FedSignalsandKeynesianUtopia

The all important Fed meeting results are out and the signal coming out loud and clear is that the extraordinary support which it has provided to the economy will continue for a long time. Nearly all the Fed policy makers foresee no rate hikes through 2022 and expect the benchmark short term rate to be near zero. The bond buying (80 bn USD in treasuries and 40 bn USD in other agency and MBS) which has supported the credit markets through the supply of liquidity will also continue. 

Fed Chief Jerome Powell also acknowledged the impact on employment levels in his press conference alluding to the widespread unrest and vowed that the Fed will do whatever it takes to get the economy back on track. In their first economic projections this year, the Fed expects the unemployment rate to end 2020 at 9.3% and 5.5% in 2022, which is still 2 percentage points more than the 3.5% unemployment rate seen in Feb this year. The debate on the inflationary impact of the loose monetary policy also appears to be waning as the Fed expects it to be weak at 0.8% this year and rising to 1.7% by the end of 2022.

The reactions of the US stock markets was muted as the Dow Jones ended the day down by close to 1% post policy. The dollar index jumped up above 96 levels post the announcement. The US 10 year benchmark treasury yield trades at 0.71 compared to 0.90 seen 5 days back.

As the Fed announces that ample liquidity and ZIRP will remain in vogue for coming years, and the other major economies like the Eurozone and Japan are already in the NIRP zone, it is an opportune time to remember John Maynard Keynes who was one of the most influential economic thinkers of the 20^th century. In his 1934 book, The General Theory of Employment, Interest and Money, Keynes makes an interesting point. He uses the phrase “Euthanasia of the rentier” and wishes the demise (or annihilation) of the class of people who live on interest income. His theory goes that the rentier is not adding any thing productive to the economy and hence is disposable. How to achieve the same? Make interest rates so low that it becomes unfeasible to live off rent and such rentiers will then gradually disappear. According to him, such people are exploiting the scarcity value of capital and hence ample capital along with low interest rates is the way to go. If the trend of interest rates across the world (especially in developed economies) is analysed, it appears that Keynes’s rentier free utopia might be close at hand (although quibbles will still continue on the theoretical efficacy of his argument).

The Indian rupee opened at 75.80. Stock markets are down slightly and the 10 year benchmark bond trades at 5.76. The CPI data is supposed to be out tomorrow and is expected to be around 5.50 for the month of May against 5.84 for the April. The data will be marred, thought, by the collection difficulties owing to the lockdown situation.