Interbank market news scan: Fed Governor Waller emphasizes independence of the Federal Reserve …

Today, Federal Reserve Board Governor Christopher J Waller delivered remarks on the Federal Reserve-US Treasury relationship and the importance of political independence of the Federal Reserve …

“By way of introduction, I spent the first part of my career as an economics professor and researcher. One of my main fields of inquiry was monetary policy theory. I have long been a strong believer in the virtues of central bank independence, and today I will devote my remarks to that topic.1

As a result of the COVID-19 crisis, tremendous monetary and fiscal measures have been taken to provide economic relief to American households and businesses. The Federal Reserve took a host of actions, including lowering its policy rate to zero and purchasing securities to support market functioning and provide monetary accommodation.2 The Congress enacted several packages that funded the health response to the pandemic, expanded unemployment insurance, and provided economic assistance payments to households and businesses.3

The virus also created uncertainty and turbulence in financial markets, which led the Federal Reserve to establish emergency lending programs to serve as lending backstops and support the flow of credit to households, businesses, nonprofits, and state and local governments.4 Establishing these programs under section 13(3) of the Federal Reserve Act required substantial cooperation between the Department of the Treasury and the Federal Reserve.

The Congress has provided spending of roughly $5.8 trillion during the past year to deal with the pandemic and its effects on the economy.5 This action has pushed the ratio of publicly held U.S. debt to nominal gross domestic product to more than 100 percent for the first time since World War II.6 The Federal Reserve’s holdings of U.S. government debt has risen to around $7 trillion, with about $2.5 trillion of that total resulting from its asset purchase program aimed at smoothing credit market functioning and providing monetary accommodation.

Because of the large fiscal deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressures (1) to keep interest rates low to help service the debt and (2) to maintain asset purchases to help finance the federal government. My goal today is to definitively put that narrative to rest. It is simply wrong. Monetary policy has not and will not be conducted for these purposes.

My colleagues and I will continue to act solely to fulfill our congressionally mandated goals of maximum employment and price stability. The Federal Open Market Committee (FOMC) determines the appropriate monetary policy actions solely to move the economy towards those goals. Deficit financing and debt servicing issues play no role in our policy decisions and never will. Chair Powell made this same point in his recent comments to the Economic Club of New York.7 My objective today is to reinforce that message.

This does not mean, however, that the Treasury and Federal Reserve should never work together. My comments today will focus on the issue of cooperation—on when and how much is beneficial and on the potential costs that should not be overlooked.

Let me point out that there are two fronts for interaction between the Treasury and the Federal Reserve. The first is what I will call “back office” operations. By this term, I mean the range of fiscal agency services that the Federal Reserve provides to the Treasury by statute.8 For example, the Federal Reserve maintains the Treasury’s operating account, accepting deposits, paying checks, and making electronic payments on behalf of the Treasury. It provides securities services on behalf of the Treasury, supporting the auction, issuance, and redemption of marketable Treasury securities. It also provides application development and infrastructure support services, assisting in the Treasury’s efforts to improve government cash- and debt-management processes. Since the Federal Reserve is the fiscal agent for the Treasury—and to play that role efficiently and at low cost—the Federal Reserve and the Treasury must always work closely together on operations issues.

The second form of interaction involves the Treasury and the Federal Reserve working together on certain macroeconomic policy issues. I will discuss two areas where differing degrees of interaction could occur, emergency lending facilities and economic stabilization, and one area where that interaction should not, and does not, occur—debt financing.

First, let me talk about emergency lending facilities authorized by section 13(3) of the Federal Reserve Act.9 During a financial crisis or extreme market malfunctioning, cooperation between the fiscal and monetary authorities is imperative. An important role of a central bank is to step in and provide liquidity to ensure market functioning during those “unusual and exigent circumstances.”10 And under those circumstances, since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Secretary of the Treasury is required to approve any new programs under the Federal Reserve’s emergency lending authority.

As I mentioned, the Federal Reserve and the Treasury undertook this kind of coordinated response a year ago, as uncertainty about the economic effect of the virus caused markets to begin seizing up. Many section 13(3) facilities were established to support the flow of credit to households, businesses, and state and local governments. All of these emergency programs required the approval of the Secretary of the Treasury, and many of them were supported by the Treasury’s financial backing, using funds specifically appropriated by the Congress for these facilities in the Coronavirus Aid, Relief, and Economic Security Act.

At times like these, cooperation between the fiscal and monetary authorities strengthens financial stability. A financial crisis is not a time for uncooperative behavior from either side. However, with regard to the second area, economic stabilization, it is imperative that the central bank remain independent from the fiscal authority. There are sizable costs if cooperation turns into fiscal control.

To understand this point, consider a situation where the economy is hit with a negative shock that depresses aggregate demand. The Macro 101 textbook policy response we teach students is for the monetary and fiscal authorities to enact stimulative policies to increase aggregate demand. This effort involves fiscal actions, such as increasing spending and cutting taxes, which increase the deficit. The finance ministry’s job is to finance the deficit that results from these fiscal policy actions. Greater borrowing by the finance ministry to finance these policies will tend to put upward pressure on interest rates, which crowds out private sector spending. In this textbook example, the monetary authority should respond to this upward pressure on interest rates by adopting a more accommodative policy stance to bring rates back down.

From an institutional design viewpoint, what would be the appropriate arrangement to ensure this type of policy response? One obvious solution would be to give the finance ministry control of monetary policy to ensure a coordinated policy response. This logic suggests central bank independence is an impediment to optimal stabilization policy.

So why have an independent central bank? Why create an impediment to socially beneficial cooperation?

In the situation where monetary policy is under control of the Treasury, and thus the executive branch in the United States, political motivations may influence decisions. To return to my stabilization example, as the economy recovers, with all of the monetary and fiscal stimulus in place, this stimulus may lead to undesirable inflation pressures. The standard monetary policy response is to evaluate the current employment and inflation situations and raise interest rates when deemed appropriate. However, if monetary policy is under the control of the Treasury, then to further juice the economy for short-term political gains, this action could be delayed past the date the central bank would want to raise rates. Consequently, the argument goes that a hot economy may cause substantial inflation pressures that are hard to rein in politically, and which ultimately harm Americans in the longer run. This view is backed up by the political economy literature, which argues that having monetary policy under the control of political authorities may lead to excessive inflation and economic volatility that is not socially optimal.11 Put another way, it can lead to an unstable economy, on which households and businesses cannot rely.

Subsequent academic research, including mine, focuses on ways in which the central bank could be designed to prevent this undesired outcome from happening.12 One of those ways is delegating decisionmaking to a policy committee that is insulated from short-term political pressures. Institutional details that enhance insulation include giving central bankers long terms and prohibiting removal from office for political reasons. This literature provides the theoretical foundations for central bank independence and the importance of central bank credibility.

A look across countries is instructive. Operational independence with clearly specified goals for monetary policy has become the norm for central banks in advanced economies, reflecting the consensus that has emerged over the past 30 years concerning the benefits of central bank independence.

The Congress was fully aware of the potential misuse of monetary policy for political reasons, and it purposefully created the Federal Reserve as an independent central bank. The design features of the Federal Reserve minimize political influence over monetary policy while still maintaining accountability to the Congress and to the electorate for its policy actions.13

Eventually, in 1977, the Congress mandated that the Federal Reserve conduct monetary policy to effectively promote the goals of maximum employment and price stability. By having monetary policy overseen by independent officials, the incentive to misuse stabilization policy for partisan purposes is reduced. Monetary policymakers can focus on what is best for the economy over the long run.14

Finally, we come to the third area of potential interaction between the central bank and the Treasury: debt financing. When governments run up large debts, the interest cost to servicing this debt will be substantial. Money earmarked to make interest payments could be used for other purposes if interest rates were lower. Thus, the fiscal authority has a strong incentive to keep interest rates low.

The United States faced this situation during World War II.15 Marriner Eccles, who chaired the Federal Reserve at the time, favored financing the war by coupling tax increases with wage and price controls. But, ultimately, he and his colleagues on the FOMC concluded that winning the war was the most important goal, and that providing the government with cheap financing was the most effective way for the Federal Reserve to support that goal. So the U.S. government ran up a substantial amount of debt to fund the war effort in a low interest rate environment, allowing the Treasury to have low debt servicing costs. This approach freed up resources for the war effort and was the right course of action during a crisis as extreme as a major world war.

After the war was over and victory was achieved, the Treasury still had a large stock of debt to manage and still had control over interest rates. The postwar boom in consumption, along with excessively low interest rates, led to a burst of inflation. Without control over interest rates, the Federal Reserve could not enact the appropriate interest rate policies to rein in inflation. As a result, prices increased 41.8 percent from January 1946 to March 1951, or an average of 6.3 percent year over year.16 This trend, and efforts by then-Chair Thomas McCabe and then-Board member Eccles, ultimately led to the Treasury-Fed Accord of 1951, which restored interest rate policy to the Federal Reserve. The purpose of the accord was to ensure that interest rate policy would be implemented to ensure the proper functioning of the economy, not to make debt financing cheap for the U.S. government.

The upshot of these examples is that cooperation between the Federal Reserve and the Treasury is important to address macroeconomic policy issues. But research shows that, to avoid distortions in using monetary policy for deficit financing, it is important to have an independent central bank with a clear and credible inflation target, which the Federal Reserve does.17 Central bank independence is critical for maintaining that target and keeping inflation expectations in line with that target.

My message today is that the Federal Reserve and the Treasury should work together at key times and along certain dimensions. Back-office operations are done efficiently and effectively in this manner. And in times of crisis, coordination allows policies to be implemented quickly and forcefully to set the stage for a strong path of recovery. But for this arrangement to work, the political independence of the Federal Reserve is essential—it is the best way for the Federal Reserve to meet its congressional mandate and allow policymakers to meet the longer-term needs of the American people. The Treasury and the Federal Reserve both recognize this necessity and have issued joint statements to this effect in the past.18

With this independence, of course, the FOMC is committed to being accountable and transparent about our actions to both the Congress and the public—and the Federal Reserve strives to continually improve its transparency. In 2020, for example, the FOMC released a new Statement on Longer-Run Goals and Monetary Policy Strategy.19 This new framework explains how we interpret the mandate that the Congress has given us and describes the broad framework that we believe will best promote our maximum-employment and price-stability goals.

Going forward, the monetary policy choices of the FOMC will continue to be guided solely by our mandate to promote maximum employment and stable prices. These congressionally mandated goals always drive our decisions; partisan policy preferences or the debt-financing needs of the Treasury will play no role in that decision.

Cooperation in times of crisis, like during the initial phases of the COVID crisis, was crucial for staving off an economic disaster, putting us on the road to recovery, and helping avoid long-run scarring and was the appropriate way to serve the Fed’s dual mandate. But the independence of the Federal Reserve is in the nation’s best interest and should be valued and protected by all.”

Source: Board of Governors of the Federal Reserve

Interbank market news scan: Archegos Capital is the management firm that banks are watching this morning …

Banks. Shares of Europe’s largest banks dropped on Monday after extending credit to a major client that couldn’t meet its obligations. Banks tumble after U.S. fund wilts (msn.com)

Banks. U.S. stock futures edged lower Monday after a large investment fund unwound billions of dollars in holdings, triggering concerns that stocks in the portfolio and banks who dealt with the firm could face sharp losses. Stock Futures Drop as Banks Warn of Losses | Fox Business

Banks. Swiss financial watchdog FINMA said on Monday it has been informed by Credit Suisse CSGN.S about its involvement in an international hedge-fund case involving several banks. Swiss watchdog says several banks involved in hedge-fund case | Nasdaq

Federal Reserve. Federal Reserve governor Christopher J. Waller addresses the importance of Federal Reserve independence this morning at 11:00 EST. Federal Reserve Board – Calendar

Federal Reserve. The Federal Reserve releases data on foreign exchange rates and selected interest rates today at 4:15 pm EST. Federal Reserve Board – Calendar

Currency pair29 March 2021 7:18am
EUR/USD1.770
AUD/USD0.7648
GBP/USD1.3832
USD/JPY109.5600
NZD/USD0.6997
USD/CHF0.9395
USD/NOK8.5782
USD/SEK8.6867
USD/CAD1.2592

Interbank market news scan: Lael Brainard provides detailed description of the inflationary bump expected from the American Recovery Plan …

The following remarks by Federal Reserve Governor Lael Brainard were delivered yesterday before the annual conference of the National Association of Business Economics …

“It has now been a year since the onset of COVID-19 in the United States. The past year has been marked by heartache and hardship, especially for vulnerable communities, as well as by the resilience and extraordinary efforts of Americans everywhere, particularly those on the front lines. The past year has also seen determined efforts on the part of policymakers—public health, fiscal, and monetary—to do what is necessary and stay the course until we return to full strength.1

These determined efforts have contributed to a considerably brighter economic outlook. A comparison between the median of the most recent Federal Open Market Committee (FOMC) Summary of Economic Projections (SEP) and the first projection following the onset of the pandemic, in June of last year, highlights the improvement in the outlook. The change in the SEP median suggests an improvement in the projected level of gross domestic product of 6 percent at the end of 2021 and 2022, a decline in the unemployment rate of 2 percentage points at the end of 2021 and 1-1/2 percentage points at the end of 2022, and an upward revision to the headline inflation rate of 0.8 percentage point at the end of 2021 that narrows to a 0.3 percentage point upward revision at the end of 2022.2 The expected improvements in the outlook reflect progress on controlling the virus, nearly $3 trillion in additional fiscal support, and forceful and timely support from monetary policy.

Although the outlook has brightened considerably, the fog of uncertainty associated with the virus has yet to lift completely, and current employment and inflation outcomes remain far from our goals. The focus on achieved outcomes rather than the anticipated outlook is central to the Committee’s guidance regarding both asset purchases and the policy rate. The emphasis on outcomes rather than the outlook corresponds to the shift in our monetary policy approach that suggests policy should be patient rather than preemptive at this stage in the recovery.

Outcomes
Recent data indicate that activity has picked up this year. After a dip in the final months of 2020, personal consumption expenditures (PCE) stepped up considerably so far this year, and spending on durable goods has been particularly strong. This pattern appears consistent with a quick spend-out from the Consolidated Appropriations Act (CAA) stimulus checks at the turn of the year, particularly among lower-income households that may have previously exhausted the funds provided in the CARES Act (Coronavirus Aid, Relief, and Economic Security Act).3

Like the spending data, the labor market data turned more positive in January and February following weakness at the end of 2020. Although the unemployment rate has moved down 1/2 a percentage point since December, the K-shaped labor market recovery remains uneven across racial groups, industries, and wage levels.4 The employment-to-population (EPOP) ratio for Black prime-age workers is 7.2 percentage points lower than for white workers, while the EPOP ratio is 6.2 percentage points lower for Hispanic workers than for white workers—an increase in each gap of about 3 percentage points from pre-crisis lows in October 2019.

Workers in the lowest-wage quartile continued to face staggering levels of unemployment of around 22 percent in February, reflecting the disproportionate concentration of lower-wage jobs in services sectors still sidelined by social distancing.5 The leisure and hospitality sector is still down almost 3.5 million jobs, or roughly 20 percent of its pre-COVID level. This sector accounts for more than 40 percent of the net decline in private payrolls since February 2020. Overall, with 9.5 million fewer jobs than pre-COVID levels, we are far from our broad-based and inclusive maximum-employment goal.

Inflation similarly remains far from the goal of 2 percent inflation on average over time. Both headline and core PCE inflation were below 2 percent on a 12-month basis throughout 2020 and came in at 1.5 percent in January.

Finally, while vaccinations are continuing at an accelerating pace, over two-thirds of the adult population have yet to receive their first dose, and there are risks from more contagious strains of the virus, social-distancing fatigue, and vaccine hesitancy.6

Outlook
As the economy reopens, the potential release of pent-up demand could drive stronger growth in 2021 than we have seen in decades. However, it is uncertain how much pent-up consumption will be unleashed when social distancing completely lifts, and how much household spending will result from the new stimulus and accumulated savings. With PCE accounting for roughly 70 percent of the economy, this uncertainty about consumption spending contributes to uncertainty about activity, employment, and inflation.

In part, the outcome will hinge on distributive questions that are imperfectly understood. Households accrued considerable additional savings that led to a $2.1 trillion increase in liquid assets by the end of last year.7 Higher-income households appear to have cut back on discretionary services spending over the past year and increased their purchases of durable goods, which may see some satiation going forward. For moderate-income households that are not cash constrained, it is possible there will be a lower near-term spend-out from the American Rescue Plan payments relative to the CAA payments, given that less than 75 days elapsed between the two rounds of payments. Households whose cash flows were improved by the CAA stimulus may save more of the most recent stimulus for precautionary reasons. That said, there is upside risk if a substantial fraction of stimulus payments and accumulated savings are spent in 2021 rather than more slowly over a longer time period.

On the other side, there is potential for some leakage abroad if, as anticipated, foreign demand growth in some regions is weaker than in the United States. Imports soared during the second half of last year and grew further in January, even with worsening backlogs at U.S. ports. As port congestion and supply chain bottlenecks ease, international spillovers could lead to some slippage between the increase in domestic demand and resource utilization, which has implications for employment and inflation.

In the labor market, as vaccinations continue and social distancing eases, businesses in hard-hit services sectors will increase hiring, accelerating the pace at which workers find employment. The strong and timely support from fiscal as well as monetary policy likely reduced the extent of scarring during the pandemic, which should aid the pace of hiring at in-person services establishments once the virus is well controlled.

The speed of further improvement in the labor market following the initial rush of reopening is less clear, however. Some employers may be cautious about significantly increasing payrolls before post-COVID consumption patterns are more firmly established. Others may be implementing measures to stay lean and contain costs. In the December Duke CFO survey, roughly one-half of CFOs from large firms and about one-third of those from small firms reported “using, or planning to use, automation or technology to reduce reliance on labor.”8

In addition to greater use of technology, there is likely a significant amount of slack on the participation and part-time margins. The EPOP ratio among workers ages 25 to 54 is still a full 4 percentage points below its pre-COVID level, and the number of workers working part time because they cannot find a full-time job is 1.7 million higher than pre-COVID.

Although core and headline PCE inflation came in at 1.5 percent on a 12-month basis in January, the well-anticipated base effects from price declines in March and April of last year will cause inflation to move above 2 percent in April and May. It also seems likely that a surge of demand may be met by some transitory supply bottlenecks amid a rapid reopening of the economy, leading PCE inflation to rise somewhat above 2 percent on a transitory basis by the end of 2021.

Entrenched inflation dynamics are likely to take over following the transitory pressures associated with reopening. Underlying trend inflation has been running persistently below 2 percent for many years.9 In addition, research suggests that although increasing labor market tightness may show through to wage inflation, the pass-through to price inflation has become highly attenuated.10 These results suggest that businesses tend to respond to increased labor costs by reducing margins rather than increasing prices later in the cycle. Thus, as resource utilization continues to tighten over coming years, recent decades provide little evidence to suggest there will be a material nonlinear effect on price inflation.

Policy
The FOMC has communicated its reaction function under the new framework and provided powerful forward guidance that is conditioned on employment and inflation outcomes. This approach implies resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance.

By focusing on eliminating shortfalls from maximum employment rather than deviations in either direction and on the achievement of inflation that averages 2 percent over time, monetary policy can take a patient approach rather than a preemptive approach. The preemptive approach that calls for a reduction of accommodation when the unemployment rate nears estimates of its neutral rate in anticipation of high inflation risks an unwarranted loss of opportunity for many of the most economically vulnerable Americans and entrenching inflation persistently below its 2 percent target.11 Instead, the current approach calls for patience, enabling the labor market to continue to improve and inflation expectations to become re-anchored at 2 percent.

One simple illustration of this difference is the way in which FOMC communications under the new framework have shifted market expectations around the conditions associated with the lift off of the policy rate from the lower bound. This shift is suggested by a comparison of the surveys of primary dealers and market participants conducted by the Federal Reserve Bank of New York in the most recently available surveys, in January 2021, and under the prior policy framework, in March 2015. In the January 2021 surveys, the median respondent expected the unemployment rate to be a bit below 4 percent at the time of liftoff, as compared with 5.3 percent in the March 2015 surveys. Similarly, in the January 2021 surveys, the median respondent expected a 12-month headline PCE inflation rate of 2.2 to 2.3 percent at the time of liftoff, as compared to roughly 0.5 percent in the March 2015 surveys. The most recently available surveys suggest that market participants expect policy to look through the rolling off of base effects as well as possible transitory price increases due to short-term supply-demand imbalances.

The FOMC has stated that in order to anchor inflation expectations at 2 percent, it seeks to achieve inflation that averages 2 percent over time. This language recognizes that the public’s expectations of inflation are linked to the experience of inflation outcomes. In the nine years since the Committee formally defined price stability as annual PCE inflation of 2 percent, the average 12-month PCE inflation reading has been 1.4 percent. Persistently low inflation creates the risk that households and businesses come to expect inflation to run persistently below target and change their behavior in ways that reinforce low inflation.12

With inflation expected to rise above 2 percent on a transitory basis, I will be closely monitoring a dashboard of indicators to assess that inflation expectations remain well anchored at levels consistent with the Committee’s objective. These indicators include survey and market-based measures, along with composite measures like the staff’s Index of Common Inflation Expectations.13 Survey measures have picked up a little but remain around pre-COVID levels. Meanwhile, five- and 10-year TIPS (Treasury Inflation-Protected Securities)-based measures of inflation compensation have moved up almost 1 percentage point since last summer and are now at levels last seen in 2013 and 2014. These changes likely reflect both the improvement in the anticipated outlook and market participants’ understanding of the Committee’s new reaction function.14

The overall price-stability objective of achieving inflation that averages 2 percent over time provides an important guidepost for assessing the path of inflation. Along with realized inflation, I will be monitoring a range of average inflation concepts in the literature to assess the path of policy that would be consistent with closing the inflation gap under a variety of make-up strategies.15

While the outlook has brightened considerably, with jobs nearly 10 million below the pre-COVID level and inflation persistently below 2 percent, the economy remains far from our goals, and it will take some time to achieve substantial further progress. By taking a patient approach based on outcomes rather than a preemptive approach based on the outlook, policy will be more effective in achieving broad-based and inclusive maximum employment and inflation that averages 2 percent over time. The combination of patient monetary policy, together with accelerating progress on vaccinations and substantial fiscal stimulus, should support a strong and inclusive recovery as the economy reopens fully.”

Federal Reserve chairman Jerome Powell’s testimony before Congress puts spotlight on a recovering economy without emphasizing yield impacts …

The following is Federal Reserve chairman Jerome Powell’s testimony before the U.S. House of Representative’s Committee on Financial Services:

“Chairwoman Waters, Ranking Member McHenry, and other members of the Committee, thank you for the opportunity to discuss the measures we have taken to address the hardship wrought by the pandemic.

I would like to start by noting the upcoming one-year anniversary of the CARES Act (Coronavirus Aid, Relief, and Economic SecurityAct). With unanimous approval, Congress provided by far the fastest and largest response to any postwar economic downturn, offering fiscal support for households, businesses, health-care providers, and state and local governments. This historically important legislation provided critical support in our nation’s hour of need. As the virus arrived in force, our immediate challenge was to limit the severity and duration of the fallout to avoid longer-run damage. At the Fed, we also acted with unprecedented speed and force, using the full range of policy tools at our disposal.

Today the situation is much improved. While the economic fallout has been real and widespread, the worst was avoided by swift and vigorous action—from Congress and the Federal Reserve, from across government and cities and towns, and from individuals, communities, and the private sector. More people held on to their jobs, more businesses kept their doors open, and more incomes were saved. But the recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes.

As we have emphasized throughout the pandemic, the path of the economy continues to depend on the course of the virus. Since January, the number of new cases, hospitalizations, and deaths has fallen, and ongoing vaccinations offer hope for a return to more normal conditions later this year. In the meantime, continued social distancing and mask wearing will help us reach that goal.

Indicators of economic activity and employment have turned up recently. Household spending on goods has risen notably so far this year, although spending on services remains low, especially in sectors that typically require in-person gatherings. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up.

As with overall economic activity, conditions in the labor market have recently improved. Employment rose by 379,000 in February, as the leisure and hospitality sector recouped about two-thirds of the jobs it lost in December and January.

The recovery has progressed more quickly than generally expected and looks to be strengthening. This is due in significant part to the unprecedented fiscal and monetary policy actions I mentioned, which provided essential support to households, businesses, and communities.

However, the sectors of the economy most adversely affected by the resurgence of the virus, and by greater social distancing, remain weak, and the unemployment rate—still elevated at 6.2 percent—underestimates the shortfall, particularly as labor market participation remains notably below pre-pandemic levels.

We welcome this progress, but will not lose sight of the millions of Americans who are still hurting, including lower-wage workers in the services sector, African Americans, Hispanics, and other minority groups that have been especially hard hit.

The Federal Reserve’s response has been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system.

When financial markets came under intense pressure last year, we took broad and forceful actions, deploying both our conventional and emergency lending tools to more directly support the flow of credit. Our actions, taken together, helped unlock more than $2 trillion in funding to support businesses large and small, nonprofits, and state and local governments between April and December. This support, in turn, has helped keep organizations from shuttering and put employers in both a better position to keep workers on and to hire them back as the recovery continues.

Our programs served as a backstop to key credit markets and helped restore the flow of credit from private lenders through normal channels. We deployed these lending powers to an unprecedented extent last year. Our emergency lending powers require the approval of the Treasury and are available only in very unusual circumstances.

Many of these programs were supported by funding from the CARES Act. Those facilities provided essential support through a very difficult year. They are now closed, and the Federal Reserve has returned the large majority of the Treasury’s CARES Act equity, as required by law. Our other emergency lending facilities are following suit imminently, although we recently extended the PPPLF (Paycheck Protection Program Lending Facility) for another quarter to continue to support the PPP (Paycheck Protection Program).

Everything the Fed does is in service to our public mission. We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible on behalf of communities, families, and businesses across the country.

Thank you. I look forward to your questions.”

Interbank market news scan: Crypto rates fall as crypto exchanges seek more support from traditional finance platforms …

The takeaway:

Cryptocurrency exchanges are doing their best to gain increased legitimacy in the world of finance by hiring advocates with knowledge of Washington or taking their increasing valuations on to publicly traded stock exchange platforms. Meanwhile, the Federal Reserve’s decision today to maintain its fed funds rate may continue to drive more investors toward cryptocurrencies as the dollar continues to fall in value relative to other currencies. With low-rates expected through 2023, there is no end in sight for increased crypto valuations, although hiccups are expected along the way. This is not to say that crypto will maintain its hold on the digital currency space. Bitcoin, for example, is not truly anonymous, according to Digitex CEO Richard Byworth. If that is the case, does that give non-anonymous central bank digital currencies less competition in the future?

Also, cryptocurrency saw another fall in valuation as of 11:07 pm EST 17 March 2021.

To see what we’re following, follow the links …

CFTC should review crypto because it’s exploding: Baucus. https://www.bloomberg.com/news/videos/2021-03-12/cftc-should-review-crypto-because-it-s-exploding-baucus-video

Goldman, Citi lead U.S> banks plowing billions into China. https://www.bloomberg.com/news/videos/2021-03-17/goldman-citi-lead-u-s-banks-plowing-billions-into-china-video

Bitcoin may rise to $175,000 by year end. https://www.bloomberg.com/news/videos/2021-03-15/bitcoin-may-rise-to-175-000-by-year-end-diginex-ceo-video

Coinbase Global, the largest cryptocurrency exchange in the US, on Wednesday revealed that the company now has a valuation of $68 billion ahead of its planned direct listing due in large part to recent private transactions, Reuters first reported. https://markets.businessinsider.com/currencies/news/coinbase-ipo-valued-68-billion-ahead-direct-listing-bitcoin-cryptocurrency-2021-3-1030220737

Creator who sold NFT house for $500,000: “We’ll be living in an augmented reality lifestyle soon.” https://www.cnbc.com/2021/03/17/creator-of-first-nft-digital-house-krista-kim-on-augmented-reality-.html

Cryptocurrency exchange rates as of 17 March 2021 11:07 pm

BTC/USD=56,150.30 ETH/USD=1,771.60

BTC/EUR=47,097.80 ETH/EUR=1,485.99

BTC/GBP=40,364.90 ETH/GBP=1,273.55

BTC/AUD=72,505.00 ETH/AUD=2,287.61

BTC/CAD=69,904.10 ETH/CAD=2,205.55

BTC/CHF=51,975.70 ETH/CHF=1,639.89

BTC/JPY=6,124,550.00 ETH/JPY=193,236.00

BTC/CNY=365,010.00 ETH/CNY=11,516.50

Source: OANDA

18 March 2021 12:14 am EST

Interbank market news scan: Will central banks tighten rates sooner than later and beware the reflation narrative …

   Exchange Rate as of 22 February 2021 As of 9:21 am EST Exchange Rate as of 25 February 2021
AUD/USD0.7868 0.7929
USD/CAD1.2613 1.2558
USD/CNY6.4859 6.4548
EUR/USD1.2117 1.2152
USD/INR72.4500 72.2983
GBP/USD1.4001 1.4141
USD/JPY105.4100 105.7300
USD/MXN20.4212 20.4361
USD/DKK6.1342 6.1185
USD/NOK8.4557 8.4322
BTC/USD55,701.5000 49,795.0000
ETH/USD1,955.4000 1,622.5700
Source: OANDA

From the Federal Reserve …

As of February 25, 2021, the Federal Reserve reported the prime bank rate is 3.25%.  The discount window rate is at .25% and the effective fed funds (interbank overnight rate) is at .07%. 

The Federal Reserve also reported the 2-year Treasury yield at .11; the 10-year yield at 1.37%, and the 30-year yield at 2.21%.

Follow the links ….

US futures have turned negative, with European stock markets reversing earlier gains as rising yields continue to weigh on sentiment. Stocks pull back on higher yields (fxstreet.com)

European stocks enjoyed another positive session yesterday, driven once again by the travel, hospitality and commercial real-estate sector. Higher rate concerns put to one side with Europe set for a positive open | CMC Markets

It’s all about that reflation narrative, a narrative that continues to force upward pressure on stocks and downward pressure on the Buck. In our Wednesday call, we did however warn to start expecting more dovish speak out of central banks around the globe, in an effort to slow the pace of the USD decline. The reflation trade narrative [Video] (fxstreet.com)

25 February 2021

Interbank market news scan: Fed chair Powell shares economic output with US Senate …

The following opening statement was delivered by Jerome Powell, chairman of the Board of Governors of the Federal Reserve System:

My takeaways

  • The pandemic has had a disproportionate impact on minority group and low-wage workers.
  • The Federal Reserve’s monetary policy remains the same. No change in the two-percent longer-run inflation goal.
  • Current monetary policy of two percent longer-run inflation goal asserts an accounting for positive benefits to low and moderate income groups with a flexible inflation average target with two percent as the anchor.
  • The Federal Reserve will continue with its purchase of $120 billion a month in mortgage-backed and agency-backed securities each month.

“Chairman Brown, Ranking Member Toomey, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report.

At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Since the beginning of the pandemic, we have taken forceful actions to provide support and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to households, businesses, and communities. Today I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread. The resurgence in COVID-19 cases, hospitalizations, and deaths in recent months is causing great hardship for millions of Americans and is weighing on economic activity and job creation. Following a sharp rebound in economic activity last summer, momentum slowed substantially, with the weakness concentrated in the sectors most adversely affected by the resurgence of the virus. In recent weeks, the number of new cases and hospitalizations has been falling, and ongoing vaccinations offer hope for a return to more normal conditions later this year. However, the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.

Household spending on services remains low, especially in sectors that typically require people to gather closely, including leisure and hospitality. In contrast, household spending on goods picked up encouragingly in January after moderating late last year. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. The overall recovery in economic activity since last spring is due in part to unprecedented fiscal and monetary actions, which have provided essential support to many households, businesses, and communities.

As with overall economic activity, the pace of improvement in the labor market has slowed. Over the three months ending in January, employment rose at an average monthly rate of only 29,000. Continued progress in many industries has been tempered by significant losses in industries such as leisure and hospitality, where the resurgence in the virus and increased social distancing have weighed further on activity. The unemployment rate remained elevated at 6.3 percent in January, and participation in the labor market is notably below pre-pandemic levels. Although there has been much progress in the labor market since the spring, millions of Americans remain out of work. As discussed in the February Monetary Policy Report, the economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers and for African Americans, Hispanics, and other minority groups. The economic dislocation has upended many lives and created great uncertainty about the future.

The pandemic has also left a significant imprint on inflation. Following large declines in the spring, consumer prices partially rebounded over the rest of last year. However, for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft. Overall, on a 12-month basis, inflation remains below our 2 percent longer-run objective.

While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year. In particular, ongoing progress in vaccinations should help speed the return to normal activities. In the meantime, we should continue to follow the advice of health experts to observe social-distancing measures and wear masks.

Monetary Policy
I will now turn to monetary policy. In the second half of last year, the Federal Open Market Committee completed our first-ever public review of our monetary policy strategy, tools, and communication practices. We undertook this review because the U.S. economy has changed in ways that matter for monetary policy. The review’s purpose was to identify improvements to our policy framework that could enhance our ability to achieve our maximum-employment and price-stability objectives. The review involved extensive outreach to a broad range of people and groups through a series of Fed Listens events.

As described in the February Monetary Policy Report, in August, the Committee unanimously adopted its revised Statement on Longer-Run Goals and Monetary Policy Strategy. Our revised statement shares many features with its predecessor. For example, we have not changed our 2 percent longer-run inflation goal. However, we did make some key changes. Regarding our employment goal, we emphasize that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for low- and moderate-income communities. In addition, we state that our policy decisions will be informed by our “assessments of shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.”1 This change means that we will not tighten monetary policy solely in response to a strong labor market. Regarding our price-stability goal, we state that we will seek to achieve inflation that averages 2 percent over time. This means that, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. With this change, we aim to keep longer-term inflation expectations well anchored at our 2 percent goal. Well-anchored inflation expectations enhance our ability to meet both our employment and inflation goals, particularly in the current low interest rate environment in which our main policy tool is likely to be more frequently constrained by the lower bound.

We have implemented our new framework by forcefully deploying our policy tools. As noted in our January policy statement, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate 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, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial further progress has been made toward our goals. These purchases, and the associated increase in the Federal Reserve’s balance sheet, have materially eased financial conditions and are providing substantial support to the economy. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.

Since the onset of the pandemic, the Federal Reserve has been taking actions to support more directly the flow of credit in the economy, deploying our emergency lending powers to an unprecedented extent, enabled in large part by financial backing and support from Congress and the Treasury. Although the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) facilities are no longer open to new activity, our other facilities remain in place.

We understand that our actions affect households, businesses, and communities across the country. Everything we do is in service to our public mission. 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.

Thank you, I am happy to take your questions.”

23 February 2021

Interbank market news scan: Federal Reserve, community development, foreign exchange rates …

Federal Reserve Board Governor Lael Brainard made the following remarks regarding the economy, the Federal Reserve, and low income communities:

“Thank you, President Kaplan, our Advance Together partners, and everyone here for joining us today. I am honored to participate in this event and welcome the awardees of this important initiative to celebrate your success. Today marks a significant milestone in this effort to improve economic opportunity for residents of 25 counties across the great state of Texas. The Federal Reserve Bank of Dallas created Advance Together as a way to promote initiatives in Texas that reduce inequities in education and workforce development, and these Implementation Awards recognize outstanding examples of furthering those goals.

The Importance of Education and Workforce Development Initiatives
At the Federal Reserve, our community development mission is to promote economic growth and financial stability across the country, particularly in vulnerable communities. The ability to access quality education and training to build workforce skills is critical for low-income workers seeking greater opportunity for themselves and their families. Likewise, reducing the disparities in labor market opportunities among individuals in our society helps to support broader economic growth and financial stability.

These issues have taken on even greater importance over the past year. The COVID-19 pandemic has upended our personal and professional lives and continues to cause economic hardship for many Americans. While the economy has recovered substantially from the effects of the pandemic, it is concerning to see signs that the improvements have been uneven, with some households continuing to struggle with unemployment and facing financial difficulty.

Information from the Federal Reserve Board’s Survey of Household Economics and Decisionmaking, or SHED, provides evidence of these disparities.1 In the July 2020 responses to the SHED, many households reported major employment disruptions due to COVID-19, including layoffs, reductions of hours, or unpaid leave. By mid-summer, many of the affected individuals had returned to work, and many were receiving unemployment insurance benefits and other financial assistance. Even so, unemployment remained very high in July, and 23 percent of SHED respondents said they were either “just getting by” or “finding it difficult to get by.” Not surprisingly, those experiencing employment disruptions disproportionately reported that they were likely to have difficulty paying their bills.

The survey showed that employment disruptions and financial challenges disproportionately affected people of color and low-income families. And, unlike during previous recessions, a larger share of working women than men were laid off from their jobs.2

For many families, the pandemic exacerbated existing financial challenges. Economic mobility is largely driven by family financial stability and geographic resources such as transportation, quality education, and broadband access. The Fed’s research and its ongoing work in community development show that there is no quick fix for the disparities in household financial stability. And no single organization or government agency can solve these complex problems alone.

The Importance of Collaborative Efforts
This brings me to the importance of collaboration to address multidimensional community issues. While affordable housing and quality jobs are two very visible needs for low-income households, meeting these needs requires strategies that stretch across the fabric of the whole community, including childcare, education and training, transportation, and a safe and healthy environment. Collaboration between individuals and organizations of different talents and strengths can help find the kind of holistic solutions needed to bring greater opportunity to those at risk of being left behind in the recovery.

Today, we are here to celebrate Advance Together, one such effort to foster economic inclusion through innovative and collaborative programs. In 2020, the Federal Reserve completed a review of “place based” community development initiatives, those focused on a single community or area, across its 12 districts. While the place-based initiatives varied in purpose, scope, and approach from community to community, the very best of those local collaborations are reflected in Advance Together’s winning proposals. Most notably, each of these community-driven initiatives uses evidence-based research, fosters public–private partnerships, and promotes a collective vision for success.

The four winners that we are honoring today are the Educate Midland and Education Partnership of the Permian Basin; the Big Country Manufacturing Alliance, based in Abilene; the Family Pathways 2-Gen Coalition in Austin; and the Deep East Texas College and Career Alliance.

It has truly been a pleasure to learn about the unique and innovative efforts each of you are undertaking to address the education and workforce challenges in your own communities. Members of the Educate Midland & Education Partnership are analyzing student data to deepen their understanding of student outcomes by race and to identify practices that can reduce inequities in education and workforce development that limit economic opportunity. The Big Country Manufacturing Alliance is streamlining training and job placement for young workers interested in manufacturing careers. The Family Pathways 2-Gen Coalition supports students with children on their path to a college degree. And, finally, the Deep East Texas College and Career Alliance is helping rural and first-generation college students attain post-secondary credentials that are in demand by employers.

Just as Advance Together benefited from past place-based initiatives, the lessons learned from your local collaborations will inform and influence new community strategies going forward. I look forward to following your efforts to create economic opportunity in communities across Texas. It’s really an honor to join in your celebration today. Congratulations to the winners and thank you to all of the participants.”

Federal Reserve data

As of February 19, 2021, the Federal Reserve reported the prime bank rate is 3.25%.  The discount window rate is at .25% and the effective fed funds (interbank overnight rate) is at .07%. 

The Federal Reserve also reported the 2-year Treasury yield at .11; the 10-year yield at 1.34%, and the 30-year yield at 2.14%.

Foreign exchange rates:

Currency pairsExchange Rate as of 4:15 pm 22 February 2021(1) As of 6:23 am EST Exchange Rate as of 23 February 2021(2)(3)
AUD/USD0.7873 0.7896
USD/CAD1.2596 1.2613
USD/CNY6.4555 6.4631
EUR/USD1.2136 1.2149
USD/INR72.5000 72.4890
GBP/USD1.4025 1.4089
USD/JPY105.5800 105.1300
USD/MXN20.4000 20.7170
USD/DKK6.1268 6.1225
USD/NOK8.4467 8.4661
BTC/USD  51,971.1000
ETH/USD  1,700.9700
Sources: Federal Reserve(1); Reuters-FX rate(2), Crypto-rates(3)

The banking system and community reinvestment

The following comment was filed today with the Board of Governors of the Federal Reserve:

Board of Governors of the Federal Reserve System

Docket No. 12-1723 and RIN 7100-AF94

Comment

Introduction

The following comment is filed in response to an Advance Notice of Proposed Rulemaking (“ANPR”) issued by the Board of Governors of the Federal Reserve System (“Board”).  This comment addresses Question 1 in the ANPR which asks the following:

“Does the Board capture the most important Community Reinvestment Act (“CRA”) modernization objectives? Are there additional objectives that should be considered?” 

The answer to this question is no, the Board does not capture the most important CRA modernization objective and that an additional objective should be considered.  The most important objective this modernization initiative should capture is to expressly define what is meant by the word “community.”  Neither rule or statute defines the word “community”, and the Board should use its rulemaking to expressly define the term.  By expressly defining “community”, targeted credit will be created leading capital to flow to its most productive use, generating returns for community resources and the lending banks, and aiding the Board of meeting its dual mandate of price stability and full employment.

Argument

No amendment to 12 CFR Part 228 Community Reinvestment (Regulation BB) can be made until the term “community” is properly defined.  The lack of clarity in the definition could result in capital not flowing to entities that can leverage capital to produce income, employment, and returns to and of capital. 

To create a sustainable, stable, and prosperous Caribbean American community in the United States, it is important that banks, as information search agents and intermediaries between savers and entrepreneurs, be able to identify the resources that can be employed to generate stable income and returns to capital. Race, ethnicity, and even income itself should not be the prime information targets for banks.  Banks should be targeting communities that are built on resources i.e., mining, farming, creative associations, manufacturing, etc., where the controlling interests of these resources or activities are controlled primarily by minority groups and employment resulting from exploitation of these resources or activities flow to members of minority groups with controlling interest in the resources or activities.

Targeting capital and credit merely toward income groups will dilute the impact capital and credit can have on increasing income for and employment of minority groups tied directly to resources and activities that generate income.  In other words, it would be a waste of capital merely to approve credit for any borrower who does not have an ownership interest in the resource that the community relies on.

In addition, from a cost-benefit perspective, there would be less waste of funds where credit is targeted to a resource based on present value of a future income stream from a community-owned asset.  The Board would be able to better quantify returns on the investment by accounting for jobs created by the exploitation of a community-owned asset.  By accounting for returns to the investment and jobs created, the Board has another factor to consider when meeting its mandate of full employment and stable prices.

Conclusion

To get to this point, where the Community Reinvestment Act of 1977, helps the Board meet its dual mandate, the Board should recommend changes in the statute that expressly defines community as an association of ethnic minorities built on the ownership or control of an income-generating resource or asset.  This stricter definition would better target credit and capital to an activity that is generating income and employment for an ethnic group on a whole.  

Interbank market news scan: Central banks and inequality …

While the economic recovery around the world remains uneven, fragile, and unbalanced across sectors, financial markets are generally doing very well, thanks! In the United States, only half of the unemployment caused by the pandemic last year has been reversed, while stock markets continued to boom. Of course, this largely reflected the extraordinary support given by monetary authorities since March last year. Central Banks and Inequality – Economic News, Analysis, and Discussion (thestreet.com)

Interest in bitcoin and other cryptocurrencies may be surging, but central banks don’t want to be left behind by financial innovation. In fact, more than 80% are examining how to launch digital versions of their own currencies. Why central banks want to launch digital currencies (msn.com)

Mexico’s central bank on Thursday cut its benchmark interest rate for the first time since September, flagging uncertainty over the economic outlook and global efforts to tackle the COVID-19 pandemic. Mexico Central Bank Cuts Interest Rates, Says Outlook Uncertain | Investing News | US News

Currency pairsExchange Rate as of 4:15 pm 8 February 2021(1) As of 12:38 pm EST Exchange Rate as of 11 February 2021(2)
AUD/USD0.7656 0.7749
USD/CAD1.2781 1.2689
USD/CNY6.4664 6.4542
EUR/USD1.2035 1.2121
USD/INR72.8500 72.7080
GBP/USD1.3714 1.3820
USD/JPY105.4400 104.6800
USD/MXN20.1300 19.9915
USD/DKK6.1785 6.1327
USD/NOK8.5428 8.4619
Sources: Federal Reserve(1) ; Reuters(2)

11 February 2021 8:41 pm EST