USCPI,RBIOMOandeconomicdogmas

Yesterday the important news globally was inflation data in the US. The CPI number for January came at 1.4% which was better than most market estimates. The benign inflation reading was followed up by comments from Fed Chief Jerome Powell where he said that given the number of people who have lost their jobs during the pandemic, achieving and sustaining maximum employment would require more than supportive monetary policy. Powell also spoke about the policies instituted post World War II when the government took it upon itself as a duty to provide jobs to all the men returning from war and how it’s important to show the same kind of commitment to the unemployed currently.

Parsing the above statement by Fed chief one realises that given the monetary stance has been ultra-accommodative (dovish) already for some time, the “more than supportive” is essentially a “docile dove” policy. The markets and especially the high yield-high risk assets would love this approach. It is no surprise that the equity markets across the world are trading in green and the emerging market currencies have strengthened post the statement. The inflation remaining low, the Biden administration working on new stimulus packages and a Fed committed to support full employment targets indicate that the party has some more legs to go.

Now let’s see Powell’s statement in a bit of historical context also. Whose responsibility is it to provide full employment, is it on governments shoulders? Then what about the private businesses and the basic tenet of capitalism. In his book The Little Big Number, economic historian Dirk Philipsen traces the history of government involvement in the economy. He writes that before the Great depression in 1929, the most pervasive economic thinking was that governments should stay away from tinkering too much with the economic equilibrium. A spirit of “Laissez Faire” pervaded where government restricted itself to collecting taxes and providing a stable administration and basic infrastructure. Economic agents in the private domain generated employment purely on the basis of profit motives. He writes that the Hoover administration which was in charge during the great meltdown was seeped in this dogma and President Herbert Hoover especially was a great believer that supporting the needy with alms (unemployment benefits) kills the enterprising skills of Americans. We all know what happened later. Hoover was booted out in 1933. Point is that the economic dogmas are malleable, and the current ones also should not be thought as final word.  

Domestically the major action is seen in the bond markets where RBI conducted OMO for 20k Cr INR yesterday. The yields on the benchmark bond is down to 5.98 compared to yesterday’s highs of 6.07. The very fact that 14k Cr INR of 10-year paper was purchased by RBI yesterday at the cut off yield of 6.003 has helped the cause of the bond markets.