Central banks can only do so much

Posted by: Paul Donovan

04 Aug 2020

Daily update

  • The pandemic is a fiscal policy problem rather than a central bank policy problem. Lockdowns meant government policy took away peoples' incomes. Fiscal policy needed to replace those incomes. The Federal Reserve's Senior Loan Officers' survey emphasized the limits on what central bank policy can do – credit conditions tightened, signalling that banks are cautious about transmitting policy to the economy.
  • President Trump indicated that a US firm would be able to purchase the Chinese video app TikTok, but that it would need to pay a "substantial sum" to the government. Any enforced payment to the government, however randomly applied, should be treated as a tax. In this case, the tax itself is not especially economically important. The random nature of the tax, applied almost at whim, adds a risk premium to doing business in the US.
  • In Japan, Tokyo consumer price inflation increased, with higher education costs. There was not really a general price increase, however. In advanced economies, consumer prices are likely to stay relatively low in the near term. Spare capacity will weigh on the economy although some relative prices will shift. Producer prices are due from the Eurozone.
  • US factory orders are due but not a major market focus.

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