FOMC Minutes, Dollar strength and understanding Greenspan

Alan Greenspan, the former US Fed Chief was famous for making arcane statements regarding the Fed policies. He once famously summed up his communication style saying that “I know you think you understand what you thought I said but I am not sure you realize that what you heard is not what I meant”. The statement obviously puts into play an entire cottage industry which revels in deciphering what Fed statements mean. The situation has not changed even 15 years after Greenspan’s retirement. We are still sieving through the Fed minutes to decipher what they said and whether it means risk on or risk off.

The FOMC minutes for the July policy were released yesterday. The crux of the policy was that the US economy is still in the doldrums and would require further help in the coming days. They concur that the rebound in employment is already slowing and any further improvement would depend on broad and sustained reopening of business activity. This part is dovish. The Fed though cast doubts on whether yield caps as a tool make sense as of now, and also the widely expected inflation targeting measure was postponed for some later date. This part was not so dovish.

The markets though were quick to react with longer tenor yields going up by a bit, the dollar index sprang back to 93 levels and stock markets yielded some ground. The Dow Jones ended in mild red. EM Currencies retreated against the dollar in the opening today. Gold is trading at 1950$/oz.

The other important news was around the second pandemic relief package where it was reported that the Republican side is now preparing for an even smaller sized package than what they had previously announced. We had written yesterday that there was a climb down by the Democrats where they were ready to go with a USD 1.5 trn relief package to meet the other side half way. This essentially means that the stalemate on the package will continue. The Fed has also raised its concern multiple times that fiscal stimulus by the government is required to put money directly in the hands of the public. The Fed’s efforts of easing the liquidity conditions are secondary as they are predicated on businesses availing low cost loans and starting their shops again. But that can only happen when the virus allows the reopening.

Some relief to the risk assets came with the news that the US and Chinese negotiators plan to meet for video talks in coming days to discuss the phase one trade deal. This is some respite after President Trump said earlier this week that he doesn’t want to talk to China now. In another development on this front, the US suspended or terminated three bilateral agreements with Hong Kong, a follow up to the last month move of revoking HK’s special status.

Domestically, the rupee has opened weaker against the dollar in line with the overall dollar strength seen globally. The Indian bonds have opened on a slightly positive note with GS 5.79 2030 back below 6%. With the RBI MPC minutes slated to be released today the market expects some dovish tone essentially to make up for the no rate action in the last policy. The markets are also waiting for the auctions due tomorrow where 30000 Cr INR worth G Secs will be on the table.