The FED causes confusion in the financial circles both with its monetary policy decisions and its regulatory moves.
The markets were asking the FED to signal its intention by raising US Treasury bonds interest rates, and investors were a little shocked when FED members said other issues, such as employment, were a priority.
However, on the regulation front, the FED terminates the COVID-19 measures for capital requirements that directly oppose its efforts in monetary policy.
The central bank announced last week that it would lift the exemption from the boost leverage requirements on March 31, as scheduled. The industry was lobbying to extend this exemption, and given the FED’s super-compliant attitude, it was sure that this would happen.
The exemption allowed banks not to count Treasury bonds or reserves as assets when determining the leverage ratio, thus allowing them to lend more by taking more deposits.
FED said that it will examine this rate and signaled that the rate could be changed permanently. But if this is the case, why is the temporary exemption not extended?
In Which Direction Is FED’s Policy Going?
For Wall Street, this move doesn’t make much sense. As many commentators point out, this move contradicts the FED’s goal of increasing employment, as a notkada will force banks to reduce their activities.
Moreover, it also contradicts security and cautious concerns, because if risk-free assets such as Treasury bonds and central bank deposits are considered the same as high-risk assets, why not choose higher returns?
FED members are constantly talking about anchoring inflation expectations, but at this point it seems to be the FED’s policy that is anchored. Some analysts even talk about a regime change.
You don’t need to look far to see why the FED is shifting its priorities. Two progressive Democratic senators; The Chairman of the Banking Committee, Senator Sherrod Brown of Ohio, and Massachusetts Senator Elizabeth Warren, a member of the committee, are obsessed with banks and openly expressed their opposition to extending the exemption.
It is a concern that regulatory agencies such as the OCC and the FDIC not only allow the senators to set the tone, but also that an allegedly independent FED will line up without any objection.
Later this year, US President Joseph Biden will decide whether to re-appoint Jerome Powell as FED President, and so there is a growing perception that Powell wants to at least avoid causing unnecessary trouble.
Lael Brainard, the only board member associated with the Democrats, is now standing by to become the next head of the FED, after loyally accepting another name — his former boss, Janet Yellen — to become Treasury Secretary.
On questions, Powell repeatedly emphasized that inflation must exceed the FED’s 2% target by more than just a transitional basis in order to assess a possible move to interest rates. Of course, this raises the question of how much or for how long inflation should exceed 2%.
Powell also downplayed the importance of members’ estimates of inflation or interest rates in his Summary of Economic Forecasts, pointing out that these are individual estimates, not a consensus opinion as a result of an argument.
These names will probably try to clarify the FED’s policy, but they are unlikely to clear up the confusion of investors, as they cannot make precise statements about inflation and interest rates.