Lael Brainard’s testimony before the U.S. Senate: Emphasis on inflation …

Chairman Brown, Ranking Member Toomey, and other members of the Committee, thank you for this opportunity to appear before you. I am greatly honored to be nominated by President Biden to serve as Vice Chair of the Board of Governors of the Federal Reserve System. If confirmed to this position, I look forward to continuing to work with members of this Committee.

We are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades. Over the past year, unemployment has fallen by 2.8 percentage points, and growth is estimated to be around 5 1/2 percent, according to a variety of private forecasts.

But inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task.

When the pandemic struck in 2020, I worked closely alongside Chair Powell and Secretary Mnuchin and many others, with the support of Congress, to calm financial market turmoil and save American jobs and businesses. When markets stabilized, I worked to responsibly wind down the emergency facilities we established. Today the economy is making welcome progress, but the pandemic continues to pose challenges. Our priority is to protect the gains we have made and support a full recovery.

Since 2014, as a member of the Federal Open Market Committee, I have supported monetary policy that is responsive to evolving economic conditions. Our approach helped sustain the longest recovery on record with low inflation and millions of jobs.

More broadly, I have worked to safeguard and grow our economy during the Administrations of five Presidents from both parties. I have worked on the U.S. policy response to every major financial crisis over three decades. I served at the Department of the Treasury as part of the team responsible for supporting America’s recovery from the Global Financial Crisis and responding to the euro-area financial crisis. I served at the White House as part of the team helping to safeguard the American economy from the Asian financial crisis as well as financial crises in Mexico, Brazil, and Russia. In some foreign countries, I saw up close how high inflation hurts workers and families, especially the most vulnerable.

I am committed to pursuing the Federal Reserve’s congressionally mandated goals of price stability and maximum employment and to maintaining the strength and resilience of our financial system. I am committed to the independent and nonpartisan status of the Federal Reserve.

If confirmed, I look forward to supporting Chair Powell in carrying out the responsibilities assigned to the Federal Reserve and in fostering transparent communication and accountability to you and the American people. I will bring a considered and independent voice to our deliberations, drawing on insights from working people, businesses, financial institutions, and communities—large and small—across the country. I will support policies that are in the interests of the American people and based on the law and careful analysis of the evidence.

Before closing, I want to thank my husband and daughters for their steadfast support of my work. And I would like to commend the outstanding efforts of the individuals across the Federal Reserve System who work so hard every day to serve the American public.

Senators, I thank you for this opportunity to appear before you and for considering my nomination. I would be pleased to respond to any questions.

Source: Board of Governors of the Federal Reserve

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


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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.

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

Federal Reserve Bank of New York sees no changes in short-term, long-term inflation …

Short- and Medium-Term Inflation Expectations Unchanged; Job and Income Expectations Strengthen Further

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the December 2021 Survey of Consumer Expectations, which shows that both short- and medium-term inflation expectations were unchanged. Uncertainty and disagreement about future inflation decreased at both the short- and medium-term horizons. Home price expectations rose in December but remained below their May 2021 peak. Households reported increased optimism about their labor market prospects, with earnings growth, job loss, and job finding expectations all improving. Households’ income growth expectations also improved, rising to a new series high.

The main findings from the December 2021 Survey are:


  • Median one-year and three-year-ahead inflation expectations both remained unchanged in December at 6.0% and 4.0%, respectively. The Survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at both the one- and three-year horizons.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short- and medium-term horizons, retreating from their series highs recorded in November.
  • Median home price expectations increased to 5.5% from 5.0% in November. The increase was driven by those below age 60 and those who live in the “South” and “West” Census regions.
  • Expectations about year-ahead price changes fell by 3.5 percentage points for the price of gas (to 5.7%), 1.4 percentage points for food prices (to 7.8%), and 1.0 percentage point for the cost of a college education (to 8.1%). The median expected change in the price of medical care and rent remained unchanged at 9.6% and 10.0%, respectively.

Labor Market

  • Median one-year-ahead expected earnings growth increased by 0.2 percentage point in December to 3.0%. The increase was most pronounced for respondents with an annual household income below $50,000.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased by 0.9 percentage point to 35.2%.
  • The mean perceived probability of losing one’s job in the next 12 months decreased by 1.3 percentage points to 11.6%. Similarly, the mean probability of leaving one’s job voluntarily in the next 12 months decreased by 0.3 percentage point to 19.9%.
  • The mean perceived probability of finding a job (if one’s current job was lost) increased to 57.5% from 55.9% in November, its highest level since its pre-COVID reading of 58.7% in February 2020. The increase was driven by respondents at least 40 years old and those without a college degree.

Household Finance

  • The median expected growth in household income increased by 0.2 percentage point to 3.4% in December, a new series high. The increase was most pronounced for respondents with no more than a high school diploma.
  • Median household spending growth expectations declined to 5.5% from a series high of 5.7% in November. The decrease was driven by respondents with household income under $50,000 a year and those with no more than a high school diploma.
  • Perceptions of credit access compared to a year ago slightly improved, with more respondents saying it is easier to obtain credit than one year ago on average. Expectations for future credit availability also improved, with more respondents expecting it will be easier to obtain credit in the year ahead compared to in November.
  • The average perceived probability of missing a minimum debt payment over the next three months increased by 0.3 percentage point to 10.3%. The increase was driven by those with some college education.
  • The median expectation regarding a year-ahead change in taxes (at current income level) decreased by 0.3 percentage point to 4.4%.
  • Median year-ahead expected growth in government debt decreased by 1.6 percentage points to 10.8%, its fifth consecutive monthly decrease.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now decreased by 0.5 percentage point to 28.2% in December.
  • Perceptions about households’ current financial situations compared to a year ago improved slightly. However, more households still reported a worse situation compared to a year ago than reporting an improved situation. Year-ahead expectations about households’ financial situations also improved, with fewer households expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now decreased slightly by 0.2 percentage point to 38.9%.

About the Survey of Consumer Expectations (SCE)

The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy.

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows us to observe the changes in expectations and behavior of the same individuals over time. For further information on the SCE, please refer to an overview of the survey methodology here, the interactive chart guide, and the survey questionnaire.

Mariah Measey
(347) 978 3071

Interbank Market News Scan: The Bank of Canada held its policy rate today, but I was nervous about USD-CAD

The Bank of Canada today held its policy rate at .25% citing the effectiveness of its quantitative easing program which is currently comprised of asset purchases of CAD 2 billion a week. While seeing a recovery in its economy, Covid-19 and supply chain disruptions were noted as the usual suspects for dampening of economic growth in certain sectors.

The Bank noted contraction in its export sector, in particular its auto industry with consumption, business investment, and government spending contributing to Canada’s economy.  Inflation is running around 3.7%, much hotter than its 2% target.

From a yield and inflation aspect, I could not see why Americans would want to move dollars into Canada’s economy.  Granted U.S. inflation, at 5.4% over the last 12 months, is running hotter than inflation in Canada.  However, according to data from Bloomberg, ten-year treasury yields are higher in the U.S. (1.35%) than they are in Canada (1.21%).

Yesterday, data from Reuters showed the USD/CAD closing around 1.2621 and I quite frankly thought (in my gut) that the exchange rate would decrease by 11:00 am EST but decided to hold out for the Bank of Canada narrative on rates.  I did not see much change in this report versus last month’s monetary policy release.  I also did not see any calls for changes in monetary policy which added support, in my opinion, to an expected increase in USD/CAD.

The takeaway for me is there is nothing wrong with listening to your gut but always challenge the feeling with data and vice versa. 

Please feel free to share thoughts on central bank decisions and foreign exchange.  

Happy Star Trek Day!

Alton Drew

8 September 2021

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Interbank Market News Scan: The Fed speak not providing much to shift foreign exchange markets …

A Bloomberg interview with Federal Reserve Bank of Dallas president Robert Kaplan along with remarks by Federal Reserve Board vice-chair Richard Clarida and Federal Reserve Bank of Atlanta president Raphael Bostick did not provide much information to attribute to any shifts in the foreign exchange markets. 

In a 9 August 2021 interview with Bloomberg, Mr Kaplan expressed confidence about where the fed funds rate, the overnight rate for loans between Fed member banks, stood.  The current target range of the fed funds rate is between 0 and .25%. 

Mr Kaplan expressed caution that the fed funds rate and the effects of asset purchases by the Federal Reserve be looked at separately.  Currently the Federal Reserve is purchasing $120 billion a month of US Treasury securities and agency-backed securities as part of a strategy to keep liquidity in the credit markets while keeping borrowing rates low.  The Federal Reserve’s monetary policy is designed to add fuel to U.S. economic growth by making lower cost credit available to businesses.    

In remarks made the following day, Federal Reserve vice-chair Clarida noted that the U.S. was out of the recession precipitated by government lock down of the economy in March 2020.  He expects the economy to continue its expansion through next year while cautioning that growth will be tempered by a variant of the coronavirus responsible for the Covid-19 pandemic.  Vice-chairman Clarida does see unemployment continuing to fall through 2023 along with inflation which he forecasts to be around 2.2% in 2022 and 2023.

The Federal Reserve is today following a flexible rate policy that will allow the economy to run periodically over its inflation target of 2%.  Dallas Fed president Kaplan did note that businesses are expecting to raise prices, in line with Federal Reserve forecasts on inflation.  Mr Kaplan also noted that there was an active debate regarding when the Federal Reserve would start cutting back on its monthly $120 billion a month asset purchases. Mr Kaplan also believes that adjusting asset purchases now would put less pressure on the fed funds rate.

As Federal Reserve Bank of Atlanta president Bostick shared today, the two percent inflation target number is thought by the Federal Reserve to be the appropriate numerical goal to mitigate the risks of deflation.  The rate, as a pre-condition to a healthy economy, is seen as appropriate in assisting households protect themselves from any changes in purchasing power.

The takeaway for traders is that sluggish growth in the US in 2022 and 2023 may result in tempered appreciation of the dollar’s value in those years.  So far, the Federal Reserve is seeing little change in relative income or price changes.  Nor does the Federal Reserve seem to signaling much in relative interest changes, at least in the short to intermediate term.  

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