I will address the topic of central bank communications, with a particular emphasis on those times when financial markets and the central bank have different expectations about what a central bank decision will be. Such situations lead to surprises and often to market volatility.Of course, not all surprises are equal. For one, communications that shift or solidify expectations that are diffuse or not strongly held are less likely to be disruptive than communications that run counter to strongly held market beliefs. Further, there are worse things than surprises. The central bank must provide its views regarding the likely evolution of monetary policy, even when this view is not shared by market participants. A concern for surprising the market should not be a constraint on following or communicating the appropriate path of monetary policy. That said, there are good reasons to avoid unintended surprises in the conduct of policy.In the pits all interest rate swaps are equally surprising to everyone. If the market appears to have one belief than you already are off equilibrium.
Tuesday, April 18, 2017
Lousy banking theory
Posted by Matt Young at 5:00 AM