Maxine Waters’ HR 2543 gives me the impression that Congress does not understand banking …

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (“Board” or “FRS”), today finished up his semi-annual tour of Capitol Hill when he presented to the U.S. House Committee on Financial Services the status of the Board’s monetary policy as it impacts the US economy.

I have watched hundreds of Congressional hearings over the past twelve years and quite frankly I never expect very much substance.  I would advise that if you can’t read Mr Powell’s entire report, then his written testimony should suffice.

The chairman of the committee, Maxine Waters, Democrat of California, announced early in the hearing that a bill she sponsored, the Federal Reserve Racial and Economic Equity Act (HR2543), had passed the House and is now sitting in the Senate.  The intent of the bill is to add additional demographic reporting requirements; to modify the goals of the Federal Reserve System, and for other purposes.”

Specifically, HR2543 would require the FRS to:

  1. Eliminate disparities across racial and ethnic groups regarding employment, income, wealth, access to credit;
  2. Conduct monetary policy and bank regulation in order to eliminate the aforementioned disparities;
  3. Conduct payment system operations in order to eliminate racial and ethnic disparities;
  4. Continue carrying out the Community Reinvestment Act of 1977; and
  5. Conduct comparisons across different demographic groups including race, ethnicity, gender, and educational attainment.

I have come to accept Congress’ authority to create a central bank system pursuant to Congress’ responsibility under the U.S. Constitution to regulate the value of money.  I can understand a constitutional argument that Congress used an implied or ancillary power to create the FRS.  Using the central bank as a social agency for diversity, equity, and inclusion I can’t fully embrace.

The Constitution does not provide for a central bank much less for a central bank that has as part of its mandate the mitigation of harm in the banking system to ethnic minorities. The boat has long left the harbor for any mitigation of banking harms to blacks.

Blacks were not a part of America’s capital and natural resources allocation plan dating back to the 1600s.  The exponential increase in capital holdings by whites are an expected result of human behavior and lineage maintenance.  Due to slavery and the Jim Crow era, Blacks were doomed to remain behind in the capital holdings race.  In order to participate in true banking activity, the entire population of blacks in America for its first 300 years would have to have owned land, waterways, access to minerals, and access to fair labor markets in order to trade for credit.

What Mrs Waters has proposed in her bill is about the best that the black political class can do in Washington.  Even if the measure passes in the Senate, the necessary reallocation of capital to blacks would not occur. 

HR 2543 serves no other purpose but to rile up Senate Republicans and make them the scape goat for failed policy.      

Alton Drew

23 June 2022

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While Powell’s hawkishness is the move in the right direction, it doesn’t negate the need to get rid of the Federal Reserve

On 21 March 2022, Jerome Powell, chairman pro tempore of the Board of Governors of the Federal Reserve, made comments about labor markets, inflation, and reduction in the balance sheet of the Federal Reserve System. Mr Powell acknowledged that the labor market is tight and that nominal wages are rising, particularly at the lower end of the wage distribution.  Given what he noted as the severe imbalance of supply and demand in the labor market, Mr Powell wants to use the Federal Reserve System’s monetary policy tools to moderate the growth in demand for labor.

Analysts and investors have been raising concerns about the Federal Reserve’s balance sheet.  Mr Powell noted in his comments that reducing the Federal Reserve System’s balance sheet could bring inflation to near two percent over the next three years.

The economy, according to Mr Powell, is in a position to handle tighter monetary policy and he stated his willingness to see the interbank overnight (fed funds) rate increase by more than 25 basis points at the next Federal Open Market Committee meeting.

I appreciate the hawkishness for one reason.  It pushes back on the desire by political factions to weaponize the fed funds rate.  The effective fed funds rate, a volume-weighted median of transactions level data collected from banks, has increased over four times from its long-term rate of .08% to a current 0.33%.  The fed funds rate is the overnight rate that banks charge each other for lending and borrowing excess reserves.  The rate sits near the middle of the .25% to .50% range recommended by the FOMC.

On its face, the recent effective funds rate may incentivize banks to seek returns from the interbank market versus purchasing Treasurys.  For example, the yield per day on a one-year Treasury bill is .00442% versus an overnight fed funds rate of 0.33%.  Putting those excess reserves into the bond market would call for much higher yields which in turn would call for a fall in asset prices and clamping down on the rise in prices.

The Federal Reserve System has at its disposal a number of monetary policy tools to nudge banks to the overnight trading range including open market operations; the discount window and discount rate; reserve requirements; interest on reserves; reverse repurchase agreements; and liquidity swaps, to name a few.

Even with its tools and noble statutory mandate of pursuing stable prices and full employment, the Federal Reserve System still represents Congress’ abdication of its responsibility for coining money and regulating its value. Yes, Congress can authorize the mechanisms it deems necessary for meeting this statutory duty, but where the taxpayer/consumer/electorate is seeing an erosion of her spending and saving power, might it be time for Congress to reassert its statutory duty versus allowing the Federal Reserve System to act as a coordinator of bank cartel activity?

Alton Drew

23.03.2022

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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  

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Interbank Market News Scan: I expect that the GBP-USD will continue inching up

As of 10:03 am EST, I haven’t seen any news out of the Bank of England discussing modifications to findings in its August monetary policy report.  The current bank rate set by the Bank of England is 0.1% with a target rate of inflation at 2.0%.  The Bank of England currently purchases GBP895 million in government bonds in an attempt to keep borrowing rates low for consumers and businesses. 

The Bank of England expects inflation to continue rising over the Bank’s current 2.0% target for the next two years before falling back to the target.

OANDA reports a .41% increase in the GBP-USD exchange rate between 30 August and 7 September with an exchange rate of 1.3839 as of 10:03 am EST.  As of 10:17 am EST, Reuters reports an exchange rate of 1.3780 while Bloomberg reports an exchange rate of 1.3787.

There is a hearing scheduled at 11:00 am EST on 8 September 2021 to discuss the Bank of England’s August monetary policy report.  The London market closes today at 11:30 am EST.    

Alton Drew

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No, the banks are not the bad guys …

Alton Drew

The Board of Governors of the Federal Reserve System begin their two-day meeting next Wednesday, one day after the general election. No changes in inter-bank rates are expected, but what will be of interest is a likely repeat of the plea that Congress and the Executive implement a fiscal policy that keeps the economy on life support during the pandemic. Depending on who wins the Electoral College, Chairman Jerome Powell’s post-meeting comments will be either soothing or raise more hairs on the back of the public’s necks.

Mr Powell will reiterate the need for fiscal policy because monetary policy can only do so much. Monetary policy has as one of its goals the backstopping of its member banks, providing needed liquidity when the credit pipes become clogged by opening the flow of credit to businesses via the banks whose inability to lend could stem from not having enough capital to support additional lending.

Fiscal policy, the Fed chairman will likely remind us next Thursday, does a better job of getting cash into the hands of consumers resulting in increased personal expenditures. Consumer spending has historically driven around seventy percent of national income, and that the kind of spending that is needed now.

But this relief is going to be temporary. The more sustaining stimulus will come from an economy that opens back up. If the polls continue to hold and Joe Biden takes office in January 2021, he could take actions to keep needed capital in the United States that probably props up the economy. Would Mr Biden want to tax this capital as part of his promise to bring about an equitable tax environment where the affluent pay their fair share of taxes or will he back pedal on taxing captured capital in order to quell any attempts at tax avoidance while ensuring the availability of stimulative spending?

Mr Biden may also be reminded that in an economy that is credit driven, where banks are the information search agents that help capital seek out higher returns by identifying worthwhile investments, he could also leave banks, their investors, and their depositors off of his tax hit list thus helping the Federal Reserve further unclog the credit pipes.