Key highlights of Fed Chair Jerome Powell’s testification before the congress

Primary mandate

  • Stable prices at 2% inflation rate
  • Low unemployment rate

Highlights of the US economy

  • US unemployment is at 3.7% the lowest in 50 years
  • Longest period of economic expansion at 11 years
  • Philips curve is dead – Inflation rate and unemployment rate seems to be  decoupled and no longer correlated

Key concerns within the environment

  • US inflation rate has fell below 2%
  • slowing global growth
    • manufacturing
    • investments
    • trade
    • business fixed investments
  • international trade volume slow down
  • slowing US business investments
  • lots of central bank with low interest rates have little wiggle room if recession were to occur

Federal Reserve as an institution

  • US economy is 70% consumer driven
  • Responds to congress policies
  • Responds to fiscal policies
  • reopens market when economy grinds to a halt
  • resilient to president’s (executive branch) meddling
  • utilizes framework and the tools available to achieve symmetrical 2% inflation rate
  • Fiscal policy is more powerful than monetary policy
    • becomes critical during a severe downturn
  • 4 key pillars of monitor
    • Asset price
    • leverage in financial system
    • leverage away from banks
    • funding risks
  • Fed will negotiate with other countries and will reject terms if international terms cannot be expected to work within the US system – Insurance Capital Standards
  • Will look for more tools to pursue mandate since interest rate is already very low
  • Can handle counter cyclical policies
    • buying US treasuries to increase supply of money in circulation

On the labor market

  • Income inequality
    • 1% owns 40% of wealth in America
  • US has less social mobility than other more developed countries
    • since 40 years ago US education system has not be able to train people to capitalize on technology and globalization
  • Median and lower income has stagnated (those without a degree)
    • Only increased 3% wage increase despite low unemployment rates
    • does not make up 2% inflation rate and productivity gains
    • chief causes
      • technology: automation has severely increased individual productivity and thus throughput capacity while production demand has not yet caught up with this increased capacity
      • globalization: more and more qualified workforce is coming online around the world that can be employed
  • community in the fringes finally getting to join the workforce in recent years after 2008 recession
  • employers having problems finding qualified people to fill positions – 7 million open positions within the US
    • good people skills
      • service economy
      • manufacturing economy
    • opioid crisis

Uneven development

  • US 3.7% unemployment rates
  • Michigan
    • layoffs due to trade war
    • 2018 April – 4.2% unemployment
    • 2019 April – 4.6% unemployment
    • cannot raise bonds at competitive rates
    • infrastructure on the rocks
  • Wisconsin – 2.8% unemployment rates
  • Economic development is increasing moving to the coast
    • young people are moving to the coast and to cities
    • able people are doing the same
  • Policies need to solve problem by increasing productivity
    • technology savviness
    • basic research skills and aptitude

On minimum wage

  • concerns over job loss when USD15 minimum wage is imposed
  • some will lose their jobs
  • others will make more money

Quantitative easing

  • expected to happen again this year
  • has caused substantial buildup of federal reserves
  • 22 trillionUSD Federal debt in total
  • corporate tax rate cuts leads to another expected 1trillion USD deficit this year
  • interest on government debt expected to become largest category of federal government expense by 2026 – government has less money to spend on anything else expect paying debts
  • Higher debt should have lead to higher interest rates, due to the special case of US being a reserve currency, government has been able to continue borrowing at low interest rates
    • Japan has higher debt to GDP ratio and low interest rates
  • Debt will get past on to next generation
  • If does not occur will undermine USD as the world’s reserve currency

World’s reserve currency

  • A very stable equilibrium for a long time
  • Can potentially have multiple currencies
  • On going back to the gold standard
    • will undermine the Dual mandate
    • Federal reserve will be forced to managed the price of gold instead – which sometimes fluctuate wildly
  • Currently USD was the British Pound a while back
  • Conditions for a sustained reserve currency
    • being the largest economy
    • best institution
      • democracy
      • rule of law
      • open to commerce with international trading nations
    • fiscal sustainability

Banking sector concerns

  • Going off LIBOR rate at end of 2021
    • Banks will no longer be required to offer a LIBOR rate at the end of day
    • will present a coordination problem especially for assets that do not have a predefined rate – mortgages
  • potential reduction of banks stress buffer
  • banks prefer to hold reserves versus treasury
  • bank CEOs areas of worries
    • leveraged lending
    • shadow banking
      • CLO/Hedge funds/ Mutual funds – area Global Financial Stability board is actively looking into
  • works closely with the Federal reserves

Speed up payment systems

  • use case: allowing cheques to clear faster so that mum can cash in salary to pay for food at home
  •  participants
    • regional banks
    • big banks
    • technologists
  • Federal Reserve will enter the market directly to be the settler
  • inter-operability with legacy system is a concern

Wire Fraud

  • Currently wire to an account
  • proposes to wire to an account with a name match
    • UK based system
    • conflicts with some state laws
  • organized crime primarily carried out within the real estate sector

Facebook LIBRA

  • facing negative headwinds
  • seen as aiding money laundering
  • privacy and data protection concerns
  • huge impact due to 2 billion users on platform
  • will be a marathon instead of a sprint to implement and roll out
  • Facebook conferring with governments around the world
  • will become the world’s largest payment system


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