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Sometimes we wonder if there had been no central banks in the world, then there wouldn’t have been any central bank chief statements to look for, no bimonthly rate setting meetings, no post meeting statements, no minutes to be released and no future inflation dot plots to be analysed. Such a world would be really cruel to commentators like us because in such a world what would we analyse on a daily basis. So this is one more valid reason for central banks to exist apart from the slightly worthy objectives like ensuring price stability and maximum employment in the economy.

On that note, yesterday we had the FOMC meeting statement coming out. On the expected lines the Fed decided that the interest rate will be kept at zero for at least until 2023 by that time it believes that the inflation would come up to the target level of 2% and the unemployment rate would also improve substantially. As per the dot plot estimates all policy makers but one believe that the rates will be near zero until 2022 and only a few estimate them to edge up slightly in 2023.  The Fed also acknowledged that the recovery is back by revising their GDP estimate to 3.7% contraction for the year against the 6.5% decline forecasted in June.

Now most of this was already priced in by the markets so no surprise there (the Dow ended flat). However we would do well to raise two important long term queries here. First one being, how the investment allocation changes in case the rates in any economy are close to zero for an extended period. Second one being  what tools are at the disposal of central banks to bring back inflation in case they are already at the lag end of rate cutting cycle. We will discuss these topics in detail one by one during a later note.

On the data front, we saw the release of retail sales data in US yesterday. The print was underwhelming as the sales grew only 0.6% for the month of August against the expectation of 1%. The effect of expiry of pandemic related relief benefits in the end July can be one primary reason. With the income prospects severely constrained it is more natural that the public would look to save then spend. The second tranche of relief package still gets debated in the US senate. It is important to note that in a consumer economy if the consumer behaviour changes it can impact GDP growth in the long term. In that case all the metrics like Debt to GDP etc. will be of no use as the denominator would have shrunk making the metric look much worse. In a recent opinion piece former RBI governor Raghuram Rajan refers to relief measures as medicine for a bed ridden patient, hence he writes that saving them for later makes little sense.

Moving on we will also see Bank of England coming up with their policy decision today. The rates are expected to be unchanged though in a new development, apart from the covid issues, the bank has to rethink Brexit problems afresh. The UK economy has seen the worst contraction in the G7 countries with second quarter contraction of around 20% YOY.

Rounding up the CB discussion, in India we had the speech by Governor Das in a FICCI forum yesterday. He reiterated that there is pressure on growth and RBI will do whatever it takes to revive growth. The 10 year benchmark bond yields eased by 3 bps from 6.02% to close at 5.99%. On the market wrap, DXY at 93.45, US 10Y at 0.68, Euro @ 1.1766, GBP @ 1.2930, INR @ 73.68, Gold @ 1944$/oz and the Brent crude @ 41.75$/bbl.