When analyzing fiscal impact on exchange rates, traders should focus on government expenditure data not narrative …

Political analysis should follow this chain of events. First, there is the world view or philosophy of state leadership. The party or strong man in charge imposes his or her world view on his society. She takes the next step and creates a narrative, writes a story that is consumed by parts of society. There will be conflicting narratives promoted by factions, and via the political system, a winner will be determined. With political power in hand, the victorious faction will draft the policy or action plan that activates the narrative. And finally, to make sure that there is no confusion as to what is the prevailing narrative, it is codified in law for all to read or hear.

The Democratic and Republican parties have been vocal about their world views on inflation. The Republicans argue that Mr Biden’s spending under his American Rescue Plan is leading to high rates of inflation. The Republicans energize their argument by citing the last Consumer Price Index print which came in at 7% year-over-year for December 2021. This was up from the November 2021 print of 6.8%.

The Democrats rebut by arguing that spending under the American Rescue Plan will provide income supports that eventually lead to normal employment levels. Rather than increase consumer prices, the American Rescue Plan, along with the Build Back Better legislation sitting in the Senate, will ease long term prices. Americans have been facing high consumer prices in part due to clogged supply chains and Democrats have been arguing since last spring that this government investment will expand capacity and produce lower prices.

Traders should cut through the political banter and look at the data. Data from the U.S. Bureau of Economic Analysis shows that as a percentage of gross domestic product, federal government spending has held around 7% between 31 March 2021 and 31 December 2021. Actual dollar spending has declined during this period. First quarter 2021 spending was approximately $1,375.2 billion. Federal spending declined in the second quarter 2021 to $1,356.7 billion and fell further in the third quarter 2021 to $1,339.1 billion. During this period, the MarketWatch dollar index signaled dollar strength with the dollar going from 93.23 on 31March 2021 to 95.97 on 31 December 2021.

Along with the dollar strengthening over this period came inflation. Data for the U.S. Bureau of Labor Statistics shows that the Consumer Price Index went from 2.6% in March 2021 to 7.0% in December. Mr Biden could deflect Republican attacks by implying that inflationary pressures are a reflection of the growing money supply spurred on by asset purchases made by the central bank since March 2020. That would leave a few in Washington scratching their heads since the man who led the $120 billion a month purchase of Treasury and agency mortgage-backed securities, Jerome Powell, was nominated by Mr Biden for a second four-year term. In addition, Democratic leadership in the U.S. House and U.S. Senate have been singing Mr Powell’s praises for his interventionist policies.

Granted, the increase in M1 money supply has gone from $18,669.2 billion in March 2021 to $19,874.8 billion in November 2021 (latest figure available) making Mr Powell’s actions an easy target for the “too much money chasing too few goods” argument, but Mr Biden and in particular the progressives in the Congress will need Mr Powell’s cooperation to fund their Build Back Better agenda. The Fed is the Treasury’s underwriter and Progressives can ill afford politics that upset its banker.

The irony is that Mr Biden has showed no penchant to artfully deflect criticism from Republicans to the Fed for his handling of inflation. However, for the trader that is neither here or there. The question should be whether proposed fiscal policy will have an impact on the direction of foreign exchange rates and if so, in what direction.

Alton Drew

20.01.2022

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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

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Biden’s tepid response to inflation numbers should tell traders he has no answer on rising prices …

Political analysis and commentary

This morning’s consumer price index number came in at an unsurprising 7% increase in all prices between December 2020 and December 2021. In a tepid written statement, President Biden expressed contentment with a fall in the energy, natural gas, and gasoline indices. While food prices did increase, their rate of increase was lower in December 2021 than in November 2021. Mr Biden touted his American Rescue Plan, signed in March 2021, as the mechanism containing price increases and a source of the strong economic growth being seen in the United States.

The lack of enthusiasm behind the statement may be due in part to the economy’s growth. Yes, growth in the United States is positive, coming in at 2.3% annualized in the 3rd quarter of 2021. But this rate is approximately one-third of the 2nd quarter 2021 growth rate of 6.7%. When we remove energy and food price increases from CPI, done because of the volatility in those prices, we still get an annualized increase in prices faced by consumers of 5.5%.

Compounding the mixed growth results is the rise in the dollar index. Since Mr Biden’s inauguration, the dollar has increased in strength, rising approximately 4.9% in value between 20 January 2021 and 12 January 2022. Typically this means that foreign nations find it more expensive to purchase dollar-denominated goods and services. Exporters may have to reduce prices which benefits domestic consumers. The increased demand for goods and services domestically, on the other hand, could lead to an increase in prices here at home.

When evaluating the political environment surrounding inflation, traders should be wary of the narrative coming out of the Executive branch as it pertains to policies. Controlling inflation is done by controlling money supply and that feat is the responsibility of the Federal Reserve. The American Rescue Plan is budget legislation. It is fiscal policy that lays out the spending priorities of the federal government. On the flip side, you could make the argument that government, by injecting $1.9 trillion into the economy, is increasing aggregate demand for goods and services. Inflation, however, is not a consumption demand problem. It is a money supply problem, and traders should bear in mind that any narrative surrounding inflation should come from that premise.

In short, traders should take Mr Biden’s assessment of his actions pertaining to inflation with a grain of salt.

Alton Drew

12.01.2022

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CPI: Biden, citing American Rescue Plan, sees headway in reducing inflation.

“Today’s report—which shows a meaningful reduction in headline inflation over last month, with gas prices and food prices falling—demonstrates that we are making progress in slowing the rate of price increases. At the same time, this report underscores that we still have more work to do, with price increases still too high and squeezing family budgets.

Inflation is a global challenge, appearing in virtually every developed nation as it emerges from the pandemic economic slump. America is fortunate that we have one of the fastest growing economies—thanks in part to the American Rescue Plan—which enables us to address price increases and maintain strong, sustainable economic growth. That is my goal and I am focused on reaching it every day.” — President Joseph R. Biden

The J-Cubed Corporation and its discount currency …

The J-Cubed Corporation (Jay Powell, Janet Yellen, and Joe Biden) are responsible for wholesale production of a currency ( a fast food restaurant coupon) and creating an underlying value for that currency that makes it attractive to other public corporations ie nations.

The banks, (licensed resellers or “currency pimps”) are responsible for getting the currency into the hands of individuals and businesses that put the coupon to its best use while generating taxes for the J-Cubed Corporation and steady bond yields for individuals (“The Global Johns”).

Are the wholesalers and resellers putting out too much currency? Since October 2020, the U.S. monetary base (currency in circulation plus reserves held in accounts at Federal Reserve banks) has increased by approximately 28.8%. Meanwhile, the Federal Reserve’s preferred metric for inflation, the personal consumption expenditure index, has increased approximately five percent during the same period.

The yield on U.S. 10-year bonds is at 1.49% at the time of this print, up 57 basis points since December 2020.

My question is, will Joe Biden be able to create a narrative that scores him some political points between now and when inflation is expected to abate, which is between early spring and the fall of 2022.

As Bill Clinton learned quickly and clearly in 1994, a sound economy and a path to re-election is about keeping The Global Johns happy. Any other reference to “economy” is just refried noise for the business media to transmit …

Alton Drew

24.12.2021

The impact of Build Back Better on the interbank market will be reduced by increasing likelihood Democrats failing to come together on its passage… And Jerome Powell may benefit

According to the Tax Foundation, a public policy think tank, President Biden’s proposed “Build Back Better” plan will generate government revenues of $2.1 trillion over the next ten years.  After accounting for approximately $1 trillion in tax credits for individuals and businesses, the Tax Foundation estimates the US government will net just over $1 trillion in revenues over the ten-year period.  This amount can be whittled down further by accounting for tax revenues recovered from increased compliance activity bringing the estimated bottom-line amount generated to $862 billion.

The economic price for the proposal, according to the Tax Foundation, would be a decrease in long-run gross domestic product by .98%; a reduction in capital stock of 1.84%; a wage rate reduction of .68%; and net loss of 303,000 jobs.

Meanwhile, the Committee for a Responsible Federal Budget, a public policy think tank, estimates that after accounting for offsets and expiration of a number of programs, Mr Biden’s “Build Back Better” plan will require financing of another $2.9 trillion of debt.  The Committee estimates that interest on new debt may be $1.1 trillion by 2031.

Today, the yield on the ten-year Treasury note closed at 1.48%, according to data by Bloomberg, after getting as high as 1.50%.  It is unclear whether the increase in rates accounts for passage tax increases and social welfare spending contained in the “Build Back Better” plan.

The future economic impact from this plan appears to be flat over the next ten years.  A .98 percent reduction in economic growth over ten years is negligible.  So is a loss of 303,000 jobs.  In addition, Speaker Nancy Pelosi is signaling to the progressive wing of the Democratic Party that they may have to settle for a plan that falls short of $3.5 trillion.  If the bill fails in the House, not only is impact a moot concern, but the Democrats and Mr Biden will see a further drop in their political capital where their constituents see them as incapable of delivering on big ideas.

If the package fails, I can see some upside for Jerome Powell, current chairman of the Board of Governors of the Federal Reserve.  Mr Powell’s tenure as chair ends in February 2022.  A failed Biden economic passage brought on by a fractured party may mean that Mr Biden will have to take any opportunity to infuse confidence in the American economy.  So far, the Federal Reserve has been that one constant.  Mr Biden may have no choice, especially going into the mid-term election campaign season, but to re-appoint Mr Powell to another term as head of the Fed.

Alton Drew

27 September 2021  

Interbank Market News Scan: The increase in US currency in circulation is correlated with a decrease in US dollar value

29 August 2021

Data from the Federal Reserve shows that between July 2020 and July 2021 the amount of currency in circulation increased approximately 10% from $1,981.7 billion in July 2020 to $2,186.4 billion in July 2021.

Data from the MarketWatch dollar index showed that over the period July 2020 to July 2021, the value of the dollar decreased by 1.26%.

DateCurrency in circulation (in billions)MarketWatch Dollar Index
July 2020$1,981.793.35
August 2020$2,007.692.14
September 2020$2,027.593.89
October 2020$2,040.594.04
November 2020$2058.391.87
December 2020$2071.689.93
January 2021$2094.290.58
February 2021$2100.990.88
March 2021$2117.893.23
April 2021$2154.991.28
May 2021$2169.590.03
June 2021$2179.192.44
July 2021$2186.492.17

Sources: Board of Governors of the Federal Reserve, MarketWatch Dollar Index

In theory, American demand for imports, American investments in foreign countries, and speculation adds to the supply of American dollars.  Government intervention can also add to the supply of US dollars.  Expected tapering of US Treasury bills and agency mortgage-backed securities is expected to start later this year and this activity may result in a reduction of US dollars in circulation as the Fed sells off these securities.  The scarcity in dollars should see a future increase in dollar index value as well as an increase in interest rates.

The Federal Reserve tills the currency soil while the banks distribute the currency fruit.  If dollars are distributed by banks via loans at higher interest rates, tax generating activities via business and commerce may slow down.  The narrative behind the American currency, that American capitalism is the appropriate policy for generating and distributing wealth, will be tainted where capital becomes too expensive for businesses to access.

From the fiscal side, President Biden’s $3.5 trillion dollar infrastructure could suck more air out of the room putting upward pressure on rates and making more capital inaccessible by businesses.  Upward pressure on interest rates will only compound the fears that current inflationary trends will become more stationary than transitory.

Alton Drew

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Government strategy: Is Biden staffing up for currency war with China and the Eurozone?

Last Friday, the Federal Reserve Bank of New York announced that the head of its markets group, Daleep Singh, has resigned to join the Biden administration as both Deputy National Security Advisor and Deputy National Economic Advisor. This is the second prominent Biden administration choice being asked to sit in what apparently are two different policy realms: foreign and domestic. Dr. Susan Rice, who is an expert in foreign affairs, is currently Mr Biden’s assistant for domestic policy and chair of the domestic policy council in Mr Biden’s absence.

Mr Biden reportedly thinks of domestic and foreign policy as one and the same. One of the holdovers from the Trump administration is the focus on China. Mr Biden has expressed that China should expect “extreme competition” from the United States while emphasizing that there is room for accord without conflict. Mr Biden has signaled that avoiding conflict during intense competition may require falling back on existing international law.

Mr Biden’s China agenda will require buy-in from the American public. American manufacturers and farmers in particular were directly impacted by the Trump administration’s tariff war with China. Mr Biden will need a domestic policy agenda that gets Americans on board with his China initiative while crafting a policy agenda towards China that reflects benefits in the American domestic economy.

The currency portion of the foreign agenda toward China for now does not include a currency war. At the outset of her tenure Treasury Secretary Janet Yellen signaled that the US would abandon any remnant of the “strong dollar” policy favored by the Trump administration preferring instead to allow the market to determine currency rates. The dollar’s overall steady weakening in currency markets makes its domestically produced goods more attractive to foreign importers, a weakening not due to any market intervention on the part of the United States. In theory this makes domestically produced items more attractive price wise to US taxpayers and makes imports from foreign nations i.e. China, more expensive.

Secretary Yellen will be receiving direct messaging from the Executive Office of the President on China and likely on currency issues. Ms Yellen, as Treasury secretary, is a member of the National Security Council for which Mr Singh will now have a high staff role. Mr Singh has extensive experience in the area of foreign exchange having focused on U.S. interest rates and the currency markets for the better part of eight years when he was with Goldman Sachs. Secretary Yellen is also a member of the Domestic Policy Council where Dr. Rice will serve as chairman when Mr Biden is not present.

The government strategy takeaway here is to pay additional attention to the messaging from the national security council and the domestic policy council and ascertaining whether messages out of the Executive Office of the President and the Treasury Department are in sync when it comes to the US’ stance on currency markets.

Government strategy: Jobs report firms Biden resolve to focus on household aid …

Currency pairsExchange Rate as of 4 February 2021The eventPost Event-Exchange Rate as of 5 February 2021 
AUD/USD0.7616US adds 49,000 jobs. Biden believes years before US sees full employment0.7616 
USD/CAD1.2782US adds 49,000 jobs. Biden believes years before US sees full employment1.2809 
USD/CNY6.4585US adds 49,000 jobs. Biden believes years before US sees full employment6.4639 
EUR/USD1.2030US adds 49,000 jobs. Biden believes years before US sees full employment1.9920 
USD/INR72.8942US adds 49,000 jobs. Biden believes years before US sees full employment72.8955 
GBP/USD1.3651US adds 49,000 jobs. Biden believes years before US sees full employment1.3637 
USD/JPY105.0200US adds 49,000 jobs. Biden believes years before US sees full employment105.3000 
USD/MXN20.1501US adds 49,000 jobs. Biden believes years before US sees full employment20.3041 
USD/DKK6.1815US adds 49,000 jobs. Biden believes years before US sees full employment6.2005 
USD/NOK8.5960US adds 49,000 jobs. Biden believes years before US sees full employment8.6190 
Source: OANDA

In the news

From the White House’s Council of Economic Advisors. This morning’s jobs report reveals that the pace of job gains has slowed sharply in recent months as the pandemic continues to weigh on job creation, especially in face-to-face services. Strong relief is urgently and quickly needed to control the virus, get vaccine shots in arms, and finally launch a robust, equitable and racially inclusive recovery. The Employment Situation in January | The White House

House Democrats on Friday voted to adopt a final budget measure, setting off an approximately two-week sprint to draft a coronavirus relief bill that would mark President Joe Biden’s first legislative win. House clears way for massive coronavirus stimulus plan (msn.com)

The Commerce Department’s National Telecommunications and Information Administration (NTIA) is committed to increasing broadband Internet access across America, particularly in unserved and underserved communities. The recently enacted Consolidated Appropriations Act of 2021 provides new sources of tribal broadband funding to assist in mitigating the effects of the COVID-19 pandemic which is exacerbating the digital divide across Indian Country.  NTIA Announces Tribal Consultations on New Program to Increase Broadband Access Across Indian Country | U.S. Department of Commerce

The Takeaway

The White House will not be placing emphasis on infrastructure deployment via its “American Rescue Plan.” The White House appears focused on short term aid to households via an additional $1400 in aid payments and on the gender issue, particularly the reported disproportionate impact pandemic-induced unemployment has had on women in the workforce. Not to say that infrastructure is off the agenda. Mr Biden through the U.S. Department of Commerce, has announced the administration’s intent to incentivize the deployment of broadband infrastructure on Native American lands via grants from the U.S. Department of Commerce.

Mr Biden’s approach to infrastructure, at this juncture, seems more like patchwork versus coordinated, targeted, and streamlined. Covid relief itself, through the American Rescue Plan, looks like it will be delayed with final work on legislation not expected until March 14th.

Currency markets should not view the funding as a currency mover especially with no definitive information on the impact the funding will have on interest rates or yields, factors that make the US more attractive for investment thus greater demand for US currency.

Government strategy: Joe Biden Playing it “by the book” and Scoring an “A” So Far ….

As Savik questioned Spock about his use of deception in their communications, the seasoned Starfleet officer reminded her that the narrative must always be presented by the book.Joe Biden is the seasoned commander and his “by the book” play so far has him scoring an “A.”

Yesterday, his Treasury secretary released a statement describing an economy on the rebound. The irony is that she noted it has been on a rebound since May 2020. MarketWatch, a business publication, has made the same observation.

Even with 10 million fewer people employed, the economy is inching closer to where it stood pre-pandemic. This should scare us folk who rely on our wages, but like Mr Spock, the Biden administration is using a little distraction away from the economic enemy by focusing on a reconciliation bill that may or may not provide any sustainable stimulus to an economy that may not need anymore stimulus dollars.

If a labor force of x-10 million can get the economy back on its feet then the real issue is not stimulus money or impeaching Donald Trump (another distraction engineered by Senate and House leadership). The real issues are a weaker dollar that suppresses wages, unemployed people who need work, higher interest rates due to the government borrowing needed to pay for stimulus, and a brewing currency war that challenges the dollar’s status as the world’s reserve currency. So, why the “A”? Because this is what a smart, newly elected president does in the first 100 days; they deliver what they promise.

The question is, at what cost the deception?