CB communication, Fed structure and transitory risk on

Markets latch on to every word which the central bankers say. In the US speakers from Fed regularly interact with media on public forums apart from the scheduled testimonies to the congressional committees. Not only the Fed Chief but the other speakers who are part of FOMC or are related to regional Feds are constantly shadowed for what they are saying. Similar is the case elsewhere too for example ECB’s Lagarde, BOE’s Bailey and BOJ’s Kuroda’s public statements are sieved through for any hints on possible monetary actions. Is the inflation too hot or too low, is it transitory or structural, is the job market robust, is the recovery going to be a V shaped or W shaped, every word gets wide coverage.

Fed however remains in a league of its own. The elaborate structure of Fed which was designed a century back having different layers. The central bank comprises of Federal Reserve Board of Governors, 12 Federal Reserve Banks and a Federal Open Market Committee. The genesis of this elaborate structure was the law makers wanted to keep the central bank decentralised. We have written previously that how the concept of an all-powerful central bank was always viewed with suspicion in the US congress and it was vetoed out twice in 19^th century. The current structure came into place in early 20^th century post a bank run when multiple private financiers came together and pooled their wisdom and heft together to arrive at a decentralised model. A book by the name 13 Bankers by James Kwak and Simon Johnson describes the moment of formation of the bank in all its juicy detail. But that’s a topic for another day.

Now the point which we were discussing before we as usual digressed was the central bank communication. Fed with all its army of governors, local chiefs and FOMC members feeds the market with constant source of views and opinions. The comments yesterday by St Louis Fed President James Bullard and BOE’s Andrew Bailey on inflation in their respective economies were well received by the market and added to the dovish sentiment. Readers will note that the word which gets predicated with most of the inflation discussion is now “transitory”. And this is true across the both sides of Atlantic. Dovishness is followed by risk on. The first harbinger of risk on is Dollar Index, when you want to move out from the safest and the most liquid asset, one must be having some appetite for risk. Dollar Index is nestled calmly below 90 levels for three days now. The EM currencies are having a good day too. The Indian Rupee is below 73, South African ZAR is below 14. US yields are also down, 10-year UST is trading at 1.60.

One issue which one needs to think is that what events can change this consensus sentiment that inflation is transitory? One can follow the upcoming Central Bank meetings for both the DM and the EM economies. If you see that the rates are raised, then the fair assumption is that “transitory” is a rhetoric tool only. This week we will have rate decisions from Bank of Indonesia and Bank of Korea, it will be worthwhile to tune in.