Part of reading the United States’ currency value is reading the underlying shift in its cultural values.


The United States is at a crossroads in terms of its culture. A corporate democracy such as this one sees elected officials willing to deficit spend on programs designed to buy votes from an electorate increasingly under stress due to the uncertainty of an economy that may not be able to provide for their wants and needs. According to the Congressional Budget Office (CBO), America’s fiscal year 2021 budget deficit is approximately $3.003 trillion. While estimated revenues totaled $3.842 trillion, FY2021 outlays were estimated at $6.845 trillion. Fiscal year 2020 saw estimated revenues at $3.420 trillion with outlays estimated at $6.552 trillion. The FY2020 deficit was higher than FY2021, coming in at $3.142 trillion.

I would expect the Administration to argue that the last two years saw the federal government increasing its outlays to combat the Covid-19 pandemic, but if we go back 40 years, we find not only expected increases in outlays and revenues, but increases in outlays far outstrip increases in revenues. For example, FY1982 outlays were $.746 trillion compared to FY2021 outlays of $6.845 trillion, amounting to a 818% increase over the 40 year period. The increase in revenues over the same period amounted to 522%, where FY1982 revenues totaled $.618 trillion and FY2021 revenues came in at $3.842 trillion.

In addition, mandatory spending, which is dictated by past law that sets out mandatory requirements for spending on items such as social security, Medicare, and income security programs, increased 1,211% between FY1982 and FY2021. Meanwhile, discretionary spending, where a program is approved during the congressional appropriations process, saw a 407% increase in outlays between FY1982 and FY2021. The programs funded during this process include national defense, transportation, education, and housing.

Democracy is expensive. As politicians carve out “alphabet fiefdoms” ie, BLM, LGBQT+, Latinx, DEI (diversity, equity, inclusion programs) etc., the promises made convert into programs that have to be paid for. Low interest rates over the last decade and a half have accompanied the expansion in spending. Cheap money leads to more spending. For example, according to data from the Federal Reserve, the current prime lending rate is approximately 3.25%. This represents a 70.4% decline in the prime rate since 8 August 1983.

In addition, the rates on Treasury debt issued to fund government programs have been falling steadily since January 2000. According to data from the US Treasury, interest rates reflecting long term composite debt in excess of ten years has fallen from 6.87% in January 2000 to 1.89% in December 2021.

Democracy is expensive, but the current low interest rate environment gives American politicians the impression that democracy is affordable. With every new demand from small but vocal factions along the political spectrum, the wider the interest-rate driven deficit.

I have started to liken a currency to a coupon you get from a fast food restaurant. No matter how deep the discount, the crappier the food, the less valuable the coupon. The US Treasury-Federal Reserve Fast Food Corporation is no different. The current rate of inflation (6.8%) that destroys its spending value compounds the damage from lower rates of return and from increased government spending designed to buy votes while providing little other value to the currency holder.

Alton Drew


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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Contracting out the circulation of the U.S. political economy’s currency … and the never-ending threat of intervention

Article I, Section 8 of the United States Constitution describes Congress’ duty to regulate money.  Specifically, Congress has the duty to:

“Coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…”

While the government has maintained the responsibility of minting coin and cash, the regulation of its value as well as that of foreign coin, is left up to the markets.  I am curious, though, as to how the law defines, “money”, “coin”, and “currency.”

A quick and dirty Black’s Law Dictionary definition of “currency’ is coined money and such banknotes or other paper money as are authorized by law and circulates as a medium of exchange.  31 CFR § 1010.100 defines currency as:

“The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.”

In the United States, the US Treasury and the Federal Reserve System source the currency.  They are the “farmers’ of the commodity we call currency.  According to Federal Reserve data, as of October 2021, there is approximately $2202.9 billion of currency in circulation.  When you factor in currency held in reserve at the Federal Reserve, the total monetary base of the United States as of October 2021 is approximately $6331 billion. 

The banks that the Treasury and the Federal Reserve charter and regulate participate in the interbank market, the market in which foreign exchange rates for currency is set.  I like to think of these banks as the wholesale/retail enterprises that are responsible for circulating currency, transmitting the value of the US political economy globally.  While I believe the US government could technically set these rates itself, the capitalist economic policy implemented by the US government prefers private institutions carry out this mission.

I would think that wholesale (bank) and retail traders and brokers prefer this model because they determine the share of income (profit) garnered via foreign exchange.  Because the Treasury and the Federal Reserve are the “farmers” of the currency and are primarily held responsible by the Congress for the day-to-day valuation of the currency, traders and brokers should stay mindful that the cloud of potential government intervention in the market always looms.

Keeping the dark cloud of potential intervention into the foreign exchange market dispersed can only occur via constant monitoring and initiatives to keep government at bay.  That is the trader and broker’s daily call to action.

Alton Drew


Interbank Market News Scan: Yellen appoints a new Comptroller of the Currency chief …

Links of interest to follow …

Trading desks, investment banks. Barclay’s CEO Staley on trading revenue, compensation costs, and return to office. Barclays CEO Jes Staley Staley on Trading Revenue, Compensation Costs, Return to Office: Video – Bloomberg

Trading desks, banks. Citigroup, Nuveen accused of mishandling evidence in muni brawl. Citigroup, Nuveen Accused of Mishandling Evidence in Muni Brawl – Bloomberg.

Trading desks, banks, blockchain. European debt pioneer trumpets revolution coming from blockchain. EIB’s Richard Teichmeister Says Revolution to Come From Blockchain – Bloomberg

Banks.  U.S. Treasury Secretary Janet Yellen plans to make her mark by naming a new supervisor for a major U.S. banking regulator that Democrats say was too friendly to large banks under the Trump administration, according to two people familiar with the matter. Yellen to Shake up U.S. Bank Regulator With New Appointment – Sources | Investing News | US News

Banks, central banks. The U.S. nonprofit Digital Dollar Project said on Monday it will launch five pilot programs over the next 12 months to test the potential uses of a U.S. central bank digital currency, the first effort of its kind in the United States. Digital Dollar Project to launch five U.S. central bank digital currency pilots | Reuters

Foreign exchange rates of interest …

Currency PairsRates as of 11:05 pm EST 3 May 2021
Source: Reuters

Janet Yellen’s Senate testimony emphasizes American Rescue Plan as integral to turning around the economy

The following is Janet Yellen’s written testimony before the U.S. Senate Committee on Banking and Finance …

“Chairman Brown, Ranking Member Toomey, members of the Committee, thank you for having me.

We are meeting at a hopeful moment for the economy – but still a daunting one. While we’re seeing signs of recovery, we should be clear-eyed about the hole we’re digging out of: The country is still down nearly 10 million jobs from its pre-pandemic peak.

When Congress passed the CARES and Consolidated Appropriations Acts last year, it gave the federal government some powerful tools to address the crisis. But upon taking office, I worried they weren’t powerful enough. After all, there were – and still are – some very deep pockets of pain in the data.

One-in-ten homeowners with a mortgage are behind on their payments, and almost one-in-five renters are behind on their rent. There are 22 million people who say they don’t have enough food to eat. One-in-ten adults are hungry in America.

I looked at data like these, and I worried that the COVID economy was going to keep hurting millions of people now and haunt them long after the health emergency was over.

We know that when the foundations of someone’s life fall apart – when they lose the roof over their head or the ability to eat dinner every night – the pain can weigh on them for years. Their earning potential is permanently lowered.  I worried about this happening on a mass scale.

That’s why I advocated very hard for the American Rescue Plan, and it’s why my first – and most enthusiastic – message today is: Thank you.

With the passage of the Rescue Plan, I am confident that people will reach the other side of this pandemic with the foundations of their lives intact. And I believe they will be met there by a growing economy. In fact, I think we may see a return to full employment next year.

Of course, the speed and strength of our recovery depends, in part, on how we implement the legislation. Treasury is tasked with much of that work, and there is nothing that I – or my team – take more seriously. We appreciate your oversight on this matter, and I want to briefly tell you about how we’ve been working.  

Since taking office two months ago, we have been expediting relief to the areas of greatest need. For example, small businesses – and especially the smallest small businesses, which are disproportionally owned by women and people of color.

The pandemic has hit these businesses hard. The Paycheck Protection Program was an early lifeline, but because of issues with the program’s design, the first rounds often didn’t reach the smallest sole proprietorships. We’re addressing that now. We worked with SBA to tweak how the program was implemented. It’s allowing the PPP to reach millions more microbusinesses and entrepreneurs, especially in rural and low-income areas.

We’re also building capacity to support these communities over the longer term. Because of the December legislation, Treasury now has $12 billion to inject into community development financial institutions and minority depository institutions. In turn, these CDFIs and MDIs can lend that capital out, helping people buy homes and start businesses in places that the financial services sector traditionally hasn’t served well.  

Then, there are the families I spoke about, the ones struggling to keep a roof over their head and food on the table.

The American Rescue Plan provides more than $30 billion to help renters and homeowners at risk of losing their homes. And we’re making sure that assistance flows as efficiently as possible.

For instance, the previous Administration put in place rules that required tenants and landlords to provide quite a bit of documentation to get rental assistance, including detailed statements about their income. But some people don’t have access to those documents. We’re cutting through the red tape for them, while still taking reasonable steps to prevent fraud and abuse.

And of course, we’ve been sending direct payments to Americans – a lot of Americans. As of last week, we had issued over 90 million payments. 

And all this is just a fraction of Treasury’s work. There are so many more relief programs, including one that will provide $350 billion in aid to state and local governments. Implementing all of it is more complicated than it sounds, and we are working closely with stakeholders to make sure that these programs are both efficient and effective.

Behind these many relief programs, these millions of transactions, are a staff of very dedicated (and very tired) Treasury and IRS employees. My final word is to them: Thank you. You are putting on a master class in how government should work in the furnace of a crisis. I’m grateful to be your colleague.

With that, I am happy to answer any questions you have.”

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.

Interbank market scan: End of US portion of trading day sees dollar mixed in light of no major Federal Reserve, Treasury actions

Currency pairsExchange Rate as of 9:48 am EST 3 February 2021The eventPost Event-Exchange Rate as of 4:15 pm EST 3 February 2021Impact
AUD/USD0.7612No major Fed or Treasury event0.7616Slight dollar weakening
USD/CAD1.2791No major Fed or Treasury event1.2781Dollar weakening
USD/CNY6.4580No major Fed or Treasury event6.4579No change
EUR/USD1.2018No major Fed or Treasury event1.2029Dollar weakening
USD/INR72.8358No major Fed or Treasury event72.8086Dollar weakening
GBP/USD1.3642No major Fed or Treasury event1.3635Slight dollar strengthening 
USD/JPY105.0100No major Fed or Treasury event105.0500Dollar strengthening
USD/MXN20.1116No major Fed or Treasury event20.2050Dollar strengthening
USD/DKK6.1900No major Fed or Treasury event6.1919Dollar strengthening
USD/NOK8.6078No major Fed or Treasury event8.5865Dollar weakening
Source: Reuters

Government strategy: A reminder to ignore the noise …

I came across this quote from fellow blogger Brian Twomey regarding the noise in the currency trade market:

“Much occurred in 6 months: elections, change from Republicans to Democrats, Covid, lockdowns, gazillions of central bank meetings, average Inflation Targets. The market and the target price doesn’t care to such things and will never care in the future. The target price and the price path to target is the only concern.”

I agree the past eleven months have been noisy given the last election and the Covid pandemic. One way to block out the noise is to remodel how you view government’s role in the political economy. You start by creating two major blocks.

The first block is comprised of “The Barbarians”, the citizenry whose passions America’s founders were concerned about. The Barbarians are made up of the taxpayers and consumers whose dollars keep the political economy going. Between February 2020 and November 2020, the U.S. listened to a lot of noise generated by two management companies vying for the job of controlling government and managing the populace: the Democrats and the Republicans. The Barbarians chose the Democrats during the 2020 silly season to be their political managers.

The second block is “The Cosa Nostra.” Within this block is where the interbank market operates; where banks trade overnight dollars in order to meet their reserve requirements and acquire foreign exchange. This block is co-managed by the Federal Reserve and the Treasury. Specifically, the Treasury, as a political agency, plays a conduit role tying the Barbarians to the Cosa Nostra. To fund the political promises made to the Barbarians, the Treasury issues bonds underwritten by the Federal Reserve and taxes the Barbarians in order to raise proceeds necessary for paying off its IOUs to the Federal Reserve. The Federal Reserve is the Treasury’s chief underwriter.

The political independence of the Federal Reserve and the lack of significant regulation of the interbank market for foreign exchange should tell the trader that it is okay to ignore the noises of the chattering classes both within government and the media. A well run political management company aware of its role in the political economy would minimize any breach of the gates separating the masses from the Cosa Nostra that can be caused by a passionate set of barbarians.

The government strategy takeaway here is to keep focus on the conduit role of government, specifically the Treasury. The pandemic stimulus discussions are a great example. How much will this package cost? How much of it will be financed? At what interest rates? Will there be a generation of yield such that capital flows into the U.S.? Will this capital flow raise demand for the US dollar?

If government activity does not generate the above questions, then it is just noise.

Interbank market scan: The US House today begins voting on Biden American Rescue Plan; central banks, foreign exchange, cryptocurrency …

The Takeaway

Across seven of ten major currency pairs the dollar exhibited continued weakness after two pandemic related events. First, there was the meeting between President Joe Biden and ten Republican senators. The President released a statement that signaled that he preferred the Democratic-controlled Congress pursue the reconciliation, a stream-lined process for getting approval of $1.9 trillion in spending on Mr Biden’s “American Rescue Plan.” The GOP senators wanted a package price tagged at $618 billion.

The second event will be actual voting on rules that provide instruction in the House on determining how revenue and spending targets be reconciled with appropriate changes in existing legislation. That vote begins today around 6:30 EST.

The main takeaway at this juncture is that the US government will have to borrow funds to finance Mr Biden’s plans and there is conjecture that Treasury will have to borrow more than the $1.9 trillion that Mr Biden is requesting. Central banks from emerging and commodity-driven economies are preparing to ramp up their reserves of the US dollar in order to buy up Treasurys when the debt is issued for purchase. Interest rates on the debt and yields are expected to inch up which theoretically should be accompanied by increased demand for the dollar. The Federal Reserve’s $120 billion per month of debt combined with other central purchases of US debt may work to create a supply of dollars to tamp down the dollar price.

Currency pairsExchange Rate as of 4:45 pm EST 1 February 2021The eventPost Event-Exchange Rate as of 2:00 pm EST 2 February 2021Impact
AUD/USD0.7641Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus0.7585USD strengthening
USD/CAD1.2776Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus1.2811CAD strengthening
USD/CNY6.4267Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus6.4551USD weakening
EUR/USD1.2135Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus1.2019USD strengthening
USD/INR72.8760Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus72.9415INR weakening
GBP/USD1.3699Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus1.3654USD strengthening
USD/JPY104.6400Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus105.0700USD strengthening
USD/MXN20.5641Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus20.1798USD weakening
USD/DKK6.1262Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus6.1874USD strengthening
USD/NOK8.5474Biden signals preference for reconciliation; Congressional Democrats prepare to vote on stimulus8.6173USD strengthening
Source: Federal Reserve and Reuters

The news scan

Both houses of Congress were preparing to take the first steps forward on U.S. President Joe Biden’s $1.9 trillion COVID-19 relief package, with initial votes on Tuesday launching efforts to fast-track passage. U.S. Congress readies first steps toward $1.9 trillion COVID-19 relief bill | Reuters

Several central banks have ventured into unusual territory in the opening weeks of this year, announcing currency sales in advance as they tread a delicate line between dulling the impact of a sliding dollar and dodging the ire of the US Treasury. Central banks take rare step of flagging currency sales in advance | Financial Times (

As the Treasury Department holds its largest auctions on record, global central banks could play a familiar role in helping to sop up the deluge of debt supply set to hit markets this year. Here’s why foreign central banks are set to reprise role as big buyer of U.S. government debt (

The U.S. Department of the Treasury today announced its current estimates of privately-held net marketable borrowing[1] for the January – March 2021 and April – June 2021 quarters[2]. TREASURY ANNOUNCES MARKETABLE BORROWING ESTIMATES | U.S. Department of the Treasury

Treasury releases assessment of US economy

The following is a press release from the U.S. Department of the Treasury:

“In the final quarter of 2020, the U.S. economy expanded further, with growth in real GDP of 4.0 percent, according to the advance estimate released last Thursday.  Despite this second consecutive quarter of growth, real GDP still declined 2.5 percent over the four quarters of 2020, given the severity of the contraction in the first half of the year.  The economy’s recovery slackened by the end of the year.  Payroll job creation slowed noticeably from September through November, before declining outright in December, largely due to losses in leisure and hospitality service industries—such as restaurants and bars, hotels, performing arts venues, and other establishments that are particularly vulnerable to stay-at-home orders and other measures implemented to combat the pandemic.  While real personal consumption rose in the fourth quarter, the pace of growth was constrained in part by renewed lockdowns and reduced capacity in key service industries.  Though the second Federal economic aid package passed in December 2020 should boost growth in the first half of 2021, a full recovery nonetheless depends on effectively resolving the pandemic – the efficacy of public health measures and the rapid vaccination of the population – while ensuring that households and businesses can cope with the variety of headwinds presented by the pandemic.


Real GDP grew 4.0 percent at an annual rate in the fourth quarter of 2020, following a surge of 33.4 percent in the third quarter.  Two major components of GDP – private fixed investment and residential investment – grew at double-digit paces, but private consumption also made healthy positive contribution to growth in the fourth quarter.  Private domestic final purchases – the sum of personal consumption, business fixed investment, and residential investment – increased 5.6 percent at an annual rate in the fourth quarter, extending the 39.0 percent advance in the third quarter.  This measure captures the economy’s capacity for a self-sustaining recovery, and also attests to an underlying upward momentum in private demand.

Real personal consumer expenditures (PCE), which accounts for about two-thirds of overall GDP, grew 2.5 percent at an annual rate in the fourth quarter.  This followed a surge of 41.0 percent in the third quarter; by the fourth quarter, PCE had recovered 77 percent of what was lost in the first half of 2020.  Purchases of durable goods – a category that includes motor vehicles, household equipment and furnishings, among other items – were unchanged in the fourth quarter, after spiking 82.7 percent in the third quarter.  Purchases of nondurable goods – such as food and beverages purchased for off-premises consumption, gasoline and other energy goods, clothing, footwear, and other goods – declined 0.7 percent in the fourth quarter, following a gain of 31.1 percent in the third quarter.  Meanwhile, household expenditures on services – the component of PCE most severely affected by the pandemic and related measures – grew 4.0 percent in the fourth quarter, after rebounding by 38.0 percent in the third quarter.  With two consecutive quarters of gains in most categories, consumer spending was 2.6 percent below its level at the end of 2019.  Overall, real personal consumption expenditures added 1.7 percentage points to the rise in total GDP in Q4.

Business fixed investment (BFI) rose 13.8 percent at an annual rate in the fourth quarter, driven by gains in all three major components, and following a jump of 22.9 percent in the third quarter.  Equipment investment showed the most rapid and broad-based growth in the fourth quarter, rising 24.9 percent overall – with gains in each sub-component – after surging 68.2 percent in the third quarter.  Investment in intellectual property products grew 7.5 percent, roughly comparable to the 8.4 percent increase in the third quarter.  Meanwhile, investment in structures was up 3.0 percent in the fourth quarter.  This represented a sharp swing from the 17.4 percent drop in the third quarter, when appetite for such investment was diminished due to lower oil prices and less oil exploration, continued use of telework, and a shift in consumption patterns away from brick-and-mortar to online retail sites.  While the latter two factors were still present in the fourth quarter, oil prices have trended up since late October, prompting more investment in oil-drilling structures; according to private sources, the average rig count rose 21 percent from the third to the fourth quarters.  The fourth quarter rebound in investment for mining-related structures partially offset annualized declines of 82.1 percent and 67.0 percent in the second and third quarters, respectively. Overall, total business fixed investment added 1.7 percentage points to real GDP growth in the fourth quarter, after contributing 3.2 percentage points in the third quarter.

Inventory accumulation, albeit a volatile component, returned to a more normal pace in the fourth quarter, after a significant buildup in the third quarter.  In the fourth quarter, the change in private inventories added 1.0 percentage points to economic growth, after contributing 6.6 percentage points in the third quarter.

In three of the past four quarters, residential investment has grown at double-digit paces. After surging by 63.0 percent in the third quarter – its largest advance since 1983 – residential investment increased 33.5 percent in the fourth quarter.  This component added 1.3 percentage points to growth, after contributing 2.2 percentage points in the third quarter.  Prior to the pandemic, residential investment had contributed to GDP growth for two quarters, and growth in this sector was solid in the first quarter of 2020.  The pandemic led to a steep but temporary decline in the second quarter.  Yet since last May, this sector has gained considerable strength, supported by record-low interest rates and record highs in builder confidence.  Demand for homes has far outstripped available supply, which has led to the recent, strong acceleration in home price growth—as well as strong gains in housing wealth among homeowners.  High house prices should eventually draw in more supply to help redress the current imbalance; until then, the rise in prices is making owner-occupied housing somewhat less affordable.  

Single-family housing starts and permits have grown strongly each month since May.  As of December, single-family housing starts were nearly 30 percent above their February level and single-family building permits – a leading indicator for starts – were 23 percent above pre-pandemic levels.  Existing home sales, which account for 90 percent of all home sales, rose to a fourteen-year high in October and were up more than 22 percent over the year through December.  New single-family home sales reached a 13-year high last August; though pulling back since, new home sales were still 15.2 percent higher over the year through December. In November, the National Association of Home Builder’s home builder confidence index rose to a record high of 90; though declining a combined 7 points over the two subsequent months, the home builder confidence index in January was still at an elevated level, conveying a significantly positive outlook about market conditions in the housing sector.  In early January, average rates for 30-year mortgages set a record low that was 2¼ percentage points below the levels since in November 2018.  In the intervening weeks, rates have risen only modestly above the record low.

Government spending declined 1.2 percent at an annual rate in the fourth quarter, reflecting a 0.5 percent decline in Federal spending and a 1.7 percent decline in state and local government expenditures. Total government spending pared 0.2 percentage points from GDP growth in the fourth quarter, mostly due to the state and local government component.  State and local government consumption has fallen for three consecutive quarters, partially owing to the reduction in employees as these governments struggled to meet balanced-budget requirements. The pandemic increased health care costs for these governments but social distancing restrictions lowered revenue, creating budget shortfalls. 

The net export deficit increased $102.1 billion at an annual rate during the fourth quarter to $1.12 trillion, as recovering domestic demand fueled another surge in imports.  Exports grew strongly, if less so than imports.  Total exports of goods and services grew by 22.0 percent, while imports advanced 29.5 percent. The widening of the trade deficit subtracted 1.5 percentage points from fourth quarter GDP growth, though this was less than one-half the 3.2 percentage points of drag posed by net exports in the third quarter.


Due to measures taken to control the spread of the virus, the economy lost 22.2 million jobs last March and April, 21.1 million of which were in the private sector.  Payroll job growth resumed last May: through December, the economy had recovered nearly 56 percent of all jobs lost and 60 percent of the private sector’s job losses.  Nonetheless, the pace of job growth slowed in more recent months and the labor market recovery stalled in December, with the economy losing 140,000 jobs, including 95,000 jobs in the private sector.  In all, the number of unemployed persons stood at 10.7 million in December, and weekly initial unemployment claims continue to run about four times the average levels seen prior to the pandemic’s onset.

The headline unemployment rate remained at 6.7 percent in December for the second consecutive month, nearly double its pre-pandemic level but more than 8 percentage points below the 14.8 percent, post-World War II high reached in April 2020.  The broadest measure of labor market slack, the U-6 unemployment rate, has also declined noticeably over the past several months yet remains above pre-pandemic levels.  By December, the U-6 had been cut to 11.7 percent, roughly half its level in April 2020.  But it remains nearly 5 percentage points above the pre-pandemic low of 6.8 percent observed in in December 2019.  Moreover, long-term unemployment continues to rise: the share of the labor force who were unemployed 27 weeks or more reached 2.46 percent in December, or roughly four times the 0.68 percent rate seen in February 2020.

Although the headline labor force participation rate (LFPR) – as well as prime-age (ages 25-54) LFPR – have recovered from the lows seen in April, they have yet to return to their pre-pandemic levels and in recent months, progress has slowed.  As of December, the headline LFPR stood at 61.5 percent, or almost 2 percentage points below the six-year high seen in January 2020, and the prime-age LFPR was 81.0 percent, 2 percentage points below the eleven-year high seen in January 2020.  The employment report for January 2021 will be released this Friday, February 5.

Nominal average hourly earnings for production and nonsupervisory workers rose 5.2 percent over the year ending in December 2020, faster than the 3.2 percent pace over the 12 months through December 2019.  December marked the 29th month that this measure of wage growth has remained above 3 percent, a consistency not seen since the mid-2000s.  Job losses among lower-wage workers tended to push average wages much higher for a time, but even with the rehiring of many of these workers, wage gains remain elevated, possibly pointing to the continued shortage of skilled workers.  Relatively low inflation has also boosted purchasing power: real average hourly earnings rose 3.8 percent over the year through December 2020, accelerating sharply from the year-earlier pace of 0.9 percent.  In contrast, growth in wages and salaries for private industry workers, as measured by the Employment Cost Index, has slowed a bit.  This measure advanced 2.8 percent over the four quarters ending in December 2020, slowing from the 3.0 percent gain over the four quarters through December 2019.


Inflationary pressures remain subdued, even with the recent, moderate climb in oil prices, and still-sizeable gaps remain relative to year-ago rates.  The Consumer Price Index (CPI) for all items accelerated to 0.4 percent in December, reflecting a 4.0 percent jump in energy prices, but over the 12 months through December, CPI inflation was 1.4 percent, almost a full percentage point below its year-earlier pace.  Despite recent gains, energy prices were still 7.0 percent lower than a year ago, versus a 3.4 percent gain over the previous 12-month period.  After tapering in recent months, food price inflation accelerated again in December, as the re-imposition of dining-out restrictions boosted demand for food consumed at home.  It bears noting that 12-month food price inflation rates have remained in the range of 3.5 percent to 4.5 percent since April 2020.  Over the year through December, food prices rose 3.9 percent, more than double the 1.8 percent pace over the 12 months through December 2019.  Meanwhile, core CPI inflation edged down to 0.1 percent in the month of December.  Over the past 12 months, core inflation was 1.6 percent, or 0.7 percentage points below its pace over the year through December 2019.

The headline Personal Consumption Expenditures (PCE) Price Index (the preferred measure for the FOMC’s inflation target) also shows a restrained pace of inflation; in contrast to CPI inflation, however, current rates remain nearer to year-ago levels. The 12-month headline PCE inflation rate was 1.3 percent through December 2020, within range of the 1.6 percent pace over the previous year.  Core PCE inflation was 1.5 percent over the year through December 2020, close to the 1.6 percent, year-earlier rate.  Inflation as measured by the PCE price index has held below the FOMC’s target since November 2018.  The FOMC’s target for inflation is an average of 2 percent over time as measured by the PCE price index.  Due to the significant drop in prices during the March to May lockdowns, there may be a spike in inflation in late-winter and early-spring, but it should prove transitory.


After two consecutive quarters of growth, real GDP is nearing the level of economic activity achieved in the fourth quarter of 2019.  Yet, 10.7 million workers remain unemployed, and many businesses have closed.  A variety of headwinds and uncertainties persist, all presenting considerable downside risks to growth.  On the domestic front, the possibility that consumer mood simply levels off, or even deteriorates, could weigh on private consumption in the future.  In addition, there is considerable uncertainty about the reach of existing vaccines vis-à-vis the emergence of mutated forms of the virus, mutations which appear to be significantly more contagious.  Given the difficulties in distributing the virus to date, slower-than-expected attainment of so-called “herd immunity” could hamper the return to normal operation of the businesses most affected by the pandemic.  Finally, slower recovery in overseas markets could also adversely affect U.S. economic recovery.  To address some of these challenges, the Administration has presented a plan for rapid vaccination of the population and has proposed $1.9 trillion in additional fiscal support the economy more broadly.  Private forecasters currently project a growth rate in real GDP of 2.3 percent in the first quarter of 2021, and of 3.9 percent for the year as a whole.”

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

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

3-month: .08%

6-month: .09%

12-month: .10%

2-year: .16%

10-year: .88%

30-year: 1.62%

Fed Funds Rate: 0.08%

Federal Reserve Target: 0.25%

Prime Rate: 3.25%

Source: Bloomberg

Major political/legal events impacting currencies

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

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