The Markets are Having Greater Influence Over Monetary Policy
- Any hope of a Fed hike in June has likely collapsed in June - even if the central bank initially intended to move
- Monetary policy has targeted influence over financial stability, and speculation renders it effective or ineffective
- Both the ECB and BoJ have pushed their influence to the point of showing their limitations relative to the market
Having trouble trading in the FX markets? This may be why.
We know that central banks can generate serious volatility for the markets - the Fed, ECB and BoJ have given us clear evidence of that over the years. However, the balance of power seems to have shifted materially recently. It is increasingly clear that the market's expectations and its anticipated reactions to monetary policy are shaping what policy these authorities actually pursue.
The Fed is offering some of the most recent evidence of this speculative weight in policy determination. The FOMC has remained adamant that it would push forward with normalization of its monetary policy (so long as data warrants). Yet, the projected pace has consistently been lowered as the opportunities have come and gone. Data trends have certainly had a hand in this, but so to has the market's view. Recognizing that surprising the market can lead to destructive volatility in the financial system - which in turn poisons the market conditions the group is trying to keep steady - the bank has emphasized its communications effort. The circumstances and expectations have likely rendered a June 15 hike impossible.
Meanwhile, other central banks may have found themselves following the rule of the with a little less decorum. The ECB adopted QE expansion efforts that were sizable but were met with a decisively contradictory market response. Escalation did little to regain control of speculation. Circumstances for the BoJ are much the same with the adoption of negative rates rendering little of the market influence it once had over the Yen's bearings. Perhaps the PBoC has maintained some greater degree of control owing to the vagueness of its situation, efforts and capabilities. Then again, perhaps it hasn't been put to the test to the same degree. We discuss how market sentiment is increasingly dictating monetary policy in today's Strategy Video.
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