Between March 11 and March 17, the four major central banks held their monetary policy meetings: the European Central Bank (ECB), the US Federal Reserve, the Bank of Japan (BOJ) and the Bank of England (BOI). On its face, the most accommodating or exploitative policy attitude and communication emanating from the ECB. The silver goes to the US Fed, the BOI goes to the Bronze and the general certificate goes to the BOI. The Central Bank of Japan appeared (terribly horrible!) Giving the impression that it was raising policy in the direction of a very slight restraint.
Words are important, but not numbers. An independent analyst named Ed Yardani tracks the evolution of the Central Bank balance sheets. In his latest analysis on March 17, he did not consider Boi to be one of the major central banks, but he listed the People’s Bank of China (PBOC) as one. Excluding PBoC, the annual growth rate of their balance sheets was 57.5% in February. Including PBoC, it is 46.3%. So, China’s monetary policy stance is far more prudent than anything else.
There was a lot of innocence in the press release after the two-day meeting of the US Fed’s Open Market Committee (FOMC). The panel wants to drive US inflation at an unspecified rate of 2% for the foreseeable future, and wants to anchor public inflation expectations at 2%. It should come as no surprise that American economist Larry Summers has been at least responsible for setting the U.S. macroeconomic policy framework for 40 years.
Going forward, Mawen Mohammed A. L-Arian of the bond market explained three options for the Federal Reserve: “It will try to defuse yield problems by signaling higher securities purchases, thereby putting another foot in inflation expectations”; Policy guidance Because yields are rising for the right economic reasons and the inflation pickup is ephemeral, there is a risk of an outburst from the market, which repeatedly ensures that the policy responds in a highly responsive manner to instability “; That there is a demand that markets will always be interested in adequate and capable reversible Fed liquidity injections. “
First, what the FOMC did at its meeting last week and what it will pursue is because the rise in inflation expectations is what it wants. Up to a point, that is, the consensus opinion of economists is much higher than one might expect or expect. If Fed bond purchases are used to keep nominal rates from rising in line with inflation expectations, then real yields will be even more negative. That’s a welcome development for the Fed.
However, it would be doomed if the Fed signaled the easing of its unusual monetary conditions. While this is the right thing to do from a long-term perspective, the Fed is very risky on the path to leverage and liquidity. Its chairman Jerome Powell tried it in 2018 and abandoned it. He now has only one prayer: “Don’t hit the fan while I’m there. It will be a day. Let it be so when I am gone. “
Both policy makers and markets are now suffering from debt and liquidity. They were caught or trapped by debts created since 2007. If they go for the ‘normal’ policy setting and the normal actual rates, they will get in trouble. The pain can be very severe if someone does not think of doing the right thing for the economy. Thus, in general, major central banks expect their policy options to be driven from one meeting to another between El Erian’s first two options.
Are the bond and stock markets currently uncomfortable as they want a return to normal monetary policy? No, they want to make sure Alan Greenspan’s vintage Fed ‘put’ choice is clear. They do not just want a verbal guarantee, they want the Fed to see its discussion by increasing property purchases quantitatively and qualitatively. After using an addict for a certain dose, it ceases to give the desired forgetfulness after a while. The dose is increased. That is what we are witnessing now. Both the drug dealer and the addict are locked into their behavior. They cannot change it at will. Accidents only happen and they happen. Like Greencil.
So, let’s be clear. We are currently seeing a provocation, but it is not for policy tapping; Monetary policy will not slow down and courage will provoke big provocation. This is a different type. It is foolish to think that financial markets are chanting slogans for intelligence and prudence among policy makers.
This means that capital will flow from foreign jurisdictions into reasonably stable developing economies, which will be plentiful in the years to come. The total gross foreign direct investment equity into India from April to December 2020 was $ 51.47 billion, the highest in two decades. It is noteworthy that this happened despite the economic downturn.
India are batting with a good wicket. Rash strokes should be avoided. Stay calm, runs will come. More in the next columns.
V. Anantha Nageshwaran is a member of the Prime Minister’s Economic Advisory Council. These are the personal views of the author.