All posts by pnik

MicroStrategy Announces Proposed Private Offering of $400 Million of Senior Secured Notes

MicroStrategy® Incorporated (Nasdaq: MSTR) (“MicroStrategy”) today announced that it intends to offer, subject to market conditions and other factors, $400 million aggregate principal amount of senior secured notes due 2028 (the “notes”) in a private offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to persons outside of the United States in compliance with Regulation S under the Securities Act. The offering is subject to market and other conditions, and there can be no assurance as to whether, when or on what terms the offering may be completed.

The notes will be fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by MicroStrategy Services Corporation, a wholly owned subsidiary of MicroStrategy, and certain subsidiaries of MicroStrategy that may be formed or acquired after the closing of the offering. The notes and the related guarantees will be secured, on a senior secured basis with MicroStrategy’s existing and future senior indebtedness, by security interests on substantially all of MicroStrategy’s and the guarantors’ assets, including any bitcoins or other digital assets acquired on or after the closing of the offering, but excluding MicroStrategy’s existing bitcoins as well as bitcoins and digital assets acquired with the proceeds from existing bitcoins. MicroStrategy’s existing approximately 92,079 bitcoins will be held by a newly formed subsidiary, MacroStrategy LLC.

MicroStrategy intends to use the net proceeds from the sale of the notes to acquire additional bitcoins.

The notes and related guarantees will be offered and sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside of the United States in compliance with Regulation S under the Securities Act. The offer and sale of the notes and the related guarantees have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction, and the notes and the related guarantees may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Any offer of the notes and the related guarantees will be made only by means of a private offering memorandum.

This press release shall not constitute an offer to sell or a solicitation of an offer to buy the notes or any other securities, nor shall there be any sale of the notes or the related guarantees in any state or jurisdiction in which such offer, solicitation or sale would be unlawful under the securities laws of any such state or jurisdiction.

About MicroStrategy Incorporated

MicroStrategy (Nasdaq: MSTR) is the largest independent publicly-traded analytics and business intelligence company. The MicroStrategy analytics platform is consistently rated as the best in enterprise analytics and is used by many of the world’s most admired brands in the Fortune Global 500. We pursue two corporate strategies: (1) grow our enterprise analytics software business to promote our vision of Intelligence Everywhere and (2) acquire and hold bitcoin, which we view as a dependable store of value supported by a robust, public, open-source architecture untethered to sovereign monetary policy. For more information about MicroStrategy, visit www.microstrategy.com.

MicroStrategy is a registered trademark of MicroStrategy Incorporated in the United States and certain other countries. Other product and company names mentioned herein may be the trademarks of their respective owners.

Digital Asset Savings and Loan Platform Ledn Raises US$30M Series A

Ledn continues its global expansion plans with a $30 million financing round led by London-based investment firm Kingsway Capital.

Ledn Inc. (“Ledn”), a global digital asset platform offering innovative saving and lending products for Bitcoin and other digital assets, is pleased to announce the completion of a $30 million Series A financing round led by Kingsway Capital, with participation from new investors including Alan Howard, Hashed, Susquehanna Private Equity Investments LLLP, ParaFi Capital, Alexis Ohanian, and John Pfeffer. All investors from Ledn’s prior round including White Star Capital’s Digital Asset Fund, Coinbase Ventures, Global Founders Capital and CMT Digital also participated to fuel Ledn’s growth.

Ledn has grown its assets on its platform by over 320% since its last round, just six months ago. Proceeds of the round will be used to grow Ledn’s team and global presence, as well as continue to enhance Ledn’s technology and product offerings. Additionally, Ledn’s investors bring regional-specific expertise that will enable Ledn to achieve its mission of unlocking the power of Bitcoin and other digital assets to build wealth through innovative financial products.

“We are building a world class company to help people globally unlock the power of the fastest growing asset class for building generational wealth,” says Adam Reeds, Ledn co-founder and CEO. “With this new injection of capital, we will expand on our success in North & South America and grow our global footprint, prioritizing growth markets. Our focus is to build simple and secure solutions that allow clients to participate in the growing digital asset economy in a way that meets their individual needs and our own rigorous standard for security and reliability.”

“We prioritize the needs of the people we serve, investing in solutions like proof-of-reserves to protect them, and provide assurance that all of our lending activities are covered by real assets,” said Mauricio Di Bartolomeo, co-founder and CSO. “Growing up in Venezuela, I saw first hand how an unregulated system with little to no transparency can impact its people, and that’s why it’s such a core component of how we manage the funds our clients entrust to us.”

Ledn also recently launched Ledn Trade, a service that enables clients to exchange between USDC and Bitcoin, specifically catering to clients in growth markets who wish to quickly move between the two digital assets. The product-market fit of Ledn’s services to date is evidence of a growing global demand for this kind of innovative digital asset solution.

“Having spent nearly a decade investing in emerging and frontier markets, we’ve had first-hand experience witnessing the power of disruptive technologies delivered to billions of consumers coming online for the very first time,” says Manuel Stotz, founder of Kingsway Capital. “The emergence of digital assets, whether via Bitcoin or USD Stablecoins, is perhaps the greatest opportunity for financial inclusion, as well as an opportunity for a more decentralized and thus more equitable global internet. We are proud to support the talented team at Ledn in making this vision a reality and are honored to co-invest alongside such a world-class roster of global investors.”

About Ledn

Ledn provides financial products with a mission to help clients across the globe unlock the power of digital assets to build wealth for the long term. Operating in over 100 countries, Ledn offers interest-bearing savings accounts and Bitcoin-backed loans, enabling clients to access dollars or additional Bitcoin without needing to sell any of their existing holdings.

Ledn has active clients in 105 countries, and has exceeded $1 billion in assets on its platform. Since the start of 2021, Ledn has tripled its team while growing its total lending book by over 800% and savings products by 280%. Ledn remains an industry leader when it comes to transparency and accountability standards, being the first-ever lending platform to undergo a formal proof-of-reserves attestation by Armanino LLP, a top public accounting and consulting firm and a recognized global leader in digital asset assurance solutions. For more information visit ledn.io.

About Kingsway Capital

Kingsway Capital is a London-based investment firm whose limited partners include leading US endowments and foundations with a long-term investment horizon, measured in years and decades. Kingsway has a successful history in backing promising companies at the nexus of Emerging Markets and disruptive technologies, such as mobile internet and digital assets.

Riksbank: Brighter outlook, but the risks to financial stability are still elevated

With the help of extensive support measures, the Swedish financial system has coped relatively well during the pandemic and a financial crisis has been avoided. Credit supply has been maintained and important funding markets are now working satisfactorily. However, the risks to financial stability are still elevated. It is important for economic policy to continue to support the economic recovery, while also taking longer-term vulnerabilities into account.

Extensive support measures have prevented a financial crisis

The coronavirus pandemic is continuing to restrict economic developments. However, extensive support measures have helped to mitigate the economic consequences, and enabled the financial system to cope relatively well through the pandemic.

Over the winter and spring, further major fiscal policy stimulus packages have been launched and central banks have continued with large-scale asset purchases and extensive lending programmes. At the same time, vaccinations are under way and the outlook is brighter than when the Riksbank’s previous Financial Stability Report was published in November 2020.

Uncertain future and the risk of setbacks

The risks to financial stability are still elevated. Although the global economy has shown itself to be more resilient lately, we still do not know how the pandemic will develop and what effects it may have. Companies and households have been affected with varying severity during the pandemic. With time, the negative effects have become significantly more concentrated to parts of the service sector. Bankruptcies risk increasing in the period ahead, both in Sweden and abroad, particularly if the support measures are phased out quickly. Banks would then also risk major loan losses.

Sharply rising asset prices in several countries during the pandemic, together with increasing indebtedness, are also part of the risk outlook. In Sweden, for example, housing prices have risen sharply, which has probably to do with the unusual economic effects of the pandemic. The ability and willingness of many households to spend money on housing has increased during the pandemic. In addition, the increase in unemployment can be seen primarily among temporary workers, who normally have a weak position on the housing market.

There are vulnerabilities in the financial system that were already there prior to the pandemic. In the euro area, these are mainly a matter of weak banks and public finances, while in Sweden they mainly concern high household indebtedness and high levels of exposure among the major banks to residential and commercial properties. A crisis in the property market could threaten the stability of the Swedish financial system.

Economic policy needs to cooperate to support the recovery and counteract financial imbalances

The economic recovery requires monetary policy and fiscal policy to remain expansionary. At the same time, economic policy also needs to take longer-term vulnerabilities into account. The most appropriate way of combating these is via targeted structural measures, well-designed financial regulation and macroprudential policy. The Riksbank’s measures are having a broad impact on the economy and are therefore not particularly appropriate for counteracting financial imbalances within individual sectors in the prevailing economic situation.

The risks of high household indebtedness and the rapid upturn in prices in the housing market make it important for Finansinspektionen (FI) to allow the temporary exemption from the amortisation requirements to expire in August as planned. If the economic recovery continues as expected, it is also desirable that FI announces that the value of the countercyclical capital buffer will be increased, not least as increases are implemented with a time-lag of twelve months.

It is also important to work on a broad front to rectify identified weaknesses and further strengthen the resilience of the financial system. This is a question of, among other things, managing global challenges such as cyber risks and climate change. It is also a question of achieving a better-functioning Swedish market for corporate bonds and limiting the risks inherent in funds with corporate bond holdings.

RBNZ: Monetary Support Continued

The Monetary Policy Committee agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment objectives. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent, and the Large Scale Asset Purchase and Funding for Lending programmes unchanged.

The global economic outlook has continued to improve, with ongoing fiscal and monetary stimulus underpinning the recovery. New Zealand’s commodity export prices have benefited from this rise in global demand. However, divergences in economic activity, both within and between countries, remain significant. The sustainability of the global economic recovery remains dependent on the containment of COVID-19.

The near-term economic data will continue to be highly variable. While economic growth in New Zealand slowed over the summer months following an earlier strong rebound, construction activity remains robust. The aggregate level of employment has also proved resilient, while fiscal spending continues to support domestic economic activity.

However, tourism-related business activity continues to be affected by the absence of international visitors, with the recent opening of Trans-Tasman travel expected to only partially offset revenue losses. The extent of the dampening effect of the Government’s new housing policies on house price growth and hence economic activity will also take time to be observed.

Overall, our medium-term outlook for growth remains similar to the scenario presented in the February Statement. Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment.

A range of international and domestic factors are currently resulting in rising costs for businesses and consumers. These factors include disruptions to global raw material supplies, higher oil prices, and pressure on shipping arrangements. These price pressures are likely to be temporary and are expected to abate over the course of the year.

The Committee noted that medium-term inflation and employment would likely remain below its Remit targets in the absence of prolonged monetary stimulus. The Committee also noted that while the low interest rate environment has supported house prices, other factors such as recent tax changes, the growing supply of housing, and lending restrictions, are providing offsetting pressures.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.

Summary Record of Meeting

The Monetary Policy Committee discussed economic developments since the February Statement, and their implications on the outlook for inflation and employment. The Committee noted the ongoing improvement in global economic activity and the associated rise in long-term wholesale interest rates. Fiscal and monetary stimulus are continuing to underpin the global recovery. However, the varied pace of national vaccination programmes, and the re-introduction of COVID-19 containment measures in some countries, means that the growth outlook remains uncertain, and uneven within and across countries.

Economic activity in New Zealand has returned to close to its pre-COVID-19 level. The increase in economic activity has been supported by ongoing favourable domestic health outcomes. This has led to a catch up in consumer spending, supported by substantial monetary and fiscal stimulus.  Improving global demand and higher prices for New Zealand’s goods exports are also contributing to economic activity.

The Committee discussed the key factors underpinning the economic recovery and agreed that the outlook was unfolding broadly as outlined in the February Statement. The improvement in global and domestic economic indicators, such as New Zealand’s terms of trade, have provided members more confidence in this outlook. However, the Committee agreed on the need for caution as domestic activity remains uneven across sectors of the economy.

The Committee noted areas of the economy where business activity levels remained low. The sectors most exposed to international tourism remain weak, despite the recent re-opening of travel with Australia. Business investment also remains below its pre-COVID-19 level, although recent indicators of investment intentions suggest signs of recovery.

The Committee noted that the level of employment has remained resilient. Reports of specific skill and seasonal worker shortages have the potential to put upward pressure on some wage costs. The economy is experiencing pockets of both labour shortages and employment slack, consistent with the economic disruption caused by COVID-19.

The Committee agreed that, in aggregate, the current level of employment remains below their estimates of the maximum sustainable level but expect it to converge to that level over time. They also expect to see wage growth lift as firms compete for labour, in particular given the current low levels of immigration.

The Committee noted that underlying CPI inflation currently remains slightly below their target midpoint of 2 percent per annum. A range of domestic and international factors are expected to lift headline inflation above 2 percent for a period. Members noted these factors are expected to be temporary and include higher international transport costs, disruptions to global raw material supplies and resulting higher prices for many commodities, and administrative charges.

The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium-term inflation were mitigated by ongoing global spare capacity and well-anchored inflation expectations.

The Committee assessed the effect of its monetary policy decisions on the Government’s objective to support more sustainable house prices, as required by its Remit. It was noted that the current level of house prices result from a range of factors including low global and domestic interest rates, housing supply shortages, land use regulations, and strong investor demand.

However, the Committee acknowledged that some of the factors supporting house price growth have eased. In particular they noted the current high rate of housing construction, historically low population growth, increased loan-to-value ratio restrictions, and the Government’s recent changes to housing tax and supply policies. These factors place downward pressure on the longer-run level of sustainable house prices and are consistent with a period of significantly lower house price growth.

The Committee noted risks remain to economic growth both on the upside and downside. However, they expressed greater confidence in their outlook for the economy given the reduced risk of extreme downside shocks to the economy from COVID-19.

The Committee noted that on current projections the OCR eventually increases over the medium term, but agreed that this is conditional on the economic outlook evolving broadly as anticipated. In line with their least regrets framework, members reinforced their preference to maintain the current level of monetary stimulus until they were confident that the inflation and employment objectives would be met. They agreed this would require considerable time and patience.

The Committee discussed the effectiveness of monetary policy settings since the February Statement. The Committee noted staff advice that the LSAP programme has provided substantial monetary policy stimulus to date.

Staff noted that reduced government bond issuance was placing less upward pressure on New Zealand government bond yields. This also provided less scope for LSAP purchases with the limits outlined in the letter of indemnity, specified as a percentage of government bonds outstanding. Based on current Treasury projections for the issuance of New Zealand government bonds, the Committee acknowledged that the LSAP programme could not reach the $100bn limit by June 2022.  Members affirmed that this dollar figure was a limit, not a target.

Members endorsed staff continuing to adjust weekly bond purchases as appropriate, in particular taking into account market functioning. The Committee agreed that weekly changes in the LSAP purchases do not represent a change in monetary policy stance, and that any desired change in stance would be made via the usual Monetary Policy Committee communication channel.

The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. The Committee agreed it will take time before these conditions are met.

On Wednesday 26 May, the Committee reached a consensus to:

  • hold the OCR at 0.25 percent;
  • maintain the existing LSAP programme; and
  • maintain the existing Funding for Lending Programme (FLP) conditions.

Attendees:
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders
Observer: Bryan Chapple
Secretary: Sandeep Parekh

Governor Lael Brainard: Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs

Technology is driving dramatic change in the U.S. payments system, which is a vital infrastructure that touches everyone.1 The pandemic accelerated the migration to contactless transactions and highlighted the importance of access to safe, timely, and low-cost payments for all. With technology platforms introducing digital private money into the U.S. payments system, and foreign authorities exploring the potential for central bank digital currencies (CBDCs) in cross-border payments, the Federal Reserve is stepping up its research and public engagement on CBDCs. As Chair Powell discussed last week, an important early step on public engagement is a plan to publish a discussion paper this summer to lay out the Federal Reserve Board’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.2

Sharpening the Focus on CBDCs

Four developments—the growing role of digital private money, the migration to digital payments, plans for the use of foreign CBDCs in cross-border payments, and concerns about financial exclusion—are sharpening the focus on CBDCs.

First, some technology platforms are developing stablecoins for use in payments networks.3 A stablecoin is a type of digital asset whose value is tied in some way to traditional stores of value, such as government-issued, or fiat, currencies or gold. Stablecoins vary widely in the assets they are linked to, the ability of users to redeem the stablecoin claims for the reference assets, whether they allow unhosted wallets, and the extent to which a central issuer is liable for making good on redemption rights. Unlike central bank fiat currencies, stablecoins do not have legal tender status. Depending on underlying arrangements, some may expose consumers and businesses to risk. If widely adopted, stablecoins could serve as the basis of an alternative payments system oriented around new private forms of money. Given the network externalities associated with achieving scale in payments, there is a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses. A predominance of private monies may introduce consumer protection and financial stability risks because of their potential volatility and the risk of run-like behavior. Indeed, the period in the nineteenth century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payments system.4 It led to the need for a uniform form of money backed by the national government.

Second, the pandemic accelerated the migration to digital payments. Even before the pandemic, some countries, like Sweden, were seeing a pronounced migration from cash to digital payments.5 To the extent that digital payments crowd out the use of cash, this raises questions about how to ensure that consumers retain access to a form of safe central bank money. In the United States, the pandemic led to an acceleration of the migration to digital payments as well as increased demand for cash. While the use of cash spiked at certain times, there was a pronounced shift by consumers and businesses to contactless transactions facilitated by electronic payments.6 The Federal Reserve remains committed to ensuring that the public has access to safe, reliable, and secure means of payment, including cash. As part of this commitment, we must explore—and try to anticipate—the extent to which households’ and businesses’ needs and preferences may migrate further to digital payments over time.

Third, some foreign countries have chosen to develop and, in some cases, deploy their own CBDC. Although each country will decide whether to issue a CBDC based on its unique domestic conditions, the issuance of a CBDC in one jurisdiction, along with its prominent use in cross-border payments, could have significant effects across the globe. Given the potential for CBDCs to gain prominence in cross-border payments and the reserve currency role of the dollar, it is vital for the United States to be at the table in the development of cross-border standards.

Finally, the pandemic underscored the importance of access to timely, safe, efficient, and affordable payments for all Americans and the high cost associated with being unbanked and underbanked. While the large majority of pandemic relief payments moved quickly via direct deposits to bank accounts, it took weeks to distribute relief payments in the form of prepaid debit cards and checks to households who did not have up-to-date bank account information with the Internal Revenue Service. The challenges of getting relief payments to these households highlighted the benefits of delivering payments more quickly, cheaply, and seamlessly through digital means.

Policy Considerations
In any assessment of a CBDC, it is important to be clear about what benefits a CBDC would offer over and above current and emerging payments options, what costs and risks a CBDC might entail, and how it might affect broader policy objectives. I will briefly discuss several of the most prominent considerations.

Preserve general access to safe central bank money
Central bank money is important for payment systems because it represents a safe settlement asset, allowing users to exchange central bank liabilities without concern about liquidity and credit risk. Consumers and businesses don’t generally consider whether the money they are using is a liability of the central bank, as with cash, or of a commercial bank, as with bank deposits. This is largely because the two are seamlessly interchangeable for most purposes owing to the provision of federal deposit insurance and banking supervision, which provide protection for consumers and businesses alike. It is not obvious that new forms of private money that reference fiat currency, like stablecoins, can carry the same level of protection as bank deposits or fiat currency. Although various federal and state laws establish protections for users, nonbank issuers of private money are not regulated to the same extent as banks, the value stored in these systems is not insured directly by the Federal Deposit Insurance Corporation, and consumers may be at risk that the issuer will not be able to honor its liabilities. New forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.

In contrast, a digital dollar would be a new type of central bank money issued in digital form for use by the general public. By introducing safe central bank money that is accessible to households and businesses in digital payments systems, a CBDC would reduce counterparty risk and the associated consumer protection and financial stability risks.

Improve efficiency
One expected benefit is that a CBDC would reduce or even eliminate operational and financial inefficiencies, or other frictions, in payments, clearing, and settlement. Today, the speed by which consumers and businesses can access the funds following a payment can vary significantly, up to a few days when relying on certain instruments, such as a check, to a few seconds in a real-time payments system. Advances in technology, including the use of distributed ledgers and smart contracts, may have the potential to fundamentally change the way in which payment activities are conducted and the roles of financial intermediaries and infrastructures. The introduction of a CBDC may provide an important foundation for beneficial innovation and competition in retail payments in the United States.

Most immediately, we are taking a critical step to build a strong foundation with the introduction of the FedNowSM Service, a new instant payments infrastructure that is scheduled to go into production in two years. The FedNow Service will enable banks of every size and in every community across America to provide safe and efficient instant payment services around the clock, every day of the year. Through the banks using the service, consumers and businesses will be able to send and receive payments conveniently, such as on a mobile device, and recipients will have full access to funds immediately.

Promote competition and diversity and lower transactions costs
Today, the costs of certain retail payments transactions are high and not always transparent to end users.7 Competition among a diversity of payment providers and payment types has the potential to increase the choices available to businesses and consumers, reduce transactions costs, and foster innovation in end-user services, although it could also contribute to fragmentation of the current payments system. By providing access to a digital form of safe central bank money, a CBDC could provide an important foundation on which private-sector competition could flourish.

Reduce cross-border frictions
Cross-border payments, such as remittances, represent one of the most compelling use cases for digital currencies. The intermediation chains for cross-border payments are notoriously long, complex, costly, and opaque. Digitalization, along with a reduction in the number of intermediaries, holds considerable promise to reduce the cost, opacity, and time required for cross-border payments. While the introduction of CBDCs may be part of the solution, international collaboration on standard setting and protections against illicit activity will be required in order to achieve material improvements in cost, timeliness, and transparency.8

We are collaborating with international colleagues through the Bank for International Settlements, Committee on Payments and Market Infrastructures, and the G7 to ensure the U.S. stays abreast of developments related to CBDC abroad. We are engaging in several international efforts to improve the transparency, timeliness, and cost-effectiveness of cross-border payments. It will be important to be engaged at the outset on the development of any international standards that may apply to CBDCs, given the dollar’s important role as a reserve currency.

Complement currency and bank deposits
A guiding principle for any payments innovation is that it should improve upon the existing payments system. Consumers have access to reliable money in the forms of private bank accounts and central bank issued currency, which form the underpinnings of the current retail payments system. The design of any CBDC should complement and not replace currency and bank accounts.

Preserve financial stability and monetary policy transmission
The introduction of a CBDC has the potential to have wide-reaching effects, and there are open questions about how CBDC could affect financial stability and monetary policy transmission. Some research indicates that the introduction of a CBDC might raise the risk of a flight out of deposits at weak banks in favor of CBDC holdings at moments of financial stress.9 Other research indicates that the increase in competition could result in more attractive terms on transactions accounts and an overall increase in banking system deposits.10 Banks play a critical role in credit intermediation and monetary policy transmission, as well as in payments. Thus, the design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly. While it is critical to consider the ways in which a CBDC could introduce risks relative to the current payments system, it may increase resilience relative to a payments system where private money is prominent.

Protect privacy and safeguard financial integrity
The design of any CBDC would need to both safeguard the privacy of households’ payments transactions and prevent and trace illicit activity to maintain the integrity of the financial system, which will require the digital verification of identities. There are a variety of approaches to safeguarding the privacy of payments transactions while also identifying and preventing illicit activity and verifying digital identities. Addressing these critical objectives will require working across government agencies to assign roles and responsibilities for preventing illicit transactions and clearly establishing how consumer financial data would be protected.

Increase financial inclusion
Today 5.4 percent of American households lack access to bank accounts and the associated payment options they offer, and a further 18.7 percent were underbanked as of 2017.11 The lack of access to bank accounts imposes high burdens on these households, whose financial resilience is often fragile. At the height of the pandemic, the challenges associated with getting relief payments to hard-to-reach households highlighted that it is important for all households to have transactions accounts. The Federal Reserve’s proposals for strengthening the Community Reinvestment Act emphasize the value of banks providing cost-free, low-balance accounts and other banking services targeted to underbanked and unbanked communities.12 And a core goal of FedNow is to provide ubiquitous access to an instant payments system via depository institutions.

CBDC may be one part of a broader solution to the challenge of achieving ubiquitous account access.13 Depending on the design, CBDC may have the ability to lower transaction costs and increase access to digital payments. In emergencies, CBDC may offer a mechanism for the swift and direct transfer of funds, providing rapid relief to those most in need. A broader solution to financial inclusion would also need to address any perceived barriers to maintaining a transaction account, along with the need to maintain up-to-date records on active accounts to reach a large segment of the population.14

To explore these broader issues, the Federal Reserve is undertaking research on financial inclusion. The Federal Reserve Bank of Atlanta is launching a public–private sector collaboration as a Special Committee on Payments Inclusion to ensure that cash-based and vulnerable populations can safely access and benefit from digital payments.15 This work is complemented by a new Federal Reserve Bank of Cleveland initiative to explore the prospects for CBDC to increase financial inclusion. The initiative will identify CBDC design features and delivery approaches focused on expanding access to individuals who do not currently use traditional financial services.

Technology Considerations
Multidisciplinary teams at the Federal Reserve are investigating the technological and policy issues associated with digital innovations in payments, clearing, and settlement, including the benefits and risks associated with a potential U.S. CBDC. For example, the TechLab group at the Federal Reserve Board is performing hands-on research and experimentation on potential future states of money, payments, and digital currencies. A second group, the Digital Innovations Policy program, is considering a broad range of policy issues associated with the rise of digital payments, including the potential benefits and risks associated with CBDC.

To deepen our research on the technological design of a CBDC, the Federal Reserve Bank of Boston is partnering with Massachusetts Institute of Technology’s (MIT) Digital Currency Initiative on Project Hamilton to build and test a hypothetical digital currency platform using leading edge technology design options.16 This work aims to research the feasibility of the core processing of a CBDC, while remaining agnostic about a range of policy decisions. MIT and the Boston Fed plan to release a white paper next quarter that will document the ability to meet goals on throughput of geographically dispersed transactions with core processing and create an open source license for the code. Subsequent work will explore how addressing additional requirements, including resiliency, privacy, and anti-money-laundering features, will impact core processing performance and design.

Banking Activities
Research and experimentation are also occurring at supervised banking institutions to explore new technology to enhance their own operations and in response to demands from their clients for services such as custody of digital assets. While distributed ledger technology may have the potential to improve efficiencies, increase competition, and lower costs, digital assets pose heightened risks such as those related to Bank Secrecy Act/anti-money laundering, cybersecurity, price volatility, privacy, and consumer compliance. The Federal Reserve is actively monitoring developments in this area, engaging with the industry and other regulators, and working to identify any regulatory, supervisory, and oversight framework gaps. Given that decisions at one banking agency can have implications for the other agencies, it is important that regulators work together to develop common approaches to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.

Public Engagement
In light of the growing role of digital private money in the broader migration to digital payments, the potential use of foreign CBDCs in cross-border payments, and the importance of financial inclusion, the Federal Reserve is stepping up its research and public engagement on a digital version of the U.S. dollar. Members of Congress and executive agencies are similarly exploring this important issue. As noted above, to help inform these efforts, the Federal Reserve plans to issue a discussion paper to solicit public comment on a range of questions related to payments, financial inclusion, data privacy, and information security, with regard to a CBDC in the U.S. context.17 The Federal Reserve remains committed to ensuring a safe, inclusive, efficient, and innovative payments system that works for all Americans.


1. I am grateful to Alexandra Fernandez, Sonja Danburg, David Mills, and David Pope of the Federal Reserve Board for their assistance in preparing this text. These are my own views and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. See Jerome Powell, “Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve’s Response to Technological Advances Driving Rapid Change in the Global Payments Landscape,” Board of Governors of the Federal Reserve System news release, May 20, 2021. Return to text

3. See Lael Brainard, “The Digitalization of Payments and Currency: Some Issues for Consideration,” remarks at the Symposium on the Future of Payments, Stanford University, California, February 5, 2021. Return to text

4. See, for instance, Joshua R. Greenberg, Bank Notes and Shinplasters: The Rage for Paper Money in the Early Republic (Philadelphia: University of Pennsylvania Press, 2020). Return to text

5. Codruta Boar and Róbert Szemere, “Payments go (even more) digital” (Basel: Bank for International Settlements, January 2021). Return to text

6. Kelsey Coyle, Laura Kim, and Shaun O’Brien, Consumer Payments and the COVID-19 Pandemic: The Second Supplement to the 2020 Findings from the Diary of Consumer Payment Choice (San Francisco: Federal Reserve Bank of San Francisco, February 2021). Return to text

7. Marie-Hélène Felt, Fumiko Hayashi, Joanna Stavins, and Angelika Welte, Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada (PDF), Federal Reserve Bank of Boston Research Department Working Papers No. 20-13 (Boston: FRB Boston, 2020). Return to text

8. See Bank for International Settlements, Committee on Payments and Market Infrastructures, Enhancing cross-border payments: building blocks of a global roadmap Stage 2 report to the G20 (PDF) (Basel: BIS, July 2020); and Financial Stability Board, Enhancing Cross-border Payments: Stage 3 Roadmap (PDF) (Washington: FSB, October 13, 2020). Return to text

9. Christian Pfister, Monetary Policy and Digital Currencies: Much Ado about Nothing? (PDF) Banque de France Working Paper 642 (Paris: Banque de France, 2017). Return to text

10. John Barrdear and Michael Kumhof, The Macroeconomics of Central Bank Issued Digital Currencies, Bank of England Working Paper No. 605 (London: BOE, July 18, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2811208. Return to text

11. Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services (Washington: FDIC, October 19, 2020); and Federal Deposit Insurance Corporation, FDIC National Survey of Unbanked and Underbanked Households (Washington: FDIC, 2017). Return to text

12. See, for instance the Bank On National Account Standards, https://2wvkof1mfraz2etgea1p8kiy-wpengine.netdna-ssl.com/wp-content/uploads/2020/10/Bank-On-National-Account-Standards-2021-2022.pdf. Return to text

13. See Jesse Leigh Maniff, Inclusion by Design: Crafting a Central Bank Digital Currency to Reach All Americans, (PDF) Payments System Research Briefing, Federal Reserve Bank of Kansas City (Kansas City: FRB Kansas, December 2, 2020); and John Crawford, Lev Menand, and Morgan Ricks, “FedAccounts: Digital Dollars,” (PDF) George Washington Law Review, Vol. 89, p. 113, January 28, 2021. Return to text

14. For more information, see the Federal Reserve Community Reinvestment Act Proposed Rulemaking at https://www.federalreserve.gov/consumerscommunities/community-reinvestment-act-proposed-rulemaking.htmReturn to text

15. Federal Reserve Bank of Atlanta, “New Committee to Advance Safe, Efficient, Inclusive Payments,” news release, May 12, 2021. Return to text

16. See Eric Rosengren, “Central Bank Perspectives on Central Bank Digital Currencies,” remarks at the panel discussion of the Program on International Financial Systems, Harvard Law School, May 12, 2021, ; Jim S. Cunha, “Boston Fed’s Digital Dollar Research Project Honors 2 Hamiltons, Alexander and Margaret,” Federal Reserve Bank of Boston, February 25, 2021; and Lael Brainard, “An Update on Digital Currencies,” remarks at the Federal Reserve Bank of San Francisco Innovation Office Hours, August 13, 2020. Return to text

17. See Jerome Powell, “Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve’s Response to Technological Advances Driving Rapid Change in the Global Payments Landscape,” Board of Governors of the Federal Reserve System news release, May 20, 2021.

CME Group to Launch Micro WTI Futures on July 12

CME Group, the world’s leading and most diverse derivatives marketplace, today announced it will expand its suite of micro-sized futures contracts with the introduction of Micro WTI futures.  The contracts are expected to launch on July 12, pending regulatory review.

Micro WTI futures will be one-tenth the size of the company’s global benchmark WTI Crude Oil futures contract and cash-settled. They will enable market participants – from institutions to sophisticated, active, individual traders – to fine-tune exposure to crude oil markets and enhance their trading strategies in an efficient, cost-effective way.

“As U.S. crude continues to gain global significance, we are seeing increasing demand for tools that help a broader range of clients access these markets,” said Peter Keavey, Global Head of Energy Products at CME Group. “WTI futures have always been a top product for active traders around the world, and the smaller size of Micro WTI futures will offer more flexibility and greater precision to market users – all while enabling them to benefit from the transparency and liquidity of the world’s most robust crude oil contract.”

“Interactive Brokers’ advantage has always been our low cost, advanced technology, and breadth of products offered,” said Steve Sanders, Executive Vice President, Marketing and Product Development at Interactive Brokers. “We are excited to add Micro WTI futures to our product roster, which will allow more of our sophisticated individual investor and active trader clients to participate in the global oil markets.”

“We continue to see demand from retail active traders for micro sized futures products like this that provide access to attractive markets with greater flexibility and efficiency,” said J.B. Mackenzie, Managing Director at TD Ameritrade Futures and Forex, LLC.  “The launch of Micro WTI futures brings the crude oil markets to our clients in a more cost-effective way and is one more tool to help our clients diversify their exposure and hone their trading strategies.”

“As a growing audience of self-directed investors and traders continues to gravitate to the futures markets, we are excited to introduce the new Micro WTI Crude Oil contracts to the NinjaTrader user community,” said Martin Franchi, CEO of NinjaTrader Group, LLC.  “The smaller contract size available through this product innovation will significantly increase accessibility for more traders to this dynamic market and the opportunities available through futures.”

“TradeStation Securities, Inc. is proud to continue our strong relationship with CME through the launch of Micro Crude Oil Futures. As a platform for retail and institutional investors, we’re excited to offer our clients access to U.S. crude at a lower barrier of entry,” said John Bartleman, President of TradeStation Group, Inc., TradeStation’s parent company. “As day-one supporters of this new product, we’re continuing to prioritize our clients access to the latest Futures products and technology.”

Micro WTI futures will be cash-settled based on the daily settlement price of NYMEX WTI futures. The contracts will be listed on and subject to the rules of NYMEX. For more information or for product specifications please see: https://cmegroup.com/micro-wti

As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest ratesequity indexesforeign exchangeenergyagricultural products and metals.  The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world’s leading central counterparty clearing providers, CME Clearing. With a range of pre-and post-trade products and services underpinning the entire lifecycle of a trade, CME Group also offers optimization and reconciliation services through TriOptima, and trade processing services through Traiana.

Federal Court Orders Virginia Resident to Pay More Than $5 Million for Futures and Options Fraud

The Commodity Futures Trading Commission announced today that Judge John A. Gibney, Jr., of the U.S. District Court for the Eastern District of Virginia entered a Consent Order for Permanent Injunction, Restitution and Ancillary Equitable Relief against defendant Leonard J. Cipolla finding, among other things, that Cipolla fraudulently solicited individuals to place funds in a commodity pool to trade futures and options while misappropriating more than $5 million of the money he was given to trade. The order requires that Cipolla pay restitution of $5,102,283.51 and imposes permanent trading and registration bans.

The order resolves a CFTC action against Cipolla filed in the Eastern District of Virginia on September 19, 2019. [See CFTC Press Release No. 8020-19] Litigation against Cipolla’s company, Tate Street Trading, Inc., continues. 

Case Background

According to the order, and as Cipolla admitted, from June 2009 through April 2019, Cipolla fraudulently solicited and received approximately $7,096,303 from pool participants in connection with futures and options pooled trading. The order also found that Cipolla misappropriated more than $2.5 million for business expenses or personal use and made more than $3 million in Ponzi-like payments to pool participants.  

Despite having accepted approximately $7,096,303 from pool participants, the order found that Cipolla transferred only approximately $1,462,834 into Tate Street’s trading accounts. While Cipolla typically promised pool participants substantial returns, his actual trading between June 2009 and April 2019 was profitable in only two years and resulted in cumulative net losses of approximately $1,462,305. The order also found that Cipolla provided statements to pool participants that did not accurately reflect their trading results.

Parallel Criminal Action

In a separate, parallel criminal action, the U.S. Attorney for the Eastern District of Virginia previously announced that Cipolla pleaded guilty to mail fraud and acting as an unregistered commodity pool operator in connection with the scheme. On July 1, 2020, Cipolla was sentenced to 121 months in federal prison and ordered to pay restitution to victims. [See United States v. Leonard J. Cipolla, Case No. 3:19-cr-00126, ECF No. 40 (E.D. Va. Jul. 1, 2020)]

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC appreciates the cooperation and assistance of the U.S. Attorney’s Office for the Eastern District of Virginia in this matter.

The Division of Enforcement staff members responsible for this case are James A. Garcia, Michael Loconte, James Deacon, Erica Bodin and Rick Glaser.

FCA proposes stronger protection for consumers in financial markets

The FCA has today set out plans for a new Consumer Duty, which will set a higher level of consumer protection in retail financial markets for firms to adhere to.

Firms are already bound by FCA rules and principles to treat customers fairly and many firms are delivering the right outcomes for consumers, including good products and services at fair prices, supported by high standards of customer service and clear communications.

The FCA has seen evidence of practices that cause consumer harm, including firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess the product/service. This may provide some insight into why 1 in 4 respondents to the FCA’s 2020 Financial Lives Survey said they lack confidence in the financial services industry and only 35% of respondents agreed that firms are honest and transparent in their dealings with them.

As part of the FCA’s ongoing work to monitor and address behaviour that could lead to poor outcomes for consumers, the FCA is proposing to expand its existing rules and principles to ensure firms provide a higher level of consumer protection consistently which will enable consumers to get good outcomes.

The new Duty will drive a shift in culture and behaviour for firms, meaning that consumers always get products and services that are fit for purpose, that represent fair value and are clearly communicated and understandable. This will help, rather than hinder, consumers to make good choices and be confident that they will receive good customer service.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said: ‘The package of measures we are proposing will enhance our existing rules and is designed to tackle the harms we see in financial services markets, and their causes, as well as put consumers in a stronger position to make good decisions.

‘We want firms to be putting themselves in the shoes of consumers and asking ‘would I be happy to be treated in the way I treat my customers?’. We want consumers to be able to advance their financial wellbeing and build positive futures for themselves and their families.’

The Consumer Duty, which firms will have to follow or face regulatory action, including enforcement investigations if they fail to do so, will have 3 key elements:

  1. The Consumer Principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: ‘a firm must act in the best interests of retail clients’ or ‘a firm must act to deliver good outcomes for retail clients’.
  2. Cross-cutting rules which would require 3 key behaviours from firms, which include taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives and to act in good faith.
  3. It will also be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to 4 specific outcomes – communications, products and services, customer service and price and value.

The consultation is open for comment until 31 July 2021. The FCA expects to consult again on proposed rule changes by the end of 2021 and make any new rules by the end of July 2022. The FCA is also consulting on the potential benefits of attaching a private right of action to the new Duty, and what any unintended consequences of this might be.

Read CP21/13: A new Consumer Duty

Governor Christopher J. Waller: The Economic Outlook and Monetary Policy

At The Global Interdependence Center’s 39th Annual Monetary and Trade Conference, The LeBow College of Business, Drexel University, Philadelphia, Pennsylvania (via webcast)

Thank you, Kathleen, and thank you, George and the Global Interdependence Center, for the invitation to speak to you this afternoon. I am with you to talk about my outlook for the U.S. economy and the implications for monetary policy.1 In the last week we have received employment and inflation reports that have garnered a lot of attention. Incorporating this information into my outlook, I have two messages today. The first is that, despite an unexpectedly weak jobs report, the U.S. economy is hitting the gas and continuing to make a very strong recovery from the severe COVID-19 recession. Let’s remember, and this applies to latest inflation data too, that a month does not make a trend—the trend for the economy is excellent. My second message is that, despite the unexpectedly high CPI inflation report yesterday, the factors putting upward pressure on inflation are temporary, and an accommodative monetary policy continues to have an important role to play in supporting the recovery.

The pandemic and resulting public health response led to the sharpest drop in employment and output the United States has likely ever experienced—22 million jobs lost in eight weeks and an annualized decline of 30 percent in real gross domestic output for the second quarter of 2020. These numbers are simply staggering, and they left us in a deep, deep hole. Not so long ago, it seemed like the economic damage from COVID-19 might be with us for a long time, and that a full recovery could take many years. But thanks to the rapid development of vaccines and aggressive fiscal and monetary policy, the economy is recovering much faster than anyone expected six months ago.

I said a few weeks ago that the economy was ready to rip, and in many respects, that is exactly what it is doing. The initial estimate of first quarter real gross domestic product (GDP) growth came in at a 6.4 percent annual rate, surpassing the level of output in the first quarter of 2020, before the full force of COVID-19 hit the economy. Second-quarter growth is likely to be as much as 8 percent, and the prospects are good that GDP will be close to trend output by the end of 2021. New home sales continue to be strong. We are seeing robust household spending on durable goods despite supply bottlenecks that I will discuss in a moment. Surveys of purchasing managers point to continued solid growth in both manufacturing and business services.

So, what about that jobs report? That thud you heard last Friday was the jaw of every forecaster hitting the floor. It was a big surprise for me and most people, but it probably should not have been, because it fits with what we have been hearing from businesses about labor supply shortages. GDP is back to its pre-pandemic level, but we have recovered only 14 million of the 22 million jobs lost last spring.

To fully understand how the labor market is performing, I like to refer to the Federal Reserve Bank of Atlanta’s labor market distribution spider chart.2 The chart plots data for 15 different labor market indicators in an easy-to-read manner. Using this chart, you can compare all these indicators for February 2020, April 2020, and March 2021. Looking at these months allows one to compare the very healthy labor market of February 2020 with the depths of the pandemic decline in April 2020 and see both how well we have rebounded since then and how much farther we still have to go.

The takeaway from that chart is that the labor market has recovered on many dimensions, such as hiring plans, job openings, quits rates, and firms unable to fill job openings. But on other dimensions, the labor market is far from recovering to its pre-pandemic level. Employment, as I said, is still below where it was in February 2020, by 8 million jobs. The unemployment rate is still 2.5 percentage points higher than it was in February 2020, and we know that it is even worse for some groups—nearly 10 percent for Black workers and nearly 8 percent for Hispanics. The employment-to-population ratio continues to be depressed from February 2020. The upshot is that several measures of labor market conditions have fully recovered, but other measures indicate that the overall labor market has a long way to go to get back to full strength. In short, some of the labor market’s cylinders are firing away, and some are still sputtering, so monetary accommodation continues to be warranted.

This chart, like the disappointing jobs report for April, shines a light on a current puzzle characterizing the U.S. labor market—a lot of job openings, but high unemployment rates and a low labor force participation rate. We hear repeatedly from our business contacts about firms boosting wages yet still being unable to attract workers.3 While clearly this is a real problem for some firms at the moment, I believe this mismatch is temporary.

I think of the current problem as follows. When the pandemic hit, both labor demand and labor supply fell dramatically. The combination of widespread vaccines and fiscal and monetary stimulus caused consumer demand to recover sharply. This situation, in turn, caused labor demand to rebound quickly, particularly in goods-producing industries. However, due to factors like continued fears of the virus, the enhanced unemployment insurance, child-care issues, and early retirements, labor supply has not rebounded in the same fashion, which led to a situation with excess demand for labor and upward pressure on wages.4 And that is exactly what we saw in the April jobs report. Average hourly earnings rose 20 cents in April for private-sector nonsupervisory workers, to $25.45.

But it is likely the labor supply shortage will be temporary. As vaccinations continue to climb, fears of reentering the labor force should decline. By September, most schools and daycare facilities are expected to fully reopen, resolving recent child-care issues for many families. Finally, the enhanced unemployment benefits passed in response to the pandemic expire in September, and research has shown repeatedly that the job-finding rate spikes as unemployment benefits run out.5 Thus, while labor demand is currently outrunning labor supply, supply should catch up soon.

Now let me turn to the other leg of the Fed’s dual mandate, price stability. That second thud you heard yesterday was forecasters’ bodies following their jaws to the floor after the CPI report was released. It was a surprise, but a look at its causes doesn’t alter my fundamental outlook, which is that the main pressures on inflation are temporary.

First, let me address concerns that strong growth threatens to unleash an undesired escalation in inflation. In August 2020, the Federal Open Market Committee (FOMC) adopted a new policy framework that includes flexible average inflation targeting and a policy stance based on economic outcomes as opposed to economic forecasts.

Flexible average inflation targeting means we aim to have inflation overshoot our 2 percent longer-run goal if inflation had been running persistently below target. Given that we missed our inflation target on the low side consistently for the past eight years or so, the FOMC has said that it will aim to moderately overshoot its inflation target for some period but then have it return to target. Our willingness to aim for above-target inflation also means we will not overreact to temporary overshoots of inflation—we need to see inflation overshoot our target for some time before we will react.

An outcomes-based policy stance means that we must see inflation before we adjust policy—we will not adjust based on forecasts of unacceptably high inflation as we did in the past. Call this the “Doubting Thomas” approach to monetary policy—we will believe it when we see it.

We asked to see it, and lo and behold, we are now starting to see inflation exceeding our inflation target. But the critical question is: for how long? Although inflation is starting to exceed our 2 percent target, in my view, this development is largely due to a set of transitory factors that are occurring all at once. I can think of at least six.

First, there is what we economists call “base effects,” which is the simple arithmetic of what happens when the very low inflation readings of the first half of 2020 fall out of our 12-month measure of inflation. That adjustment will be over in a few months. A second temporary factor is higher energy prices, which have rebounded this year as the economy strengthens but are expected to level off later this year. Retail gasoline prices have jumped in some areas due to the disruption of the Colonial Pipeline, but the effect on inflation should be temporary also.

A third factor is the significant fiscal stimulus to date. Stimulus checks put money in people’s pockets, and when they spend it, there will be upward pressure on prices. But when the checks are gone, the upward pressure on prices will ease.

A fourth factor is a reversal of the very high savings that households have built up over the past year. As households draw down these savings, demand for goods and services will increase, which again will put upward pressure on prices. But, just like stimulus checks, once the excess savings is gone, it is gone, and any price pressures from this factor will ease.

A fifth factor is supply bottlenecks that manufacturers and importers are currently experiencing; supply chain constraints are boosting prices, particularly for goods—less so for services. One strength of a capitalist system is that markets adjust. If demand and prices rise for a product, supply will follow, and bottlenecks will dissipate. So once again, price pressures induced by bottlenecks should reverse as supply chains catch up and orders get filled.

Finally, the excess demand for labor I described earlier is likely to continue to push wages up in the next couple of months. How much of this increase gets passed through to prices is unknown, but some of it will. However, as I argued earlier, once labor supply catches up, this wage pressure should ease.

I expect that all of these factors will cause inflation to overshoot our 2 percent longer-run goal in 2021. But they will not lead to sustained, high rates of inflation. Financial markets seem to think the same—5-year breakeven inflation expectations are around 2.5 percent, and 5-year, 5-year-forward measures are around 2 percent, when adjusted for the difference between CPI (consumer price index) and PCE (personal consumption expenditures) inflation rates.6 Hence, markets do not believe the current factors pushing up inflation will last for long.

While I fully expect the price pressure associated with these factors to ease and for some of the large increases in prices to reverse, it may take a while to do so. Shortages give producers pricing power that they will be reluctant to let go of right away. Wage increases for new workers may cause firms to raise wages for existing workers in order to keep them. Consequently, there may be knock-on effects from the current wage increases. The pandemic has also caused firms to restructure their supply chains, and, as a result, bottlenecks may last longer than currently anticipated as these supply chains are rebuilt. There are also asymmetric price effects from cost shocks—prices go up very quickly but often tend to come down more slowly, as consumers slowly learn that the bottlenecks have gone away.

For these reasons, I expect that inflation will exceed 2 percent this year and next year. After that, it should return to target. And in my view, this fluctuation is okay—our new framework is designed to tolerate a moderate overshoot of inflation for some time as long as longer-term inflation expectations remain well-anchored at 2 percent.

Before I turn to the implications of all this for monetary policy, a word about the housing market. As I said earlier, housing is a bright spot in the economy that is encouraging investment and lifting household wealth, which is all good, but with memories of recent history in mind, the fast growth in housing prices in most areas of the United States does bear close watching. Housing is becoming less affordable, and that price increase has the biggest effect on low-income individuals and families who have struggled the most since last spring and who are always the most vulnerable to rising rents and home prices. Prices for lumber and other inputs for housing are skyrocketing, and while that occurrence is not having a significant effect on inflation, it is limiting the supply of new homes and helping feed the house price boom. Fortunately, the banking system is strong and resilient—going through multiple Fed stress tests and a tough, real-life stress test this past year. Nevertheless, I am watching this sector closely for signs of stress and will continue to do so.

So, in summary, the economy is ripping, it is going gangbusters—pick your favorite metaphor. But we need to remember that it is coming out of a deep hole, and we are just getting back to where we were pre-pandemic. Labor market indicators are more mixed with 8 million workers still without jobs. But many of the problems holding back labor supply will dissipate over time, and we should return to the robust labor market we had in February 2020. Inflation is currently being driven above our 2 percent inflation target but is expected to return to target in subsequent years as transitory inflation shocks fade.

Highly accommodative monetary policy, in conjunction with unprecedented fiscal support, has supported a rapid recovery from a uniquely sharp, pandemic-caused recession. The improving economy is helping repair the significant economic damage suffered by individuals, families, and businesses, but there is still a way to go before we fully recover.

In light of that fact, I expect the FOMC to maintain an accommodative policy for some time. We have said our policy actions are outcome based, which means we need to see more data confirming the economy has made substantial further progress before we adjust our policy stance, because sometimes the data does not conform to expectations, as we saw last Friday. The May and June jobs report may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our policy stance. We also need to see if the unusually high price pressures we saw in the April CPI report will persist in the months ahead. The takeaway is that we need to see several more months of data before we get a clear picture of whether we have made substantial progress towards our dual mandate goals. Now is the time we need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises.

Thank you for the opportunity to speak to you, and I would be happy to respond to your questions.

Riksbank: Minutes of the Monetary Policy Meeting held on 26 April

The recovery is well underway, but it will take time before inflation is more permanently close to the target of 2 per cent. Continued expansionary monetary policy is therefore needed to support the economy and inflation. At the monetary policy meeting on 26 April, the Executive Board of the Riksbank decided to hold the repo rate unchanged at zero percent and it is expected to remain at this level in the years to come. The Riksbank is also continuing to purchase assets within the envelope of SEK 700 billion and to offer liquidity within all the programmes launched in 2020.

The recovery is continuing in the global economy despite an increase in the spread of infection. Rapid and powerful fiscal and monetary policy measures abroad and in Sweden have mitigated the economic downturn and prevented a financial crisis. The economic outlook is somewhat brighter now that at the monetary policy meeting in February. But at the same time, the board members noted that the crisis has resulted in a divergence across countries, sectors and various groups in the labour market. Parts of the service sectors are still weighed down by the restrictions. The ongoing vaccinations are an important condition for slowing down the spread of infection, easing the restrictions and enabling production in contact-intensive service sectors to pick up again.

The board members pointed out that there will be substantial volatility in inflation during the coming year, as a result of the pandemic and volatile energy prices. In this context, the importance of longer-term inflation expectations remaining stable at 2 per cent was also pointed out.

The recovery in the Swedish economy is well underway, but cost pressures are expected to rise relatively slowly and, as in the February forecast, it will take time before inflation is more permanently close to the target of 2 per cent. It is the assessment of the Executive Board that continued expansionary monetary policy will be needed over the coming years to support the economy and bring inflation close to the target more permanently. The members were therefore in agreement on leaving the repo rate unchanged at zero per cent and on the distribution of asset purchases during the third quarter of 2021. Several stressed the importance of, as announced, utilising the entire envelope for asset purchases of SEK 700 billion in 2021 and after that keeping the holdings more or less unchanged over next year. This is to avoid the risk of an unwanted tightening of financial conditions.

The members also discussed how monetary policy may be adapted if economic developments turn out differently to the main scenario. Several noted that if the recovery is stronger than expected and inflation overshoots the target, this does not need to be a reason to make monetary policy less expansionary. If monetary policy needs to be made more expansionary, a few members pointed out that a rate cut is fully possible.

At the meeting, some members highlighted the risks associated with developments in the housing market and underlined how important it is that Sweden gets to grips with existing structural problems in the housing market.