Strong Jobs Number Turns Up Hawkish Pressure, Biden’s Fed Nominees Grilled, Fed/MIT Report On Digital Currency

Retail sentiment is so bad that it is good and the jobs number this morning was so good that they’re bad. This is of course because one of the Fed’s main metrics guiding tightening is employment and the bumper report makes it harder for it to stall any longer. Everyone knows which way the inflation numbers are pointing, but until “full-employment,” which is a somewhat ambiguous term, is reached they had a little more maneuvering. The report definitely added credibility to the sentiment that the Fed is behind the curve, but only time will provide the ultimate verdict. The next meeting of the FOMC is 3/15-3/16 and all expectations are for lift-off.

After the strong jobs report Fed Funds Futures moved to suggest not only more hikes in 2022 but also the increased likelihood of a 50 bps hike in March. There were also strong upward adjustments in previous months. Omicron headwinds don’t appear likely to keep the doves around in other words. Sick workers stayed on payrolls. Treasuries also sold off and the 10-yr reached 1.93%. The next inflation numbers are out on February 10th, which will be highly anticipated by fixed income markets and the Fed itself.

Another positive from the report was that labor participation reached the highest rate since the pandemic began at 62.2%. This is positive news because a higher participation rate should put downward pressure on the white-hot inflation that has been prevalent in the past months. It may also mitigate some of the wage inflation being experienced by large banks earlier this earnings season that are affecting vast swathes of the real economy as well.

Biden’s Federal Reserve nominees had their hearing on Thursday before the Senate Banking Committee. These nominations could potentially be affected by the recent stroke of Senator Lujan (D-NM) which has given the GOP a one-seat edge in the higher chamber. Republican Senators mostly went after Sarah Bloom Raskin based on an op-ed she had written in the New York Times calling for the Fed to exclude the Oil & Gas Industry from extraordinary government assistance. They repeatedly asked her if she thought the Fed should steer capital away from the industry and she repeatedly answered the Fed shouldn’t pick winners and losers. The op-ed is available here if you’d like to read it.

Lisa Cook got some flack for her previous research. One Senator said he didn’t think she had prerequisite experience in monetary policy and the ranking minority member, Pat Toomey (R-PA) accused her of dithering in her answers to his office on the Fed’s current efforts to fight inflation. Raskin has the advantage of having been confirmed as a Federal Reserve Governor before and she was also previously a policy counsel for the Senate Banking Committee itself. Phillip Jefferson mostly avoided any ire from the GOP side of the aisle. All nominees agreed that inflation should be the Fed’s top priority.

The Federal Reserve Bank of Boston and  MIT released their design for a Centrally Banked Digital Currency (CBDC) in an initiative dubbed Project Hamilton. This is distinct from the assessment the Board of Governors recently conducted which is available here.  For those interested in the Board’s latest thinking on how to reduce the balance sheet, click here for the FOMC’s guiding principles on reducing the balance sheet.

The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November and was accelerated in December. The Fed is on track to taper down to no more asset purchases by its March meeting. The Fed will be done with asset purchases in mid-March 2022 at this pace.  The benchmark yield on the 10-Year Yield was 1.93%

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