Key takeaways from the FOMC Minutes of Jan-2021 meeting
The broad message remains that easy money and low rates are here to stay.
a. There was little surprise that the FOMC in its January meeting virtually reaffirmed the original stand to keep monetary policy loose and easy well into the future. The minutes reveal that there was virtual unanimity on this issue among the 12 members.
b. This view had resulted in almost a consensus conclusion on two fronts. Firstly, the Federal Reserve kept the short-term borrowing rates in the range of 0.00% to 0.25% and maintained monthly asset purchases at $120 billion. That implies torrents of liquidity into markets and expansion of Fed balance sheet.
c. All members of the FOMC were not only unanimous about keeping rates close to zero and asset purchases elevated, but also did not see any deviation in this policy for the foreseeable future. That gives a reasonable estimate of the short to medium direction.
d. Based on a reading of the high frequency data, the FOMC members also concluded that recovery in US GDP was more likely to be back-ended than front-ended. That meant that the economic conditions were currently far from the Committee’s longer-run goals and hence there was no choice but to remain accommodative.
e. Ahead of the Jan-2021 FOMC meeting, several economists had hinted that the Fed may start tapering sooner rather than later. But the policy statement and the minutes have given a totally contrary picture. Not only on the rates front, but even on asset purchases, there are no signs of relenting.
f. FOMC members lauded the quantitative easing (QE) program. The committee has also underlined that despite the Fed’s balance sheet expanding to $7.5 trillion, the QE had materially eased financial conditions and was providing substantial support to the economy. That is an indication of the road ahead.
g. The minutes underline that the Fed would not just be driven by a spike in inflation or labour market recovery. It has set a goal of “broad and inclusive” labour market recovery, across racial, gender and income lines. In short, Fed is going to set a lot of preconditions to even start considering a shift in the current accommodative policy.
h. Fed Chair, Jerome Powell, has gone to the extent of saying that “any talks of tapering were premature”. Powell underlined that the current guidance was created after a lot of deliberation and there would be no change unless there was a very strong justification for such a shift. That means; any shift is unlikely for the time being.
i. Finally, Fed has issued a subtle warning to the markets that asset prices were elevated as is evident from the valuations of the Dow and NASDAQ. The minutes also admitted that household borrowings were at an all-time high but for now the Fed believes it is small price to pay for growth.
What must India carry from the minutes of the FOMC?
The US is India’s largest trading partner and runs a trade deficit with India. Hence the US actions do matter. Here is what India must glean.
• Growth in the US is not coming back in a hurry and that raises questions over India’s optimistic recovery estimates for FY22. India may be forced to take a serious re-look at whether such optimism can be supported.
• Rates are likely to be accommodative in the foreseeable future, so falling inflation should directly benefit the Indian economy. The risk that Indian bonds would get outpriced in the global bond markets is not to happening any time soon. Low rates are also good for equity valuations.
• What really matters to equity markets is flows and that will gain from low rates and $120 billion of asset purchases. It has generated a lot of liquidity and India has been a big beneficiary if you look at nearly Rs225,000cr flowing into Indian equities in FY21. Valuations may be a matter of opinion, but nobody argues with liquidity.
• Finally, there is a risk that the RBI and the Finance Ministry must focus on. The more the Indian markets revel in US liquidity and monetary looseness, the more India would tie up its markets to the vagaries of US economic policy. In 2013, when the US Fed just hinted at tapering, Indian equities and bonds crashed vertically. That is the big risk. The more India appears to gain from US liquidity, the more it makes itself vulnerable to US shifts.