After so many years of being guided by two recurring principles, such as weak growth and low inflation, the prospect of something different now creates uncertainty. Ultimately, we have shifted from a simple monetary policy design, which focused on whether the measures applied were sufficiently expansive, to assessing when and by how much official interest rates can rise. This is currently only the case in the United States, with other countries to follow.
Twenty years ago, there were analysts skilled in dissecting the messages from central banks: Fedwatch, ECBwatch, BOJwatch. But, I admit, the messages from the Fed under Alan Greenspan always seemed the most captivating to me. A single word, even a gesture at any conference, could generate a shift in market expectations. Such was the importance of the former Fed Chairman. Are markets less dependent on central banks now? Quite the opposite. The difference is simply that we have forgotten that monetary policy can be restrictive (sounds bad, doesn’t it?) when, until now, the bias for analysts and investors ranged between neutral and expansive.
