Powell'stestimony,abstractgoalsandRajan'sinsight

After the FOMC minutes last week and MPC minutes yesterday, it’s time to turn our gaze towards the Fed Chief’s Jerome Powell testimony to the Congress. While presenting the Semi-Annual Monetary Policy report to the Congress, Fed Chief first read out the prepared remarks and then fielded the wide-ranging questions from the senators. The tone of the prepared remarks was unmistakably dovish avoiding any hint that the current gravy train might be stopped any time soon. The ultra-low rates and the monthly bond purchases will continue till the objectives are met conclusively. And what are the objectives?  The inflation should be in the long-term average rate of 2% and there should be conditions of maximum employment. There are other side goals of making the recovery more equitable and conscientious but that lie more in the domain of fiscal policy (spending by the Federal govt) and do not come in the purview of Fed.

Now having discussed inflation threadbare for past some time lets discuss the employment issue today. The maximum employment goal of Fed is loosely defined and is not anchored to a well-articulated numerical target as is the case with inflation. As per the Fed Chief, notwithstanding the 6.3% unemployment rate right now, the more important number which he is looking at is the 10 million people who are out of payroll as compared to the pre pandemic level. Readers would do well to think about the tools at the disposal of Fed to achieve this goal. They can keep the interest rates low, that allows the firms to borrow at lower cost and keep their businesses running (consequently not fire people). Second tool is bond buying, the bond buying frees up cash on the bank balance sheets which they can use to make loans at attractive conditions to entrepreneurs. Some other tools which the central banks can employ are like yield curve control through market interventions to bring the longer-term yield down. The point is that the tools at CB’s disposal can’t solve the employment problem directly unlike governments which can do the same by starting a public works program. Simple point is that the abstractness of the goal adds to the complexity of its execution.

Raghuram Rajan in his book I do what I do writes about this conflict of mandates of central banks and places it in the Indian context. Talking about the inflation targeting as a sole defining mandate of the Indian Central Bank, he writes that it gives a clear direction to the MPC in discharge of their duties, as well as it allows the market and other economic agents to anchor their expectations properly. One thing which no one likes is uncertainty. Goals which are ill defined are harder to execute and even harder to anticipate in terms of fulfilment.

Post the testimony Dow Jones recovered its losses and closed in the green zone. The US Dollar continued its fall against the Euro, GBP and other emerging market currencies as the risk on mood improves. US 10-year yield is also down 4 bps to trade currently at 1.34. The Indian 10-year benchmark bond trades at 6.17 currently and rupee at 72.35. Wrapping up the discussion today we will talk about one of the very pointed questions which one senator asked the Fed Chief. He asked whether the low liquidity regime is fuelling the asset price bubbles. Powell’s response was “may be” but that doesn’t stop Fed from continuing with bond purchases. “May be” is the operative word here.