The Federal Reserve System’s message to American society: Start investing in more productive economic activity

The implicit agreement between the United States government and American society is that the United States government will maintain a financial and resource management infrastructure that facilitates a taxpayer’s ability to find opportunities to create income.  As the underwriter for the United States government, the Board of Governors of the Federal Reserve System has a mandate to pursue stable prices for goods, services, and assets and full employment of labor.  The Board of Governors via its Federal Open Market Committee (FOMC) employs a number of monetary policy tools to achieve this mandate with a federal funds target rate serving as indicia for how well its tools are working.

Yesterday, the Board of Governors raised this target rate to a range of .25% to .50%; in other words, an overnight rate that the Board of Governors would like to see its member commercial depository institutions lend to reach other the excess reserves they hold at their district federal reserve banks. The problem here is that at this printing, the Board of Governors has reduced to zero the amount of reserves a depository institution is required to keep at its respective federal reserve district bank.  Traders would have to look at other indicia to determine how well Board of Governors policy is doing in pursuing the federal funds target rate.

For example, traders should be looking at changes in the discount window rates that the federal reserve district banks are charging to lend money to their commercial member banks.  Traders should also look at changes in central bank liquidity swaps or changes in rates for federal reserve district bank lending facilities such as the term deposit facility or overnight reverse repurchase agreement facilities.  These are some of the monetary policy tools that the Board of Governors and its 12 federal reserve banks use to move rates toward their federal funds target and thus control the money supply.

As rates increase, American society will be put on notice.  I expect an increase in market discipline as banks and other investors seek out opportunities to increase returns on capital.  Lots of capital has gone into non-productive endeavors such as the tools and platforms riding the internet.  Amazon may have made purchasing goods and services more efficient, but can we say that Twitter and Instagram have raised American productivity and provided any societal solutions that lead to greater employment?  As the Board of Governors tackles inflation with its monetary tools, interest rates will start ticking up and entrepreneurial gimmicks that provide nothing in terms of increased yield, employment, or solutions will be and should be shunned or abandoned. 

Alton Drew

17.03.2022  

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

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

The Federal Reserve keeps rates at near zero

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.”

Source: Board of Governors of the Federal Reserve

Implementation Note issued December 16, 2020