This year, one of the vulnerabilities for the global economy may be the behavior of financial markets. Although it will not be the only one. The IMF also points to trade tensions and geopolitics as other risk factors to consider. However, the uncertainty derived from financial markets is more complex to analyze since their instability also reflects the rest of the risk factors.
In its latest minutes, the Fed noted the disconnect observed between the behavior of the markets and the economy. Specifically, it expressed concern over the fact that strong economic growth coincided with weak markets. The US monetary authority concluded that it needs more time to understand this, which has led many analysts to rule out the possibility of further official interest rate hikes in the short term.
In theory, financial markets anticipate economic progress. In practice, they often seem to have a life of their own. Are we experiencing one of these cases now? A few months ago, the IMF asked central banks not to be influenced by their instability, which is normal in a context of monetary normalization. Now, on the contrary, it recommends that they be prudent in the face of the deteriorating scenario.
In a scenario like the current one where financing is ample, under financial conditions as favorable as those provided by banks, postponing the return to normality of monetary policy measures can negatively affect the expectations of economic agents and generate distortions in the price formation of financial assets. Preserving the financial stability achieved after the crisis requires prudent management of monetary normalization focused on economic data.
