Transcripts,posterityandriskoff

Minutes of the Fed meeting in June were released on Wednesday. Apart from the plethora of views on how the economy is working, how employment and inflation are evolving, one major change which we noticed from previous minutes (April policy) was that reference to covid was only 5 times compared to 9 times in April. The close to 50% reduction, we are sure would have been picked up by some NLP algorithm. And it would have betted on policy normalisation and rise in yields. Alas the algorithm would have lost money or stopped out. This shows that neither the content nor its interpretation is that simple. US 10-year treasury yields are trading at 1.31 having touched a low of 1.25 in the trade yesterday.

Now let’s go a bit deep into the structure of minutes. The minutes contain various sections which provide a comprehensive update on what the FOMC is looking at and how it is arriving at its decision. Though it doesn’t contain the participant wise input. Readers would note that this is a slight departure from how the minutes of RBI meetings are structured. In RBI minutes each participant notes down his or her reasons for the vote. In FOMC it is more of a generalised discussion prepared by Fed Staff followed by the list of FOMC members who voted for or against the action. As per the rules a detailed only slightly edited transcript of the full Fed meeting gets released only with a lag of 5 years. The transcript hence carries the tension and any drama within the meeting room in grisly detail (the verbatim reality).

One can wonder what is the purpose of releasing such data with so much lag but all of it has to be seen as creating a verifiable record for the posterity. For example, the transcript of the meetings done in the heat of GFC were released in 2013 and show that how many of the venerable big banks were close to a default in those heady times and accessed the Fed’s emergency facilities. Who all dissented on policy decisions and later flipped their votes? All this record keeping is important for providing context at a later date. Though we fully agree that it remains much less market moving compared to a Governor’s address and FOMC statement which comes out on the policy day.

Coming back to the round-up of markets. Dollar index trades around 92.5 levels, US treasury yields as we discussed are down, gold is above 1800 $/oz, Brent crude is around 74$/bbl. The emerging market currencies like Indonesian Rupiah, Thai Baht, Korean Won trade around their recent lows against the Dollar. All in all, a sort of risk off where the EM currencies are sold, and Dollar assets are bought. Dollar assets like Dollar debt i.e. US Treasuries hence their prices go up and yield go down. Caveat Emptor, this is a very simplistic exposition of a complex phenomenon.

In other news, ECB has announced that under its review of monetary policy strategy that it is going to aim for a new 2% inflation target, and it could tolerate temporary moves beyond that point. This marks a departure from the earlier objective of keeping a “target close to but below 2%”. This implies the bank will be ready to stoke more inflation. As the central bank can’t address supply or generate more demand directly the only option with them is to remain accommodative for long and keep printing more money. This step should be Euro negative in medium and long run. However, ECB was more dovish sounding central bank amongst the DM world.

Domestically there was an interview by the RBI governor to the press where he spoke about the course of monetary policy reversal saying that a hasty retreat can impact the economic recovery. On inflation he spoke about the need to maintain it within the tolerance band. Yesterday also saw the government buying bonds under the GSAP 2.0 where bonds of aggregate amount of 20k Crore INR were bought from the market. Till we meet next week, readers can ponder on the point that almost all our updates were regarding central banks (minutes, speech, interviews). What does this phenomenon point to?