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

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

From the Federal Reserve …

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

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

Follow the links ….

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

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

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

25 February 2021

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

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

My takeaways

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

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

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

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

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

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

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

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

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

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

We have implemented our new framework by forcefully deploying our policy tools. As noted in our January policy statement, we expect that it will be appropriate to maintain the current accommodative target range of the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, we will continue to increase our holdings of Treasury securities and agency mortgage-backed securities at least at their current pace until substantial further progress has been made toward our goals. These purchases, and the associated increase in the Federal Reserve’s balance sheet, have materially eased financial conditions and are providing substantial support to the economy. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved. We will continue to clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.

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

We understand that our actions affect households, businesses, and communities across the country. Everything we do is in service to our public mission. We are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.

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

23 February 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

Federal Reserve data

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

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

Foreign exchange rates:

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

The banking system and community reinvestment

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

Board of Governors of the Federal Reserve System

Docket No. 12-1723 and RIN 7100-AF94

Comment

Introduction

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

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

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

Argument

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

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

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

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

Conclusion

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

Interbank market news scan: Central banks and inequality …

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

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

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

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

11 February 2021 8:41 pm EST

Interbank market scan: Lagarde sees holding crypto as “unlikely.” Central Bank of Nigeria explains “no to crypto.” India pursues crypto law

Follow the links …

European Central Bank President Christine Lagarde on Wednesday said she didn’t consider bitcoin to be a real currency, adding that central banks won’t be holding it as reserve currency anytime soon. ECB president Christine Lagarde says it’s ‘very unlikely’ that central banks will hold bitcoin in the near future (msn.com)

Following its ban on cryptocurrency-related transactions in the country, the Central Bank of Nigeria has explained why it was done. CBN  boss disclosed that the digital currency is used for money laundering and terrorism. CBN explains why cryptocurrency transactions were banned (withinnigeria.com)

Kingsley Moghalu, former deputy governor of the Central Bank of Nigeria (CBN) has condemned the apex bank’s reason for stopping cryptocurrency transactions in the country. Moghalu condemns CBN’s reason for banning cryptocurrency transactions (withinnigeria.com)

On Tuesday (February 9), minister of state for finance Anurag Singh Thakur said that a cryptocurrency bill was being finalised and it would be sent to Union Cabinet soon. Cryptocurrency bill: Here’s what you need to know (msn.com)

Are central banks on the verge of a currency war with the U.S? Global central bank interventions raise specter of ‘currency war’ | Morningstar

“Bitcoin needs a couple more big endorsements, and that could be the key to take prices above the $50,000 level,” Edward Moya, senior market analyst for the foreign-exchange broker Oanda, wrote Tuesday.  First Mover: As Wall Street Fixates on Inflation Hedges, Good Luck Finding Bitcoin | Nasdaq

Bitcoin ‘can’t be stopped’: Nigerians look to peer-to-peer exchanges after crypto ban. Some Nigerians plan to continue using bitcoin and other cryptocurrencies despite a directive issued by the Central Bank of Nigeria last week ordering banks to close down accounts associated with cryptocurrencies. First Mover: As Wall Street Fixates on Inflation Hedges, Good Luck Finding Bitcoin | Nasdaq

The Federal Reserve Board on Tuesday announced the second extension of a rule to bolster the effectiveness of the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). Like the earlier extensions, this one will temporarily modify the Board’s rules so that certain bank directors and shareholders can apply to their banks for PPP loans for their small businesses. Federal Reserve Board – Federal Reserve Board announces the second extension of a rule to bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP)

Currency pairsExchange Rate as of 4:15 pm 8 February 2021 As of 1:00 pm EST Exchange Rate as of 10 February 2021
AUD/USD0.7656 0.7727
USD/CAD1.2781 1.2690
USD/CNY6.4664 6.4576
EUR/USD1.2035 1.2134
USD/INR72.8500 72.8500
GBP/USD1.3714 1.3841
USD/JPY105.4400 104.6600
USD/MXN20.1300 20.0543
USD/DKK6.1785 6.1317
USD/NOK8.5428 8.4504
Sources: Federal Reserve, Reuters

10 February 2021

Interbank market scan: central banks, foreign exchange, cryptocurrency

In the news ….

The foreign exchange reserves held by the central bank rose 0.25% on a weekly basis, according to data released by the State Bank of Pakistan (SBP) on Thursday. https://tribune.com.pk/story/2282653/foreign-exchange-sbp-reserves-rise-33m-to-13b

The central bank has amended foreign-exchange regulations for companies and individuals to give it more flexibility in curbing currency speculation in a timely fashion. https://www.taipeitimes.com/News/biz/archives/2021/02/05/2003751784

Central banks of major economies, such as the U.S., the EU and Japan, have begun expanding their balance sheets by buying assets to inject liquidity into the market. The unconventional monetary policies are expected to stimulate the sluggish economies that were hit hard by the pandemic in 2020. The three major central banks cumulatively added $8 trillion, or is 2.5 times China‘s foreign exchange reserves, to their balance sheets in 2020. https://news.cgtn.com/news/2021-02-04/West-s-central-bank-balance-sheets-jump-by-250-China-s-forex-reserves-XBmXCNlsPe/index.html

The European Central Bank announced on Thursday that it has extended temporary euro liquidity lines until March 2022, as reported by Reuters. The extensions are with the central banks of Croatia, Albania, Hungary, the Republic of North Macedonia, San Marino, Romania and Serbia, the ECB noted in its press release. https://www.fxstreet.com/news/ecb-extending-bilateral-euro-liquidity-lines-with-non-euro-area-central-banks-202102041124

The Federal Reserve Bank of New York today announced the selection of  additional  counterparties  to support, as applicable,  agency commercial mortgage backed securities (agency CMBS) purchases and the Commercial Paper Funding Facility (CPFF). New York Fed Selects Additional Firms To Broaden its Counterparty Base for Agency CMBS and CPFF – FEDERAL RESERVE BANK of NEW YORK

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 news scan as of 3:32 pm AST: Peso, Indian rupee, and Japanese yen weaken against the dollar

Currency pairsExchange Rate Before Event 1:00pm ASTEventPost EventExchange Rate Post Event
AUD/USD0.7666Federal Reserve announcement0.7681Dollar weakens vs AUD
USD/CAD1.2774Federal Reserve announcement1.2759Canadian dollar strengthens vs US dollar
USD/CNY6.4822Federal Reserve announcement6.4822No change
EUR/USD1.2075Federal Reserve announcement1.2118Dollar weakens vs the euro
USD/INR73.0065Federal Reserve announcement73.0500Indian rupee continues weakness vs US dollar
GBP/USD1.3689Federal Reserve announcement1.3715US dollar weakens vs British pound
USD/JPY104.0000Federal Reserve announcement104.0600Japanese yen showing weakness vs US dollar
USD/MXN20.1832Federal Reserve announcement20.7000Mexican peso weakens against US dollar
USD/DKK6.1554Federal Reserve announcement6.1554No change
USD/NOK8.6452Federal Reserve announcement8.6242Norwegian Krona strengthens vs US dollar
Sources: Federal Reserve, Reuters

Today, Jerome Powell, chairman of the Board of Governors of the Federal Reserve issued the following statement:

“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. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. 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, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.

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; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Strategic takeaways:

  1. Traders should take a strategic position in the flow of Federal Reserve decision making on rates with the expectation of continued dollar weakness for some time as the Federal Reserve maintains its flexible average inflation rate policy for the net one to two years.
  2. The Federal Reserve may be growing weary of noting the need for fiscal action on the part of the U.S. Congress or sees no need for making such calls given the gravity of the virus and a Democratic-controlled White House and Congress that appear intent on providing another fiscal injection into the economy.
  3. Traders should expect Congress to authorize additional borrowing to finance additional stimulus. Additional fiscal demand may come at a higher interest rate price for taxpayers. Depending on how government structures the stimulus spending, monies directed to infrastructure and the ensuing contracts entered into to bring about infrastructure spending may attract additional domestic and foreign capital.
  4. The Mexican peso, Indian rupee, and Japanese yen weakened after the announcement. The dollar continued its weakness in its more popular currency pairs: the EUR/USD and the GBP/USD. The Chinese yuan remained unchanged expectedly given the People’s Bank of China’s recent announcement on their currency’s value.