Interbank market news scan: NFA issues rule to protect against manipulating bitcoin and ether prices.

NFA issues rules to protect against digital asset price manipulation …

The National Futures Association is proposing rules aimed at preventing its members from spreading inaccurate information or taking actions that result in impacting price. Specifically, NFA rule 2-51(a)(iv) requires that no member “[d]isseminate, or cause to be disseminated, false or misleading information, or a knowingly inaccurate report, that affects or tends to affect the price of any digital asset commodity. In addition, NFA rule 2-51(a)(v) also requires that NFA members not “Engage in manipulative acts or practices regarding the price of any digital asset commodity.”

The National Futures Association is the self-regulatory organization designated by the Commodity Futures Trading Commission to ensure the integrity of the derivatives industry. With some exceptions, exchanges and brokers involved in the derivatives industry are to become members of the NFA.

The rules are to take effect on 31 May 2023.

The monetary base is falling along with personal consumption expenditures …

A back of the napkin analysis of the effective federal funds rate, personal consumption expenditure index (PCE), and monetary base shows that the monetary base is declining along with the Federal Reserve System’s preferred measure of inflation, the PCE.

The monetary base, which is made up of currency in circulation and reserves held in bank vaults or federal reserve bank vaults, fell 0.0035% from $5,405.4 billion in October 2022 to $5,321 billion in February 2023.

The effective federal funds rate, the volume-weighted median of federal funds rates assessed the night before, increased from 3.08% in October 2022 to 4.57% in February 2023, an increase of 48.4%.

During the October 2022 to February 2023 period, the rate of annual increase in the personal consumption expenditure index went from 6.1% to 5.0%.

The Federal Reserve has a way to go in order to achieve its inflation target of two percent. As inflation is a monetary phenomenon, I expect that the Board of Governors will have to take a closer look at money supply versus solely focusing on rates. The year 2022 saw an increase of 5,312% in the effective federal funds rate. So far in 2023, the effective federal funds rate has increased 11.55% between January and April 2023.

The Federal Reserve would like to see a looser employment market, including reduced wage pressure and an uptick in unemployment. If these measures do not work to control inflation into 2024, more intrusive measures targeting consumer spending are anticipated.

Fed funds futures, other rates of interest …

The current fed funds target range is 4.75-5.00%. The Federal Open Market Committee is scheduled to meet on May 2-3, 2023 to decide on whether to raise the target another 25 basis points. My interpretation of CME Group fed funds futures data tells me that the market expects the effective funds rate to be approximately 4.92% by the end of May 2023. The effective funds rate is expected to fall, according to my interpretation of the CME Group’s fed funds future price quotations, to 4.62% by the end of September 2023.

The discount window, where a bank obtains collateralized loans from its district federal reserve bank, is at 5.00%. The effective fed funds rate is 4.83%.

Alton Drew

5 April 2023

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