approval for another four-year term. Senator Elizabeth Warren, Democrat of Massachusetts, will likely again make her feelings clear about how dangerous she believes Mr Powell’s bank supervision policies are for the American public. The assertions will make for some C-SPAN TV time drama but that will be about it.

I expect, based in part on his prepared remarks, that Mr Powell will describe a growing economy that has managed to create a strong job market. He is prepared to address the consequences of that growth among which are, in his words, supply and demand imbalances and bottlenecks accompanied by elevated inflation.

Inflation, I suspect, will be today’s hot topic. One-third of the U.S. Senate and all members of the U.S. House of Representatives are up for re-election this November. They want to go home to constituents this campaign season with positive news on when inflation is expected to dissipate. Wage inflation may be noted by Mr Powell where the U.S. Bureau of Labor Statistics reported in its last jobs situation report that non-farm payroll hourly earnings are at $31.31, up $.19 from the November jobs report. With unemployment at 3.9% and the addition of 199,000 non-farm payroll jobs, there is an argument that can be made that the economy is facing a full-employment scenario, thus fueling the probability of increased wage inflation.

For the twelve months ending November 2021, the U.S. experienced 6.8% inflation in all goods and services. Mr Powell had the good political sense to dump the word “transitory” as Americans expect no relief on inflation over the next one to three years as the Federal Reserve Bank of New York reported yesterday.

I would advise retail foreign exchange traders to keep their ears open for hints further refining the timing of the beginning of rate hikes as well as firmer indication as to how many are to be expected. Democratic senators will try to score political brownie points by spinning a narrative about what they can do regarding inflation, including touting support for Mr Biden’s “Build Back Better” bill which, they will argue, expands American transportation and productive capacity, thus alleviating inflationary pressures. Expect Republicans to push back on the Democratic narrative, arguing that Fed tapering of Treasury securities and agency mortgage-backed securities should have started sooner and move at a faster pace.

In reality, the most that the Senate can do for inflation and indirectly to impact the US currency is to move quickly on Mr Powell’s re-appointment, a done deal in my book.

Alton Drew

11.1.2022

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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.