While US banks are not closed today, futures exchanges are. The CME Group closed over an hour ago for fed funds futures trade. However, as of 11:27 am EST, the 30-Day Federal Funds Options was quoted at 95.1775.
The Board of Governors of the Federal Reserve System has its next meeting on May 2-3, 2023. I do not expect the fed funds options quote to change much before the meeting. Members of the Board of Governors emphasize that they are data driven and keep an eye on the personal consumption index and the unemployment rate in particular.
I suspect that the Board of Governors will view today’s jobs situation report as an indication that their monetary policy on inflation is working. The Board of Governor’s action plan requires increases in unemployment, decreased wages, and a slowdown in personal consumption.
While the unemployment rate for March 2023 remained relatively unchanged at 3.5%, wage increases are below average. Wages in March increased by 0.3%, which is below the average of 0.35% reported over the prior twelve months.
And while the non-farm payrolls increased by 236,000 in March 2023, this amount falls below the average monthly gain of 334,000 jobs over the last six months.
The political response from the Administration was to be expected. President Biden attributed what he views as a strong economy to his past legislative initiatives. Mr Biden today touted American investment in infrastructure, innovation, and clean energy as necessary for economic growth. Mr Biden did not opine on monetary policy which is out of his hands.
Mr Biden may have missed an opportunity to craft a narrative that emphasizes the importance of getting ahead of the inflationary impact of blocks of emerging economies threatening to transition from the US dollar to resource-backed currencies. These threats have yet to materialize into something definitive and until then the inflationary impact of dumping the US dollar or at least complementing it with other currencies is a way off.
In closing, today’s fed funds options quote is predicting an effective federal funds rate of 4.8225 through the rest of April 2023, in line with the 4.83% rate currently reported by the Federal Reserve Bank of New York, but below Board of Governors’ expectations at the end of 2023.
7 April 2023
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