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Fed Watch

Fed Watch

Can you feel it? The fear of a taper tantrum is in the air. Long-term yields are steepening and the annual testimony of Federal Reserve Chairman Jay Powell on monetary policy next week may be contributing to why markets were on edge. A sell-off in US bonds likely contributed to choppy markets this week. Fed Minutes from the last policy meeting were released this week and showed some lively debate amongst governors but the headline is the same; the Fed is very serious about letting inflation move above 2% to achieve maximum employment and its board members are confirming that they will view initial reflationary forces as acceptable and likely not the beginning of a significant trend. This is important since markets appeared to be partially down this week on rising rates and the fear of a ‘taper tantrum’. Powell continues to beat the steady drum of assuaging investors and that’s unlikely to change anytime soon. The weather events in Texas this week prompted rumblings amongst the board’s more progressive leaning members of the risks to the financial system posed by climate change. We noted this would be a major battle line between parties this year, and the current cold weather appears to have heated the argument up. On Thursday, Federal Reserve governor Lael Brained spoke about the Central Bank’s efforts to ensure the financial system can deal with the risks presented by climate change. “Climate change is already imposing substantial economic costs and is projected to have a profound effect on the economy at home an abroad,” said Brainerd. Just how the Fed plans to deal with these risks, and mandates their banks to account for them through their supervisory function will be a major flashpoint as time goes on. Republicans have already voiced concerns of the Fed relegating industries to financial exile by including climate scenarios in the annual stress test. The scenarios for 2021 did not contain assessments of climate risk. Brainerd advocated for it in the future though. While the headlines around the Fed and cryptocurrency have been largely positive as of late, we did notice some comments from the Federal Reserve President from Boston, Eric Rosengren. Rosengren said he was personally surprised at the continued prominence and appreciation of Bitcoin. The topic has been at the forefront since major companies like Tesla and the Bank of New York Mellon made moves to embrace the most prominent cryptocurrency. Last week, the market cap of Bitcoin surpassed $1 trillion. Mr. Rosengren did bring up an interesting point. He thinks that Central Banks will come to dominate cryptocurrency as they launch CBDCs. We think this is likely not the case and the non-aligned and democratic structure of Bitcoin will likely lead to its continued endurance and price appreciation. 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 1.34% up from 1.21% last week.

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  • Fed Watch
Mar 13, 2020

Market Expects Big Fed Rate Cut in Coming Days; New QE?

Call me chicken or ambition challenged, but I wouldn’t want to be in the shoes of Federal Reserve chairman Jerome Powell right about now. Sure, he has free limousine rides everywhere, bodyguards and everyone hangs on his every word. But right now Powell and his crew are facing the worst stock market bear since the Great Recession. He cannot just stand there, even if it were to be the best to let the market sort itself out. He has to do something. Given we are only days away from the next Fed Open Market Committee (FOMC) meeting (March 17-18), I think we might not see Fed action until then—unless the market continues to tank before then. As bad as things look, the Fed might want the dust to settle before loosening shock and awe. The CME’s Fed futures market, which has been historically a better predictor of Fed funds rate moves than the famous Fed “dot plots,” is effectively saying there is a very strong probability that the Fed funds rate will drop from 1.00%-1.25% to 0.25%-0.75% and strong probability it will return to zero-0.25%. That appears to be taken as a given by investors. The wildcard is Quantitative Easing, or QE. The market is buzzing with speculation that some kind of new QE program will be announced. The previous QE saw the Fed expand its balance sheet (and the U.S. money supply) enormously through its purchase of U.S. Treasury bonds in order to bring more liquidity to markets. There is even talk that the Fed would buy equities, which might or might not help the stock market. Some investors could see that as a panic move by the Fed. In the meantime, the NY Fed surprised markets last week with an announcement Thursday that it would offer up to $1.5 trillion in short-term loans to big banks, in order to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.” This represents an expansion of its previous program of supplying liquidity through repo operations and short-term loans in the money markets. The Wall Street Journal reported that its monthly economists’ survey expects, on average, gross domestic product to contract to 0.1% in 2Q vs a previous projection of 1.9%. They see growth of 1.2%, down from 1.9%. Annual growth was 2.3% in 2019. Separately, European Central Bank President Christine Lagarde unveiled a modest stimulus package to shield the region’s economy from the fast-spreading coronavirus, but investors weren’t impressed. She suggested the bank might cut rates further if the economic outlook worsens, but analysts were unconvinced. The eurozone economy could shrink 1.2% in 2020, as workers stay home and households cut back on travel, entertainment and large purchases, according to research firm Capital Economics. The yield on the benchmark 10-year U.S. Treasury note settled at 0.78%, new historic lows, compared to 0.78% one week ago and 1.00% the previous week ago. Unless you think U.S. bond yields are going negative, that asset class looks vulnerable to a Fed trying very hard to lift rates.

Powell Opines on Employment, Potential New Nominees

On Wednesday, Federal Reserve Chairman Jay Powell spoke at the Economic Club of New York. Firstly, the Fed Chair stressed that the Federal Reserve, counter to much media speculation, will remain patiently accommodative. He noted that transient inflationary forces likely to accompany an economic normalization would be very unlikely to affect monetary policy. He stressed that the labor market's damage is far worse than the headline unemployment rate would indicate and said the ‘real’ rate is about 4% higher at 10%. He also mentioned that we had seen the largest decline in labor force participation since shortly after World War II. One thing is clear; the Fed is more focused on unemployment rates coming down and the more equal gains that correspondingly occur across the economy, then adhering to the more 'hawkish' approach of preliminarily raising to cool an overheating economy. This is theorized to curtail the length and severity of asset bubbles, but Powell has recently questioned this logic. He is full-speed ahead on monetary accommodation and will let inflation run high. Tapering will not be occurring any time soon though. Markets appeared to get the message pretty clearly this time. The yield on the 2 -year treasury briefly touched levels below .1% before finding support at the .11% level. Nonetheless, inflation expectations are rising. More and more speculate that the $1.9 trillion Biden stimulus may overheat the economy, including the Fed-Chairman that never was, Larry Summers, who penned an op-ed on the subject. The Biden administration is the first Democratic administration to leave Mr. Summers out of its' plans for decades. The more neo-liberal economic wing, which had prominence during Obama's tenure, appears to be decidedly out of favor. Political dynamics aside, it’s worth a read, even if it's mostly an exercise in acquiring attention and waiting in the wings in case of a policy error. The other Fed 'hawks' like Bostic have been making rumblings as well. Powell's comments seem wisely directed toward the policy mandates labor-side in a clear sign he knows how to sing the right tune. Although it is early in the process, we got our first insight into President Biden's thinking on the Federal Reserve appointment he needs to fill. The two whisper candidates are Lisa Cook, a veteran Obama-admin economist. Currently, a professor at the University of Michigan, and William Spriggs, who was previously Chief Economist of the AFL/CIO and currently teaches at Howard University. Cook would be the first African American woman to serve on the Fed board. William Spriggs would be the fourth African American male to serve. The Federal Reserve released its 2021 Stress Test Scenarios. The US's largest banks have to complete these tests to regulators' satisfaction to pay a dividend. The hypothetical 'severely adverse' scenario features a panic in commercial real estate and corporate debt markets. This leads to a 55% drop in equity prices, a 4% increase in Unemployment and an identical decline in GDP over several quarters. It’s incredible to think we've recently survived a scenario far worse than anticipated by the pre-COVID-19 stress tests. Institutions have recently passed with flying colors, and we would expect the same to occur with the 2021 tests as cyclical forces continue to move in banks’ favor. 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 is1.21% down from last week 1.17%.

Biden Withdraws Shelton Nom, Fed Wants CBDC Manager

The long saga of Judy Shelton’s twisting and turning quest for a Federal Reserve Board seat has finally come to a predictable end. Her unorthodox views made it one of the more charged and dare we say entertaining nominations in modern history. On Thursday, President Biden formally removed Judy Shelton and twelve other Trump nominees’ names from the appointment docket. Shelton was nearly confirmed at the end of Trump’s tenure but as you may recall her nomination was able to be blocked in dramatic parliamentary fashion due to several Republican Senators coming down with COVID-19. Though Biden has not yet indicated who he will nominate, the eventual pick should be a good signal as to what direction the President will want the Fed to go. The general consensus is that politicians of both parties, particularly if at they sit in the Oval Office, should generally be big fans of the ultra-dovish approach that has been tailored to respond to COVID-19 by Jay Powell and his deputies. The Fed’s role and activities going forward in the economic recovery will likely be highly politicized. As vaccination campaigns continue to inch their way forward more and more focus is coming into how the Fed will handle the coming period of economic normalization. Many folks are now openly speculating that the unprecedented amounts of fiscal and monetary stimulus could heat up and force the Fed’s hand to tighten. Though Fed leadership repeatedly and often states that inflation is very welcome, initial spikes likely won’t be enough to justify tightening, and that they will let inflation run higher than normal to promote the inclusive economic gains. One thing is clear; the battle lines are being drawn for a 2021 between different camps of Fed hawks and doves. The ‘Reddit Rebellion’ seemed to also kick into gear the narrative that the Fed has created massive bubbles. We think these items are unrelated in a direct sense and agree with what Chicago Fed President Charles Evans said, “At the moment, I don’t see that as a link to macroeconomic borrowing costs for businesses or households.” That’s also how an economist gives a dismissive response if you were wondering. In an exciting development for the future of cryptocurrency, the Federal Reserve has posted a job post for a Research Director to help develop a ‘regulatory framework for emerging payments platforms.’ Though Powell has indicated in recent comments that the American central bank will likely let other Central Banks forge the initial path ahead for Centrally Banked Digital Currencies (CBDCs), the development is undoubtedly positive particularly when paired with the appointment of the crypto-friendly Gary Gensler as Chairman of the SEC. The Fed and other regulatory also met to discuss the events in markets last week. Officials largely were pleased that financial stability wasn’t substantially undermined by the events. 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 at 1.16% up from 1.07% last week.

Fed Holds Course Steady, Powell Opines on Financial Stability

The Federal Reserve held its first meeting of 2021 and announced that it will maintain its accommodative posture toward monetary policy and keep interest rates near-zero. The Fed’s statement had some significant language changes including noting that the economic and employment activity had significantly moderated. The Fed also noted that those sectors most adversely effected by social distancing and the pandemic are struggling the most. Chairman Powell also noted that unemployment rate, when calculated to include those who have also left the workforce is near 10%. The tone of this announcement was largely the same as previous meetings. Again, the Fed highlighted that there are still considerable and plentiful downside risks to the economy as we proceed through a deadly and uncertain winter. The language of this statement was also similarly tweaked with a focus on the monitoring of vaccines. The other big language change, which could be taken as a positive, was the Fed replacing taking out the ‘medium-term’ of the period where the virus poses the most risks. Powell expanded on the change, clarifying that due to vaccine developments, “The risks are in the near-term, frankly.’ Of course, what made more headlines during this wild week on Wall Street was Powell’s answer to the first question he received about the short-squeezes and volatility occurring on Wall Street. Powell avoided the issue directly and instead spoke to his assessment of financial stability in general. The questioner has noted that the Fed’s macroprudential tools primarily apply to banks and their supervision but does not cover non-bank entities. Powell was asked about the risks he saw in these non-bank areas. He noted that the Fed does not directly supervise non-bank entities, other than those designated as Systemically Important Financial Institutions (SIFIs) but that through the Financial Stability Oversight Council he coordinates with agencies that do. He also noted that a lot of the risks that made themselves apparent in the Global Financial Crisis appeared in the non-bank sector and the Fed has learned valuable lessons from that. He did not seem to indicate that new tools or more nuanced approaches to the non-bank sector were needed. He generally opined that the macro-prudential tools had been quite useful. He pointed to the strength of the banking system in February and March as evidence of the effectiveness of their tools. He stressed that for matters of financial stability, tools other than monetary policy are most effective. He said, very importantly, that he thinks preliminary tapering or ‘cooling’ to fight asset bubbles is not proven to be positive and may actually cause more harm than good. 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 is1.07% down from last week 1.09%.

Yellen Confirmed, New Admin, New Challenges For Fed

The Federal Reserve is supposed to be an apolitical agency, but there is little doubt that Federal Reserve Chairman Jay Powell is pleased he will no longer be publicly heckled by a sitting President. However, that doesn’t mean there won’t be any pressure coming at the Fed from 1600 Pennsylvania Avenue, or from the Treasury building that is right next door. In many of his post-pandemic legislative hearings, Powell has been repeatedly asked what the Fed can do about wealth inequality and climate change. As a nod to both those concerns, the Fed introduced its AIT framework which lets inflation run longer with the hopes that economic gains will be distributed more comprehensively and it has recently joined the Network for Greening the Financial System, (NGFS) which already elicited a hostile response from Congressional Republicans. One of the problems is, of course, that the Fed’s policy tools and mandates are limited and mostly blunt monetary instruments not at all tailored to the nuanced and specific policy goals that some Democratic members of Congress seem to have in mind. You can generally count on the Fed doing enough to keep lawmakers off their back while showing some deference, but the incredible demands of our time may strain this previously effective balancing act. The issue of the Fed becoming the ‘the lender of first resort, rather than of last resort’ even held up the last stimulus package. The Fed will try to keep itself out of political arguments and both sides will try to drag it in. Keeping the traditional role of the Fed will also likely be appealing to some centrist Democrats, so we wouldn’t get too crazy about proclaiming the brave-new era of Modern Monetary Theory (MMT) just yet. Opposition to the Shelton nomination is a good analog; anyone or anything too far from the center is unlikely to succeed in the nomination process for this administration as well. To be sure, preliminary battle lines are being drawn for a consequential ideological fight over the place of the Fed in bolstering a post-pandemic economic recovery, as well as how involved they should be in partisan policy priorities. We will keep you abreast as to developments in this showdown as they occur. Similarly, talk has been rising about tightening earlier than current consensus would indicate. All in all, we think that minus the expired CARES Act programs, the Fed’s actions will remain mostly the same in 2021. They are being very careful to communicate clearly and well-in-advance to markets. Additionally, there may be some positives and synergies that help markets coming from the combination of Yellen’s known and steady hand on Treasury along with Powell’s so far stellar performance. Janet Yellen is the first Treasury Secretary that is also a Fed Chair since Jimmy Carter’s nomination of then Chairman G. William Miller to Treasury which of course led to Paul Volcker’s ascension to Chairman. She got out of committee with unanimous approval. A lesser-known approval process for the twelve sitting Federal Reserve Regional Bank Presidents and their deputies was also completed on Thursday, which according to Governor Lael Brainerd was quite an undertaking and absorbed a lot of the agency’s attention of the past few weeks. 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 1.1% unchanged week over week.

Early Taper-Talk by Fed Governors Shutdown By Powell

We’ve reported in these pages that a comical title for the Federal Open Market Committee is the Federal Open Mouth Committee. The reason for this joke is on full display this week. It appears there is a bit of dissension in the ranks about when tapering and the raising of the Federal Funds rate will occur. This potentially alarming development for investors should be taken with a grain of salt. In a way, some of what the regional Fed governors were saying is actually quite bullish. The thrust of their comments seems to be based upon an assumption that there will be a particularly booming recovery once the virus subsides. Some of the more hawkish members of the board appear to be having the beginning of a conversation on tapering and rate rises and appear a bit more willing to depart from the official line in less formal comments. Some speculation has been fueled by the steepening of the yield curve and the potential that a booming recovery could lead to rate cuts sooner than is currently forecast. Of course, the comments of Fed governors set off speculation in markets of preliminary tapering and rate rises. The culprit was a collection of comments from some of the regional bank presidents. Raphael Bostic, the President of the Atlanta Fed said he was open to a late-2021 tapering, quite a bit sooner than the Fed’s current target of 2023. “A lot of it will depend on how the virus and the vaccine distribution goes. But if it goes well—if we learn quickly—I think there is some good upside,’ said Bostic. Similarly, President Robert Kaplan of the Dallas Fed said he was hopeful the economy would rebound enough by 2021 in order to begin having conversations about tapering. As soon as the murmurings started making news, Jay Powell shut them down and shut them down about as forcefully as he could. “We’ll do so by the way, well in advance of active consideration of beginning a gradual taper in asset purchases,” said Powell stressing that even that preliminary notification would come “No time soon.” Other Governors in FOMC leadership parroted Powell’s official line; the Fed will be extra careful and communicate directly before any tapering or rate-rises occur. Governors Brainerd and Clarida came to Powell’s defense as well. The Fed Main Street Lending program has been officially terminated as of January 8th. The role of the Fed in the economy going forward and whether similar programs are enacted during a tough winter for COVID-19 will be key areas we will monitor in 2021. 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 1.1% unchanged from last week.

Shelton Again Nominated; Consensus on Asset Purchases

President Trump reintroduced the recently rejected nomination of Judy Shelton in the United States Senate on January 4th, the first day of the new legislative session. Obviously, the subsequently occurring Capitol Riot has made the prospect of success about as near-zero as it can be, even though chances were slim prior to the tragic and unsettling event. Minutes were released from the December 15-16th Federal Reserve Open Market Committee (FOMC) meeting, and while they certainly showed that the body is wary of increasing headwinds due to the worsening healthcare situation, they also showed that most Fed governors remain firmly confident of a robust post-pandemic recovery. There was unanimous consensus, a rare thing in Washington indeed, about an ‘outcomes based’ approach to curtailing asset purchases. Essentially, the Fed went out of its way to tell the public that it will do all it can to avoid a repeat of the 2013 ‘taper tantrum’. This removes the prospect of what could otherwise be a nasty downside surprise. The minutes also showed only limited support amongst committee members for purchasing longer-dated US Treasuries as the Fed did in the wake of the 2008-2009 Global Financial Crisis. Senator Brown (D-OH) will become the new Chairman of the Senate Banking Committee after the dual Democratic victories in the Georgia Senate run-offs. We will keep you posted on how the Democratic control of the Senate could affect the relationship between fiscal and monetary authorities. There has been murmuring both inside and outside the Fed of revamping financial regulations. Expect one of the first targets of the Dems to be the recently stripped-down Community Reinvestment Act (CRA). Aside from this major change on the Fed’s most relevant congressional committee, some Federal Reserve members have openly spoken positively about what the prospects for more robust stimulus mean for monetary policy’s effectiveness. Despite the concern of short-term headwinds, a definite bullishness could be detected in the comments of some Fed Governors, like when Jeremy Bullard of St. Louis said this week that “The ingredients for higher inflation are in place, you have a powerful fiscal policy in place and perhaps more to come,” he said before also predicting that the economy is ‘poised to boom’ after the pandemic. Encouragingly, Richmond Fed President Barkin also said that he saw the recent rise of the 10-year yield above 1% as a positive. He said it represents positive inflation expectations from investors and not worrisome financial tightening. One of the things these minutes and recent comments from Fed Governors have confirmed is just how dovish the body has become. Loretta Mester, President of the Cleveland Fed, usually advocates for higher rates than the rest of her colleagues. Even she said that she would find 2.5% inflation acceptable. Charles Evans of the Federal Reserve Bank of Chicago said that he would be amenable to what would have been previously considered the astronomical figure of 3% inflation. Evans also importantly said that concerns about future asset bubbles should be addressed through supervision and regulation, not the agency’s dual mandate. 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 1.13% up from last week 0.93% last week.

  • Fed Watch
Dec 31, 2020

Fed Lending Power Dispute Resolved; Other Issues Reemerge

The Federal Reserve had a challenging close to a year in which it was often and regularly celebrated for its crisis response. Yet it found itself exactly where it desires to be the least: the middle of a heated and extremely consequential political fight. Certainly, the Fed would have preferred to be encouraging the adoption of more fiscal support instead of being the final reason holding it up. The dispute between the US Treasury and the Fed over the year-end termination of the Fed’s emergency lending facilities, in which the Fed wrote a rare rebuke of Treasury Secretary Steve Mnuchin’s decision evolved when Senator Pat Toomey (R-PA) introduced language forbidding the Fed to restart any lending programs that were similar to those in the CARES Act. According to the potential future Senate Banking Chairman, (if any of the Georgia Senate seats go to the GOP) he thought the Democrats would use the emergency powers to turn the Fed ‘from a lender of last resort to a lender of first resort.’ Democrats accused the GOP of trying to neuter its economic toolkit, and national preparedness, for political purposes. Aside from the partisan squabbling, the episode undoubtedly has highlighted what will likely be a key issue around the Fed in the coming months and years; just how exactly it will interact and cooperate with Fiscal authorities. The Fed’s independence is at the very core of its mission and even the new dynamic of having a former Fed Chairman as Treasury Secretary threatens to blur the traditional duty lines in American central banking. You’ll be hearing a lot more about this issue in 2021. Ultimately, a compromise was reached which allowed the Fed more flexibility in its emergency lending powers but prohibited the expiring CARES Act programs from being resurrected by the Dems. It also repurposed hundreds of billions in funds from the programs. The Fed closes 2020 with a vow to keep rates low and to let inflation run higher than it has in the past. This promise may be tested in 2021 if the strength of the recovery and inflation harbingers become significantly above consensus expectations. In an additional sign of bullishness from the Fed, it kept the Countercyclical Capital Buffer at 0% for the banks it supervises. 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 is0.91% down from last week 0.92%.

  • Fed Watch
Dec 18, 2020

FOMC Leaves Rates and Purchases Unchanged, Powell Opines on Inflation

The Fed had its final meeting in the most active year for Central Banking since the Global Financial Crisis. The headline is that Fed members continue to project no upward change in rates for at least 3 years and will continue asset purchases at the same levels for the foreseeable future. In other words, no fireworks. The tone and outcome were nonetheless positive for markets in our view. Some had speculated that the Fed might engage in further accommodative action like buying longer-dated debt as it did about a decade ago. Chairman Powell responded to questions about why they decided not to do this by explaining that long-term interest rates are already low. He said monetary policy, particularly since we can see through to mass vaccinations, is not the most appropriate or effective tool to respond to short-term economic challenges. He again resolutely implored fiscal authorities to act quickly as, in his view, assistance from them will be the most effective in getting assistance to struggling businesses and families. It is ironic and unfortunate that disputes over the future of lending programs have been thrust directly into that debate. He noted that monetary policy is not a good tool to aid industries that are struggling due to lockdowns and changed consumer behavior from the virus. The sub-text is a bit more bullish for markets than might meet the eye and may be only apparent to those who have reviewed the Summary of Economic Projections (SEP). The bottom line is that accommodation is the same, and economic projections are more positive, which is good for equities. Of course, Powell also mentioned that his agency is ready on a moment's notice to ratchet up asset purchases if the situation warrants it, i.e., taking longer to get inflation targets and maximum employment than the current SEP would indicate. Despite a lack of further accommodative action, the Fed's economic projections have gotten significantly rosier. The Fed's language also changed from terms implying indefinite support to 'bridging the chasm' until demand can recover. The Fed raised its GDP growth projection and forecast a lower unemployment rate than previously for 2021, reducing projections from 5.5% to 5%. One particularly bullish item that we wanted to highlight is that Jay Powell specifically said that in addition to the far more accommodative Adjustable Inflation Target framework that the Fed will not be considering price rises that will naturally accompany recovering demand as the beginning of a sustained inflationary cycle. This means the punch bowl will be out later than ever, in Fed speak. The risk of a 2013-style' taper tantrum' seems to be something relegated to the past for the foreseeable future. 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 0.94% up from 0.90% last week.

  • Fed Watch
Dec 11, 2020

Fed Gets GOP Rebuke On Climate; FOMC Meets Next Week

It was a relatively quiet week for the Federal Reserve. Members of the House GOP sent a letter that was considered “a shot over the bow” to the Fed for its recent inclusion of climate change in the Financial Stability Report. The Fed has also requested admission into a group of international central banks and regulators called the Network for Greening The Financial System (NGFS). Since the Financial Stability Report is directly connected to the annual Supervisory Stress Test scenarios, the letter's thrust was urging the Fed to use extreme caution and assess the potential impact of stress testing banks for their exposure to climate change. The concern articulated in the letter is that it could lead banks to unilaterally cut their exposure to the oil and gas industry and cite supervisory concerns as their justification. The letter, which enjoyed pretty diverse support from Republicans in the House, urged the Fed to engage with the NGFS sparingly. This is likely just the first iteration of many partisan skirmishes on this issue. All eyes are on the FOMC meeting Dec. 15-16, particularly given the pandemic. The continued lack of progress on stimulus talks makes any further accommodative action from the Fed next week all the more important. However, if you're waiting for positive news from next week's meeting, you may be disappointed. We surveyed all FOMC voting members' comments since their last meeting to try to decipher any intent on monetary policy. The overwhelming thrust of the FOMC members' comments was to join the ever-growing chorus of policy experts and economists saying that fiscal stimulus is what is needed. Several members commented on how significant and effective the current programs are; not a good sign for more asset purchases in the short-term, although we cannot predict the future. We only found one member who vocally advocated more monetary accommodation, Eric Rosengren, President of the Boston Fed. The biggest congruence in the Fed members' comments was their emphasis on the need for fiscal authorities to act promptly. We also wanted to give you a bit more info on Christopher Waller, the Fed's newest member. If you haven't spent the time reading the Fed's new AIT framework, then you may have missed just how overwhelmingly dovish the Fed has become. Christopher Waller was Head of Research for Jeremy Bullard at the St. Louis Fed and is considered far more 'dovish' (in the newest sense of the word in that he essentially will never raise rates because unemployment is too low) than Raphael Bostic of the Atlanta Fed, who is on record saying that the policy of getting unemployment as low as possible is a short-sighted perspective that doesn't ultimately serve the economy and American workers well. The Fed has become so dovish that Mr. Bostic, who may under previous circumstances have been considered a great potential pick for Chair in a Biden administration is now likely considered too 'hawkish' for the post. 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 0.89% up or down from last week 0.97%. Upcoming: Again, the FOMC meets Dec. 15th-16th. No fireworks expected.

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