Worries of Fed Policy Error Rising, Powell Opines On Crypto

The pressures are certainly rising on the Federal Reserve to respond to what looks like potentially significant inflationary forces in the economy and the fears of a policy error also appear to be rising with it. Larry Summers was a serious once-candidate (Yellen beat him) for Federal Reserve Chairman who has since fallen from grace in Biden policy circles. He says all Fed officials need to do to know they have their policy wrong is to walk outside. He says inflation is rising even faster than the levels that previously alarmed him. The treasury markets didn’t appear as shrill in their concerns as the former US Treasury Secretary.

Indeed, the Fed may have gotten the message as it appears to be ever so slightly elevating the prospect of ‘talking about talking about’ tightening, in the ultra-dovish parlance of today’s unified FOMC. St. Louis Bank President James Bullard said he thought we could adjust monetary policy once the pandemic was “largely behind us,” and that the time has not quite arrived, “but it does seem like we’re getting close.” The usually more hawkish Raphael Bostic also said that the Central Bank would have to “very nimble” in its response to the developing situation.

There was more news from across the economy that inflation is increasing. The Philadelphia Fed found in a report that 77% of firms reported increases in inputs while none reported decreases. Wages have also been seen to be rising. Inflation expectations for US consumers over the next year went up from a median estimate from surveyed firms of 3.0% in the previous quarter up to 4.0%.

It was also noted in the recently released Federal Reserve minutes that if rapid progress materializes in the committee’s economic goals, then they should begin tapering asset purchases. Although this language and these comments may seem relatively benign, they signal that governors are warming to the idea of tapering and that maybe consensus is loosening a bit. You may begin hearing a little more dissent as months go on after an unprecedented period of unity amongst FOMC members.

The Federal Reserve will be moving forward with efforts to research and develop a virtual currency. While it didn’t set out specific plans Chairman Jay Powell said that the Fed is in the stage of “carefully monitoring and adapting” to cryptocurrency innovations. His thoughts appeared to suggest that cryptocurrency could be used as a technology to replace the antiquated US payments system. He specified that a CBDC in America would be designed with benefits to the general public in mind. Importantly he stated that a CBDC would be a compliment to rather than replacement for the US dollar.

Another aspect of the comments on cryptocurrency appeared to be that Chairman Powell made a clear distinction between stablecoins and other cryptocurrencies. Some speculate regulatory action could be coming from the Biden Administration and these fears were only heightened by the significant volatility in cryptocurrency markets this week.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.623%.

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