Fed Communication And The Markets

  • Bloomberg View – Mohamed A. El-Erian: How Central Bankers Get Their Communication Timing Wrong
    Comments by the president of the St. Louis Fed encouraged the markets’ belief that the Fed is their BFF.

    By suggesting that the Fed may need to be more stimulative than it has signaled recently, the comments spoke directly to many years of market conditioning and over-indulgence — — specifically, Bullard observed that recent economic developments “may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data.” The issue wasn’t the content of Bullard’s remarks. The views he expressed in his well-crafted speech are understandable given the recent patch of soft economic data, together with lingering uncertainty as to whether this is truly temporary or indicative of a persistent structural headwind. Indeed, there is room for genuine discussion, debate and further research. But it is the timing that is more problematic, as it fuels — once again — the deeply-ingrained view that central banks are the markets’ BFFs. Bullard’s comment, made in the context of ample market liquidity (both actual and perceived) — short-circuited any meaningful market consideration regarding the prospects for pro-growth fundamentals. And this is a needed and important process, especially given the degree to which asset prices have already been decoupled from fundamentals.

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