Maxine Waters’ HR 2543 gives me the impression that Congress does not understand banking …

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (“Board” or “FRS”), today finished up his semi-annual tour of Capitol Hill when he presented to the U.S. House Committee on Financial Services the status of the Board’s monetary policy as it impacts the US economy.

I have watched hundreds of Congressional hearings over the past twelve years and quite frankly I never expect very much substance.  I would advise that if you can’t read Mr Powell’s entire report, then his written testimony should suffice.

The chairman of the committee, Maxine Waters, Democrat of California, announced early in the hearing that a bill she sponsored, the Federal Reserve Racial and Economic Equity Act (HR2543), had passed the House and is now sitting in the Senate.  The intent of the bill is to add additional demographic reporting requirements; to modify the goals of the Federal Reserve System, and for other purposes.”

Specifically, HR2543 would require the FRS to:

  1. Eliminate disparities across racial and ethnic groups regarding employment, income, wealth, access to credit;
  2. Conduct monetary policy and bank regulation in order to eliminate the aforementioned disparities;
  3. Conduct payment system operations in order to eliminate racial and ethnic disparities;
  4. Continue carrying out the Community Reinvestment Act of 1977; and
  5. Conduct comparisons across different demographic groups including race, ethnicity, gender, and educational attainment.

I have come to accept Congress’ authority to create a central bank system pursuant to Congress’ responsibility under the U.S. Constitution to regulate the value of money.  I can understand a constitutional argument that Congress used an implied or ancillary power to create the FRS.  Using the central bank as a social agency for diversity, equity, and inclusion I can’t fully embrace.

The Constitution does not provide for a central bank much less for a central bank that has as part of its mandate the mitigation of harm in the banking system to ethnic minorities. The boat has long left the harbor for any mitigation of banking harms to blacks.

Blacks were not a part of America’s capital and natural resources allocation plan dating back to the 1600s.  The exponential increase in capital holdings by whites are an expected result of human behavior and lineage maintenance.  Due to slavery and the Jim Crow era, Blacks were doomed to remain behind in the capital holdings race.  In order to participate in true banking activity, the entire population of blacks in America for its first 300 years would have to have owned land, waterways, access to minerals, and access to fair labor markets in order to trade for credit.

What Mrs Waters has proposed in her bill is about the best that the black political class can do in Washington.  Even if the measure passes in the Senate, the necessary reallocation of capital to blacks would not occur. 

HR 2543 serves no other purpose but to rile up Senate Republicans and make them the scape goat for failed policy.      

Alton Drew

23 June 2022

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Are Democrats missing an opportunity to strengthen their inflation argument?

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (FRS), today testified before the U.S. Senate banking and finance committee on the state of the FRS’ monetary policy.  One of the main points of questioning by the senators was the issue of inflation. 

Republicans have been asserting that loose monetary policy, specifically the FRS’s delay in raising the federal funds rate, and expansion of its balance sheet of agency and mortgage-backed securities, combined with the Biden Administration’s spending are at the heart of U.S. inflation.

Democrats’ main assertion is that companies have been taking advantage of the American consumer by increasing prices and taking profits.

We understand that in a political environment each side of the aisle aims to tug at enough electorate heart strings in order to secure votes in the fall.  I don’t pretend to be a statistician, but a back of the napkin analysis of growth in the money supply and changes in the consumer price index tells me that Republicans should include other factors in their cause of inflation analysis, and that Democrats need to trust Americans more by sharing and explaining the numbers.

According to data from the FRS, between January 2021 and April 2021 M2 money supply increased an average of 1.3%, month-over-month while inflation increased an average of 0.5% month-over-month during that same time period.

But between January 2022 and April 2022, while M2 money supply increased an average of .003% month over month, inflation increased 0.7% month over month.  The money supply was at a dead crawl while consumers continued to see price increases at a faster rate versus the same period last year.

I admit the sample is small.  I am trying to be fair to the Biden administration by reconciling his time in office with available 2022 FRS data on money supply.  Hopefully my small exercise demonstrates that there is some room for the Democrats to strengthen their arguments on the cause of inflation and that pricing behavior on the part of firms needs to be taken into consideration.

Alton Drew

22 June 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

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Fed chair Jerome Powell addresses the US Senate on monetary policy …

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

I will begin with one overarching message. At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total PCE (personal consumption expenditures) prices rose 6.3 percent; excluding the volatile food and energy categories, core PCE prices rose 4.9 percent. The available data for May suggest the core measure likely held at that pace or eased slightly last month. Aggregate demand is strong, supply constraints have been larger and longer lasting than anticipated, and price pressures have spread to a broad range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation. And COVID-19-related lockdowns in China are likely to exacerbate ongoing supply chain disruptions. Over the past year, inflation also increased rapidly in many foreign economies, as discussed in a box in the June Monetary Policy Report.

Overall economic activity edged down in the first quarter, as unusually sharp swings in inventories and net exports more than offset continued strong underlying demand. Recent indicators suggest that real gross domestic product growth has picked up this quarter, with consumption spending remaining strong. In contrast, growth in business fixed investment appears to be slowing, and activity in the housing sector looks to be softening, in part reflecting higher mortgage rates. The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply.

The labor market has remained extremely tight, with the unemployment rate near a 50‑year low, job vacancies at historical highs, and wage growth elevated. Over the past three months, employment rose by an average of 408,000 jobs per month, down from the average pace seen earlier in the year but still robust. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. A box in the June Monetary Policy Report discusses developments in employment and earnings across all major demographic groups. Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January.

Monetary Policy
The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective.

Against the backdrop of the rapidly evolving economic environment, our policy has been adapting, and it will continue to do so. With inflation well above our longer-run goal of 2 percent and an extremely tight labor market, we raised the target range for the federal funds rate at each of our past three meetings, resulting in a 1-1/2 percentage point increase in the target range so far this year. The Committee reiterated that it anticipates that ongoing increases in the target range will be appropriate. In May, we announced plans for reducing the size of our balance sheet and, shortly thereafter, began the process of significantly reducing our securities holdings. Financial conditions have been tightening since last fall and have now tightened significantly, reflecting both policy actions that we have already taken and anticipated actions.

Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.

Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy.

To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum-employment and price-stability goals.

Thank you. I am happy to take your questions.” — Jerome Powell

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

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

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

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

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

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

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

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

Alton Drew

23.03.2022

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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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Interbank Market News Scan: I bet on the AUD-USD last night…

Last night, I bet on an increase in the AUD-USD exchange rate after reading analysis that the currency pair was seeing resistance around 0.7500 USD with lows between .7440-.7480 USD. While inflation in Australia is lower than in the United States (3.8% vs 5.4%), what helped tip me to the buy side was the higher yield on Australian 10-year government bonds (1.76%) versus the United States 10-year (1.63%).

Bank rates in Australia are slightly lower which tells me that their banks have a little more incentive to lend, which they may need given an expected slow retraction in inflation with expectations at 3.1%.

Meanwhile in the United States, Treasury secretary Janet Yellen and Federal Reserve chair Jerome Powell expect inflation concerns to dissipate next year.

Personally, I suspect that if there is any inflation it will be in certain areas of the labor market. I believe businesses with any vision will put in place labor work arounds where they will not require people to come into offices. Professional, “creative” type employees will be able to demand higher salaries while low wage earners will drive down earnings as they compete with more low-wage, unskilled workers.

Back to Australia, again, expect the inflation print tonight. I will be listening to how other central banks react. The news may temper the level of rate hikes they put in place. Just a thought …

Alton Drew

26.10.2021

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

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

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

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

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

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

Alton Drew

29 September 2021