Central Bank Impact Assessment

The US might be the world’s largest #economy, but its #payments are running on antiquated, slow and non-sophisticated rails. Can the US catch up on instant payments? Let’s take a look. US payments typically take place via ACH (a network for electronic bank-to-bank transfers), wire transfers, the card networks or even cheques. The #fintech revolution has also seen the rise of P2P apps like CashApp or Venmo, and of mobile wallets like Apple Pay. But the big problem is settlement: Most bank transfers are processed in batches and take days to settle (same day exists but is an exception). And the #innovation on the Fintech side has been happening at the front-end: the likes of CashApp and Venmo are running (mostly) on ACH rails and behind the mobile wallets we find (expensive) credit cards. In 2017 the clearing house (TCH) launched real time payments (RTP), but issues remain: the majority of transactions in the US is pull-based (funds are debited – “pulled” – from an account), whereas RTP (unlike ACH) supports only push payments (funds credited – “pushed” – to an account). To address these issues, the Fed launched in 2023 FedNow, which is (with the exception of RTP), the first new payments #infrastructure in the US since more than half a century (ACH was launched in 1972)! This is a FedNow summary: — Instant payment scheme 24/7 with clearing functionality — Push-only — Support for a variety of payment forms: B2C, B2B, C2B, A2A, P2P, G2C, C2G, B2G, etc — Launch with 35 participating financial institutions and 16 service providers Essentially both RTP and FedNow are instant payment schemes. Beyond technical details such as the transaction limit, the main difference is network ownership: RTP is operated by TCH, which is a consortium of large banks, whereas FedNow is operated by the Federal Reserve. Given that RTP is supported by only 62% of US demand deposit account (DDA) institutions, FedNow’s integration with the Fed’s broader network means it will be accessible to more banks across the US, including smaller local ones that have opted to stay out of the RTP. So, what’s next? Real-time payment adoption around the globe is surging but the US is clearly lacking some of the main drivers that have caused instant payments to skyrocket in other markets, especially emerging ones. In countries like India or Brazil – global frontrunners in instant payments – there were no old systems to replace (i.e. ACH or cards in the US) and it was urgent to eliminate cash (and the black market that goes with it) and provide access to unbanked citizens. Real-time payments will grow in the US too, but it will be a rather long and slow journey. Major banks like Citi, Bank of America, PNC and Capital One Financial are still not onboard, pull payments are not even planned and customers will have to find added value in the new use cases. Opinions: my own, Graphic sources: FedNow, RTP, Panagiotis Kriaris

"For the last three years, the Federal Reserve has been fighting to bring inflation down. Now it has boldly moved to protect the second half of its dual mandate: to keep employment strong. Mr. Powell was blunt when he said last month at the Jackson Hole Economic Symposium that further cooling in labor market conditions was not welcome or necessary. This week, he declared that “the time to support the labor market is when it’s strong and not when we begin to see the layoffs.” With this statement and this cut, Mr. Powell is cementing his legacy as someone who embraces both sides of the agency’s dual mandate. With solid growth, relatively low unemployment and the stock market near record highs, the Fed chose to cut from a position of strength to preserve that strength." ... from my new piece for The New York Times Opinion on the Fed decision. #Fed #employment #inflation #Powell https://lnkd.in/emJNzirS

The Governor of Bangladesh Bank has reassured that the central bank will provide liquidity support to assist struggling banks. While this is a positive step, a critical issue is being overlooked: the non-bank financial institutions (NBFIs). A significant portion of the population relies on NBFIs for their financial needs, yet this sector has been marred by numerous scandals. NBFIs play a vital role in the financial ecosystem, complementing the functions of banks by extending services to segments often underserved by traditional banking institutions. Given their importance, it is essential that the central bank applies the same level of oversight and support to NBFIs as it does to banks. This includes measures to address governance issues, such as reconstituting the boards of troubled NBFIs, and offering them liquidity support to ensure their stability. Protecting depositors’ interests should be a priority. By enforcing stricter regulations and providing financial assistance where needed, the central bank can help restore confidence in NBFIs and ensure that this critical part of the financial sector remains healthy and capable of fulfilling its role in the economy.

The firing of Federal Reserve Governor Lisa Cook — the first Black woman to serve on the Board — is more than a personnel change. This isn’t only about one leader. It’s about what happens when the independence of our central bank comes under direct political pressure. 🔹 Fed Independence — Governors are meant to serve fixed terms, insulated from politics. Removing Cook breaks that firewall and risks turning monetary policy into another partisan lever. 🔹 Markets — The dollar slipped and futures fell on the news. When politics drives rate decisions instead of data, investors add a volatility premium. Everyone pays the price. 🔹 Policy Balance — Cook’s absence shifts the Fed toward more aggressive rate cuts. That may serve short-term politics, but it risks reigniting inflation and eroding the Fed’s credibility. 🔹 Representation & Distributional Reality — Cook was the first Black woman on the Fed’s Board. Her ouster comes as 300,000 Black women left the labor force. At the same time, the latest CPI shows women’s goods facing 170% higher inflation than men’s goods. Tariffs act as a regressive tax, especially on women. Removing Cook means fewer voices pointing out that inflation is not neutral — it disproportionately squeezes women, especially women of color. Bottom line: Cook’s firing is more than a personnel change. It risks silencing critical voices on how monetary policy affects women — widening the gap between those making decisions and those most impacted by them. Link to The New York Times article in comments. #EconomicPolicy #FederalReserve #MonetaryPolicy #FedIndependence #Leadership Nancy Levine Stearns Andrew McCaskill Mark Gannott Tara Turk-Haynes Samantha Katz

Interest rates are not just numbers… they are a reflection of an economy’s stress, stability, and strategy. Look at the extremes. Turkey at 37% and Argentina at 29% — these aren’t “high returns,” they are signals of deep inflation, currency pressure, and economic instability. When rates go this high, it means central banks are fighting to control the system, not grow it. Now compare that with developed economies. The U.S. and UK at ~3.75%, Euro Area at ~2.15%, and Singapore below 1%. These numbers reflect controlled inflation, stable currencies, and mature financial systems. Lower rates here don’t mean weakness — they mean confidence and balance. Then comes the interesting middle. India at 5.25%, Brazil/South Africa/Mexico around ~6.75%. These are growth economies balancing inflation and expansion. Rates are higher than developed markets because growth is faster — but not so high that they choke demand. This is where the real insight lies: 👉 High rates = stress management 👉 Low rates = stability 👉 Moderate rates = growth balancing And this directly impacts markets. When rates are high → borrowing is expensive → consumption slows → equity markets struggle When rates fall → liquidity increases → risk assets rally Which means, interest rates are not just macro data… They are the biggest driver of market cycles. Smart investors don’t just track stocks. They track liquidity. Because in the end, markets don’t move on stories… They move on money flow. Image Source: Trading Economics Follow Chitranjan Singh for more such insights!! #InterestRates #MacroEconomics #Investing #StockMarket #GlobalEconomy #Liquidity

In a recent study, we analyse 145,000 point estimates and confidence bounds on the effects of monetary policy shocks on output and inflation collected from more than 400 primary studies. We show that interest rate hikes by central banks are less effective in reducing inflation than conventional wisdom suggests. Correcting for publication bias, the output cost of reducing inflation increases. Our results suggest that we need realistic expectations about what monetary policy can achieve in steering inflation - and a broader mix of policy instruments, including fiscal, industrial, and competition policies, to ensure price stability at a reasonable macroeconomic cost. Policy brief in English: https://lnkd.in/dSJfrzu2 Policy brief in German: https://lnkd.in/dCATquGS Full study: https://lnkd.in/dBjXWVQ8

The Fed Cut Rates, But Can It Cut Unemployment? The global economy is at a crossroads again. After months of caution and mixed market signals, the U.S. Federal Reserve finally pulled the lever cutting interest rates by 0.25%. This marks not just a monetary shift, but a strategic one: from fighting inflation to stabilizing employment and restoring growth momentum. Yet beneath the headlines, a deeper story unfolds. While cheaper borrowing costs promise relief for businesses and households, the question remains Will this new liquidity translate into real job creation, or merely accelerate automation and cost-cutting? In this edition, we unpack the implications of the Fed’s decision: how it affects corporate cash flow, global capital markets, the ongoing U.S. government shutdown, and the widening gap between AI-driven prosperity and human-centered employment. Because in today’s economy, lower rates alone don’t guarantee higher opportunity it’s about where the money flows, and who it reaches.

Today's ECB decision to cut rates highlights how central banks are trapped and forced to reinstate financial repression even as inflation remains higher than historical norms. These policies act as a relief valve to alleviate financial stress, leading to a surge in prices of hard assets with limited supply. This is consistent with the chart below. Despite quantitative tightening in most developed economies, their money supply continues to grow substantially, undermining their policies in a significant way.

Fed Rate Cut Impact When the Federal Reserve (Fed) cuts interest rates, the stock market typically experiences several notable effects. While the specific outcomes can vary based on the broader economic context and market conditions, the general trends are often observed as follows: Immediate Market Reactions 1. Positive Sentiment: A rate cut usually signals the Fed's intention to stimulate economic activity, which can boost investor confidence. 2. Increased Valuations: Lower interest rates mean that the present value of future earnings increases, as the discount rate applied in valuation models decreases. 3. Sectoral Impact: Financials: Banks and other financial institutions may face pressure on their profit margins. Real Estate: Lower rates can boost the real estate sector by making mortgages cheaper, thereby increasing housing demand and benefiting related stocks. Technology: Tech companies, often characterised by high growth potential and significant future earnings, tend to benefit. Medium to Long-Term Effects 1. Economic Growth: Sustained rate cuts aim to spur economic growth by making borrowing cheaper for consumers and businesses. 2. Inflation Expectations: If rate cuts succeed in boosting demand, inflation may rise. 3. Corporate Debt: Lower interest rates make it cheaper for companies to refinance existing debt and issue new debt. Historical Context and Examples 1. 2008 Financial Crisis: During the financial crisis, the Fed cut rates aggressively to near-zero levels. Initially, the stock market continued to decline due to severe economic uncertainty. However, as the economy began to stabilise, lower rates supported a significant recovery in stock prices, culminating in a prolonged bull market. 2. COVID-19 Pandemic: In early 2020, the Fed cut rates to near-zero in response to the economic impact of the COVID-19 pandemic. This action, combined with other stimulus measures, helped to stabilise the stock market after an initial sharp decline, leading to a robust recovery and new market highs later in the year. Caveats and Considerations 1. Market Expectations: The impact of a rate cut can be muted if it is already widely anticipated by the market. 2. Economic Context: If a rate cut is perceived as a response to deteriorating economic conditions, the positive impact on stocks might be limited. 3. Long-Term Rates: While the Fed controls short-term interest rates, long-term rates are influenced by market forces. In conclusion, while Fed rate cuts generally have a favourable impact on the stock market, the extent and duration of this impact depend on various factors, including investor sentiment, economic conditions, and the broader monetary policy environment. Investors should consider these dynamics and remain vigilant to the broader economic signals accompanying rate cuts. References Federal Reserve Historical Interest Rates Impact of Federal Reserve Rate Changes on Stock Market Economic Insights from Fed Actions

The Federal Reserve has delivered its second consecutive rate cut, lowering the target range for the federal funds rate to 3.75% to 4%. Chairman Powell emphasized that another move in December is not a foregone conclusion despite investors' desire for further easing. The Fed is still navigating a complex and uncertain economic landscape. The impact of this is to reduce restriction of the economy. The easing trend is being reflected in falling borrowing rates as well as yields paid to savers. The Fed’s official statement noted that “downside risks to employment have risen,” even as inflation remains somewhat elevated. That highlights the tricky balance between supporting the labor market and maintaining progress on inflation. Complicating matters, the federal government shutdown has created a logjam in the release of key economic data. That doesn’t mean there’s no information available. Private-sector surveys, market indicators, and state-level data continue to offer important signals; however, they make policymaking more challenging when the official numbers arrive late or in piecemeal fashion. The latest decision also revealed strong differences of opinion among FOMC participants, with one member favoring a larger half-point cut and another preferring no change at all. Those dissents underscore the uncertainty surrounding the policy path, particularly with mixed signals from inflation and employment. By announcing an end to balance sheet reduction beginning in December, the Fed is signaling it wants to stop tightening financial conditions further. Still, officials remain committed to a data-dependent approach, assessing new information as it becomes available. In short, the central bank is trying to strike a careful balance, supporting a slowing economy without reigniting inflation pressures. Any incoming data, particularly if the federal logjam breaks, could help determine whether this recalibration continues or pauses.