The Federal Reserve, banking, and managing political theatrics ….

The Federal Open Market Committee issued a decision last Wednesday to maintain the target range of its federal funds rate between 5.25% and 5.50%. For banks that need to borrow from the Federal Reserve System’s discount window, rates for this lender of last resort facility is at 5.50%. Within the interbank market, banks will continue to see an effective federal funds rate of approximately 5.33%.

The Board of Governors of the Federal Reserve System as an agent of Congress helps to regulate the value of money and the flow of that money throughout markets. The Federal Reserve System manages monetary energy much like the Federal Energy Regulatory Commission and state public utility commissions manage the rates paid for and the flow of electricity.

The Federal Reserve System by regulating the flow of money ensures the legitimacy of the currency, the token that represents monetary energy expended and absorbed by producers and consumers.

Banks are not required by law to change the interest rates and spreads they assess on depositors, traders, or investors upon every change in the Federal Reserve System’s reference rates. As the privateers within the Federal Reserve System, the mission of the banks is maintain their charters as private agents managing the flow of money while protecting themselves against political threats to their spreads. The privateers stay on the lookout for legislation or agency rule changes that threaten bank spreads.

Political actors take the opportunity to score points with the electorate by asserting that “Wall Street fat cats” need to be reined in and be punished for their abuses. The irony is that Congress and other political actors need the banking system more than the banking system needs them. Banks can use their deep information networks to trade hard assets while on the sidelines and watch Rome burn.

(Are you ready to elevate your trader game? Visit https://traderswithedge.com/?r=348.)

Political actors rely on persuasion as a primary political tool and it is hard to persuade the electorate to listen to you when the currency you issue has no value.

The issue is, how best do you reconcile the theatrics of political actors who need to entertain the electorate with the “I’ll protect you” rhetoric with the desire of banks to optimize their spreads?

Alton Drew

3 February 2024

For more of my take on the political economy, buy my book at amazon.com/author/altondrew. Also, please support our advertisers by visiting their websites.