This page has been archived and commenting is disabled.
Michael Woodford Warns "By Blinking [On Taper], [The Fed] Has Made A Negative Reaction More Likely"
Widely credited with being the seminal paper at the 2012 Jackson Hole conference and setting the scene for "threshold-based" policy, Michael Woodford discusses his views on the costs and benefits of "forward guidance" in this Goldman Sachs interview. The Columbia professor explains how he thinks about asset purchases versus forward guidance (it’s a mistake to think of asset purchases as a way to avoid having to talk about future policy intentions), and why the market and the Fed have seemed so disconnected at various points this year despite substantial attempts by the Fed to communicate more clearly (there were mistakes in communication, but that does not mean the situation would have been better if the Fed had instead kept its mouth shut, especially in such unprecedented times.) Ultimatley he warns, "by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise."
Goldman Sachs' Allison Nathan Interview with Michael Woodford,
Allison Nathan: Haven’t central banks always tried to influence interest rate expectations? What is so special about forward guidance today?
Michael Woodford: No, central banks have not tried to do things that were at all similar to this in the past. Until quite recently, all central banks were very reluctant to say things in advance about future policy decisions, and this reluctance remains to varying degrees at many banks. The forward guidance adopted by the Fed and other central banks, which tries to influence expectations by actually saying things about policy intentions, is therefore a new policy tool and indeed one that has become more important given the near-exhaustion of the most traditional policy tool – adjusting policy rates – as rates across the major economies already hover around their effective lower bound.
Allison Nathan: What are the benefits of forward guidance?
Michael Woodford: If policy expectations matter – and I think it is pretty clear that they are crucial to how longer-term assets end up getting priced – then there are two kinds of advantages of explicitly discussing future policy by the central bank. One advantage is that it can reduce misunderstandings about policy intentions, which, in turn, can reduce uncertainty for the central bank about the effect of its policy on the markets. In principle, talking directly about policy intentions would allow the use of more complex policies, which might not otherwise be pursued for fear that they would not be understood without explanation. The second general type of gain from explicitly talking about future policy is to help ensure that the policy committee itself will follow through with its commitments even though it may have motives to depart from them later on.
Both of these potential advantages are particularly clear when you reach an effective lower bound on policy rates. At that point, convincing people that the policy rate will remain “lower for longer” can help ease financial conditions today, providing additional stimulus to the economy when traditional tools no longer can. But talking about the intention of “lower for longer” is crucial because being at this lower bound is a very unusual situation, so there is little past experience that people can look to in order to anticipate how the central bank is going to respond. There is also a clear need for the central bank to commit itself in advance in order to achieve the stimulative benefit. That is because of course later – when the stimulus has worked and the economy is improving - the bank will have little motivation to actually keep rates low (the so-called “time inconsistency” problem) unless they committed to do so in advance. To overcome that problem, the central bank needs to make an explicit promise that would be difficult or embarrassing to just completely ignore later.
Allison Nathan: What are the dangers of forward guidance?
Michael Woodford: The most obvious danger, which has likely been the main reason for central banks’ reluctance to talk about future policy in the past, is the possibility that a policy commitment that looks sensible at some earlier time turns out to be unwise because things happen in the meantime that the central bank did not expect. Those costs can be reduced without losing all of the potential benefits of forward guidance if the central banks think carefully about what kind of commitments about future policy should be made. It makes sense to avoid unnecessary specificity about things that do not need to be specified too precisely in order to achieve the desired change in expectations. For example, in the case of a commitment to keep the federal funds rate low for longer in order to stimulate the economy today, the central bank could make a very specific commitment about the path of the policy rate over time. But there would be much more likelihood of embarrassment in that case than if the bank instead committed to keep rates low until certain economic conditions arise, whenever that may be.
Allison Nathan: The BOE and the ECB have said that the intention of their shift to forward guidance has been to clarify their policies rather than to commit to “lower for longer”. Will this approach negate the benefits of the guidance?
Michael Woodford: Yes, to some degree. In the case of the Bank of England, the structure of their statement – with several so-called “knock-out” provisions - as well as their insistence that the statement was nothing more than a clarification of the BOE’s normal reaction function, has given people little reason to change their prior beliefs about how soon the Bank would raise rates. Because of this, the statement does not seem to have moved market expectations much and in the way that the BOE thought it should. Similarly, the ECB has taken small steps towards doing something that you might think of as forward guidance, but has also done so quite hesitantly; they are also inclined to deny that they are committing themselves at all about future policy. Given the aversion to talking about policy intentions in the past, this hesitation is not surprising, nor is the fact that even central banks that have decided that they should experiment with the policy do it in a way that simultaneously denies that they would ever do it, because it goes against their instincts. But that to some extent defeats the purpose of the policy. Their approach is quite different from that of the Fed, which has more clearly embraced the policy of “lower for longer”.
Allison Nathan: Is the Fed’s shift to outcome-based or “threshold” guidance from “calendar” guidance a good thing?
Michael Woodford: Yes, because threshold guidance is ultimately more credible. The problem with calendar-based guidance is that if there is a real promise to keep rates at a certain level until a certain point in time no matter what happens, it would be a pretty reckless policy. And because the policy would be reckless, it would ultimately be hard to believe. That would be the case unless the central bank restricted itself to a short horizon over which there could not be many surprises. But if the horizon is too short, the impact on future expectations would be small. So I think the possibility of making a commitment that extends far enough into the future for it to be news about future policy that would significantly matter to asset pricing is much more plausible if it is based on economic conditions rather than just based on a date.
Allison Nathan: There have been several instances when the use of forward guidance has had an opposite impact than the central banks intended – why?
Michael Woodford: The use of forward guidance is not some kind of magical tool where the mere fact that the central bank says something means that people will then think exactly that. A central bank needs to give people a reason to think something new or different about what it is going to do. A critical part of effective policy is therefore understanding what people will think they are learning about the bank’s policy. An example of this that I talked about in my Jackson Hole paper last year was the experience of the Swedish Riksbank in April 2009, when they cut their policy rate to 50 basis points and accompanied this with a statement and a published projected rate path that showed policy rates remaining at 50 basis points - the lowest level ever - until the beginning of 2011. To the Bank’s surprise, market forward rate expectations rose rather than fell following the announcement. Why? Because the big “news” of the statement was not the central bank’s lower projected rate path, which was in any case just a projection and not a commitment, but that the central bank was apparently regarding 50 basis points as a floor, which was higher than at least some market participants had previously guessed. That news shifted the markets’ most likely expected path of the future policy rate up rather than down.
Allison Nathan: How would you explain the violence of the bond market selloff in May/June, which came in response to a very small change in the Fed's message?
Michael Woodford: I am inclined to think that it indicated some mistakes in Fed communication prior to May that led to two possible types of misinterpretation about the Fed’s intentions. First, some people may have interpreted the start of “taper talk” as a signal that the Fed was trying to withdraw accommodation more broadly, and was also preparing to start raising interest rates. That was a surprise to the FOMC; they didn't think they were saying anything that would suggest they were preparing to raise rates. But they had left themselves open to that misinterpretation by failing to explain earlier the criteria that would determine the path of asset purchases in a way that sounded very different from the criteria that would determine the path of interest rates. The forward guidance about both asset purchases and interest rates focused on labor market conditions and sounded very closely related. I do not think that the Fed meant for the criteria to be the same, but they failed to sufficiently explain why they would not be. Second, there may have been a number of people who thought the purchases were going to continue at the current rate for a lot longer, and learned suddenly that they would not. If that was news to people, it was again a failure of communication because I doubt that the Fed had ever thought asset purchases would continue at the current rate beyond 2013. Despite these failures, it would be a mistake to conclude that the Fed should not have started speaking about tapering when it did; the problems would not have been avoided if the Fed had just kept its mouth shut, because the misinterpretations would still be there. And shutting your mouth is potentially setting you up for an even harder adjustment later when the misinterpretations must eventually be exposed.
Allison Nathan: Why was the market so surprised by the decision not to taper at the September FOMC?
Michael Woodford: It certainly seemed to me that during the summer the ground was being prepared for a slowing of the rate of purchases. As to why they did not actually do it, I think it was a reaction to the fact that the market had responded to those earlier hints more violently than expected. And there was evidently a decision that they could not risk a further unexpected negative reaction to an actual announcement of tapering. That was probably a mistake in judgment. By September, a modest reduction in purchases was widely expected, so I do not think there would have been a big negative reaction to that announcement. But, by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise.
Allison Nathan: Is there actually greater volatility and uncertainty in the markets as a function of this desire to communicate more, but not quite getting it right?
Michael Woodford: I don't think so, because the question is: what would be people's understanding of policy if the Fed had not tried to talk about it at all? There would be a lot of uncertainty if the Fed were adopting a policy of silence, especially given that we are in unprecedented territory. When conditions are unusual is exactly the time when trying to provide some explicit guidance is potentially most valuable, even if it is not a panacea.
Allison Nathan: How important are asset purchases as a signal of commitment to accommodative policy?
Michael Woodford: I think that a lot of the effects of asset purchases have been signaling effects. The advantage of purchases as a signal is that it is something that people see being done. It's not just talk, so it grabs people’s attention. And the fact that action is being taken gives some indication of where the majority of the FOMC stands. But the likelihood that purchases have had some signaling effect does not necessarily mean that they are the most effective way of providing the signals that the central bank wants to send. There has at times been a temptation to view asset purchases and forward guidance as two alternative means to providing further stimulus, so that we can avoid having to say more about future policy if instead we are acting to make additional asset purchases, and I think that is a mistake. To the extent that the main goal of purchases is to give a signal, then you should think consciously about what signal you are trying to give and be comfortable delivering that signal. Thinking about asset purchases as part of a coherent and consistent attempt to give signals about future policy is one thing. But it's very different from the idea that there will be a mechanical effect of purchases that allows you to avoid saying anything about future policy intentions.
Allison Nathan: What’s next for Fed communication?
Michael Woodford: It would be valuable for the Fed to provide more guidance about the process of policy normalization. When it is clear that they will begin slowing the rate of asset purchases -- which I think will have to be fairly soon, although not necessarily this year given that they did not do it in September -- the next obvious question will be how quickly the rest of the unusually easy policies will be unwound, and what the broader 'exit strategy' will look like. The last time they spoke about that was in 2011 and it’s pretty obvious that what they said then is no longer an operative strategy. They will need to say something about that at least by the time that they start tapering, because at that point it will be very clear that we are no longer in a period of just staying the course. But a likely reason not to make big statements right now is of course the imminent hand-off of the Chairmanship in January.
»
- 10139 reads
- Printer-friendly version
- Send to friend
- advertisements -
No one even knows who owns the Fed, and yet they speak as though the Fed means well, but is just misguided.
Crazy!
They all know who owns the fed, which should speak volumes on the integrity of what they say. (hint, single biggest stockholder is the morgue)
I believe that they, AKA the morgue, must actually believe we are all their stiffs.
This whole thing is horseshit, horseshit horseshit
Did the Fed change anything?
No.
If they'd not said anything then there'd have been no Taper Tantrum debate
And ensuing further decimation of whatever remaining credibility was left.
But oh, fucking no!
They got up and ruminated about all sorts of if ands and buts, maybes and coulda shoulda wouldas and on top of it, never even had the balls to speak with one voice, with everybody waltzing about in public discussing Janet Yellen's halitosis and Ben's hemorrhoids besides anything other than the official Policy Which Ben Had Outlined A Year Before.
Fuck me.
Now this equivocation?
This is slowly devolving (the whole fucking country) into an amateur hour carney side show of geeks and clowns.
Forward guidance, my ass.
Worked so well with earnings....
Just shut the fuck up and let the minutes be debated and belly button navel gazed as in the olden days.
Goldman won't be taken by surprise. Now go back to BTFATH.
Tax the fed
100 years of back taxes levied on the shareholders to be paid in lawful money , (gold )
(As per the US constitution)
If you can't audit you sure as hell can tax em!
Spit!
Too late. JPM already sold their gold vault to the Chinese. Nothing left.
Let them explain it to the IRS.
I'm not listening.
poor grogman
sure tax the fed. by all means. first though end the fed. make all the members responsible for the debt incurred, if they cannot or fail to pay in full it falls to their children, their children's children. money is all they understand. hit them with total costs, taxes, reparations, legal costs, the emotional costs, all of it. hound them as fully as the hound negligent accounts.
Now we are getting somewhere. Eliminate limitation of liability, clawback all their ill-gotten gains and replenish the now imaginary social security 'trust fund'. They are the bandits who facilitated stealing it in the first place. Eliminating limitation of liability will have the side benefit of opening an avenue to bankrupt montsanto and the pharma pirates.
No one can outbid a printing press.
These charts of corporation (including media) and bank consolidated power are mind-boggling and world-changing…a Fed-market means monopoly control.
10 Corporations Control Almost Everything You Buy — This Chart Shows How
Ten mega corporations control the output of almost everything you buy; from household products to batteries to food.
According to this chart via Reddit called "The Illusion of Choice," these corporations create the chain of supplies that flow from one another. Each chain begins at one of the 10 super companies.
Here's just one example: Yum Brands owns KFC and Taco Bell. The company was a spin-off of Pepsi. All Yum Brands restaurants sell only Pepsi products because of a lifetime deal with the soda-maker.
$84 billion company Proctor & Gamble owns companies that produce everything from detergent to toothpaste. Unilever produces everything from Dove soap to Klondike bars.
It's not just the products you buy and consume, either. In recent decades, the very news and information that you get has bundled together: 90% of the media is now controlled by just six companies, down from 50 in 1983, according to a Frugal Dad infographic from last year. [These six companies and notable properties are GE (Comcast, NBC, Universal Pictures, Focus Features); NewsCorp (Fox, WSJ, NY Post); Disney (ABC, ESPN, Pixar, Miramax, Marvel Studios); Viacom (MTV, Nick JR, BET, CMT, Paramquint Pictures); Time Warner (CNN, HBO, Time, Warner Bros) and CBS (Showtime, Smithsonian Channel, NFLCOM, Jeopardy, 60 Minutes).]
It gets even more macro, too: 37 banks have merged to become just four — JPMorgan Chase, Bank of America, Wells Fargo and CitiGroup in a little over two decades, according to this Federal Reserve map.
The nation's 10 largest financial institutions hold 54% of our total financial assets; in 1990, they held 20%. As MotherJones reports, the number of banks has dropped from more than 12,500 to about 8,000. (The chart shows how.)
The numbers are stark, and the charts visualize the mind-bending reality. This is the world we live in.
http://www.policymic.com/articles/71255/10-corporations-control-almost-everything-you-buy-this-chart-shows-how
Blinks? More like "Eye's wide Shut!"
The Rapid blinking, stuttering, and all the twitching makes me believe Benny is on heroin jone-zzzin' for his next fix!
You say blinks, I say farts.....
Let's get one thing straight - the Fed will NEVER taper. Not while it exists in this form. All the handwringing over will they or won't they is just chatter to influence and control the markets while QE continues.
-As long as the U.S. government keeps spending like a drunken sailor,
-As long as the economy remains hooked on monetary stimulus,
-As long as unemployment remains where it is,
-As long as Obamacare remains the law of the land and continues to ramp out, destroying the healthcare system as it goes,
. . .the Fed will continue to increase money printing and will not taper.
The Fed blinked because it was bluffing. It continues to bluff, and will keep on playing with a straight poker face to control the markets. Only idiots and muppets continue to believe they will 'taper'. The reason the markets feel so bad right now, aside from stocks going ever higher on the existing QE, is that we don't have ENOUGH QE as it is, according to them. The Fed is holding back because they don't want to kill the bond market (too late!).
So they either keep interest rates in check and let deflation kick in, destroying the ponzi (by tapering). Or they cause the markets to go ever higher and spike interest rates and kill bonds (by printing moar money). What will they do?
THEY WILL PRINT. They will do this to save their own jobs and the jobs of our parasite politicians. You think anyone in congress is willing to fall on their own sword to save the government? Look at the government shutdown. That should tell you all you need to know.
The Fed bluffs it will not taper 'until 2014'. Then when Ol' Yellen gets here in January, the inkjets will explode.
This isn't rocket surgery.
Obamacare destroying the healthcare system?
Hells bells, that's just the tip of the spear.
The unintended consequence of this clusterfuck is gonna be triple or quadruple the number of uninsured when its all said and done.
People gonna be dropped, companies stop plans and the cost of replacing the stuff is through the moon.
Its gonna have a major fucking drag on the Macro Economy, Folks.
Mark My Words.
That September, 2015 bottom-falls-out-of-box forecast by M. Armstrong looks increasingly plausible.
Ask yourselves if you have to pay 2,000 moar per month in premiums and 20,000 in out of pocket before deductibles....ask how much ACA will bankrupt people, families, and businesses as well as a dive in the sales of consumer staples and consumer discretionary stocks.
Ask yourselves if grown men, those 535 people will actually let ACA blow up the economy...and blow it up times 400 worse than Lehman.
Ask but don't assume it isn't the plan
Exactly. Taper talk coincided with the gold take-down, last Spring. Just buyin' time, at best.
BTFD or BTFATH, it doesn't matter, till you see the mushroom clouds in the sky.
And dock that guys pay for being smart and stupid at the same time.
Michael Woodford: It’s all by design.
Looks like the FED has a venereal disease screwing all the taxpayers during the final glory hole fucking of wealth redistribution..
A two-step process for you to write on a failed faith based monetary currency system.
Sit back, and watch how Blank/and blank friends lost money & we didn’t. When can we expect your next future posted article?
Most people who continue their education to obtain their PhD without ever working in non-education private industry are cowards. Most voting members of the Federal Reserve Board have a PhD and have never worked in non-education private industry!
PhD- [Plumbing Hardware Dispatcher]
They have been so tainted from understanding the difference between clown card debt school [brainwashed revenue generating] holding indentured slave vs. common sense.
No comment needed.
http://www.rockefellerfoundation.org/
The fed missed its only chance to taper... it would have been painful, but healthy in the long run. instead they just cranked up the printers, its all over now.
Precious metals and bitcoins, get some.
New FED's playbok written by mIchael Woodford:
Peter Schiff On Gold Catalyst: Janet Yellen Exposed - The Truth Behind the Myth
Peter Schiff separates truth from the mass media hype about Janet Yellen's real track record. As we have discussed before, her core beliefs are even more neo-keynesian than those of Ben Bernanke. The new play book for the FED is written by Michael Woodford and it will be even more fundamentally positive for the Gold. We can expect continuation of "pro-growth policies" with very little regard for the created bubbles along the way.Peter was right about the Housing Bubble in 2006, he was right about the "Tapering" in September, what will happen if he is right again with his Call on Gold? We will provide his discussion on Gold and our entry on Michael Woodford to dig it out more for interested.
http://sufiy.blogspot.co.uk/2013/10/peter-schiff-on-gold-catalyst-janet....
In exactly the same way as Paulson put a gun to taxpayers heads and said cough up a trillion or the banks get it,the banks are now saying to the Fed £85 billion a month (or whatever we want) or the market gets it.
You couldn't make this shit up. Until such time as the Fed calls the banks bluff,they'll keep printing. And,as the Fed will NEVER call their shareholders bluff......
Self Destruction
The default mode of life is self destruction. Without purpose, you will self destruct. There is purpose everywhere. Choose one. Experiment. Choose another. If you do not provide for your community, government will grow to do it for you, at a much higher cost, your freedom to choose. The TBTF Empire WMD is simply socialized self destruction mode.
Iraq is sitting on a sea of oil, but finds itself occupied and living in poverty, while American MSAs embrace fracking. The Ag REIT complex is creating a global dust bowl, and the American Government issues a war decree on weather, as an infrastructure make-work project. Those are no accidents of nature. That is human stupidity.
The global economy has no purpose, and, if you haven’t noticed, all the global powers, derivatives of energy and food control, are gearing up for war, accelerating the process with corn, which is of scant more nutritional or energy value than pot, in the name of green energy. Clear cutting a forest to grow corn and install wind turbines is yet another ratchet up the stepladder of stupidity from nuclear, because it destroys diversity, purpose, faster.
The space program failed because it was a war program, and the fall back, the auto era, is a failed relic of the past. GM doesn’t sell cars. It sells credit debt, to control energy to its own end, and thanks to the bail out/in, it’s now controlling your food. Boeing doesn’t sell jets. It sells credit debt. America sells debt, as the solution to debt. You might want to short circuit the short circuit, and grow your own victory garden, before these morons cut off your food and energy supply lines, automated by Silicon Valley for the purpose.
Or, buy more war bonds. The limousine liberals thank the drive-by Christians for participating. Now, back to the coliseum, for the football game and player IPOs, driven by Facebook, Twits without a clue, with the lowest overall quality and highest priced healthcare in the world, pleading for more corn syrup and ethanol.
Isn’t cartel extortion with prohibition grand?
Don’t give stupid credit and expect less stupid. Only you can provide purpose. Consensus is simply too slow to escape its own gravity, which is why it implodes every time. The circuit breaker simply increases the destruction with another false assumption. How you time it depends upon your development.
The empire shorts itself. All you have to do is look at it, from a distance.
What a bunch of bullshit Michael Woodford! You personify everything that is wrong with FED monetary policy. Every fucking scenario of "expectations" sought by the FED that you have noted was countered by the market with something else. Its a fucking miracle you fuckers still have a job! And this statement: "A central bank needs to give people a reason to think something new or different about what it is going to do" symbolizes the trickery and deceit that envelopes the central bank in everything it says and everything it does. How about strong dollar policy and quit bailing out the fucking government - send a signal of stewardship and accountability. But, we all know that will never happen, which is why what you say and what you do isn't worth fuck all. And how the fuck can you be surprised - Lucas demonstrated your folly nearly 40 years ago. What part of that did you not understand? Fucker.
Don't kid yourselves...
They will NEVER taper.
Taper? They can't taper. The economic elites are gaining massive income increases through the bubble in equity share prices brought on by 85 billion a month is money printing which floods liquidity into the stock market and increases the net worth of America's 1%. When all the benefit goes to the economic, political and military elites, what is not to like. They will taper anything related to social insurance for the bottom, while printing vast sums of money to boost income transfer to the top. Again, WHY would the government change a thing that is working so well for the masters of the new American plantation.
I urge you, go see "12 Years a slave"! You will watch the fate of one free working black man stand in for the 99% as the present government takes the average American away from freedom and a good paying productive job and shoves him into the 2013 American vast slave plantation, engineered by the globalist cabal who run America, the EU and any nation the Armed Forces of the West can conquer. It is a plantation economy we are headed for, if you don't like it, we have a vast highly paid police state ready to bash your face in on orders from the Masta!
they havn't blinked, they've gone deep shut eye; Rip Van Winkle type; leaving the press on for ever.
I must have missed the part where the Fed ever once said they were going to taper, thus negating the imagined blink. Stop putting words in their mouths and listen to what they actually say, not what GS imagines would be good for their latest trade.
Does a seminal paper contain semen?
Only if it tapers at the end.
"why the market and the Fed have seemed so disconnected at various points this year despite substantial attempts by the Fed to communicate more clearly"
Clearly opaque communication. We may or may not taper, based on information we don't have.
"I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise."
A negative reaction is guaranteed, just as it was when they started talking about taper. When QE1 ended there was a negative reaction. When QE2 ended there was a negative reaction. When the FED pulled in the slosh during the TARP debate, there was a negative reaction.
I read that interview and all I could think of was that what a speechwriter and teleprompter is to the usurper in chief and the executive branch, "forward guidance' and a digital printing press is to the chairsatan and the Fed.
Bankers: producing wealth out of debt since 3000 BC.
The fed will taper but will find some other way to be even more accomodating....QE4eva wont stop, just the branding will change.
See Cyprus.
http://www.forbes.com/sites/markmcsherry/2013/11/03/week-ahead-twitter-ipo-and-60-trillion-reasons-central-banks-goose-markets/
The total value of stocks around the world recently rose above $60 trillion for the first time since 2007 – and central banks like the U.S. Federal Reserve have played a big role in that rise by buying bonds and other assets to stimulate economies and provide cheap money.
Market investors are obsessed with the issue of how long this stimulus — much of which is called “quantitative easing” — can continue.
On Friday, U.S. Federal Reserve chairman Ben Bernanke is expected to speak on a panel at the International Monetary Fund, and China’s Communist Party will stage the third plenary session of the central committee on economic policy reforms on Saturday.
Central banks around the world, including the European Central Bank and the Bank of England, are expected to make key announcements on interest rates throughout the coming week and edgy investors will pay forensic attention to the language of their public statements for any clues to future policies.
The role of the central banks in markets has taken on new importance.
In the last five years since the 2008 financial crisis, the total assets of the world’s major central banks are estimated to have more than doubled to roughly $15 trillion. That’s equal to a quarter of the current value of global shares.
World stocks lost roughly $30 trillion in market capitalization after the 2008 crisis — but have bounced back by doubling in value during the past four or five years thanks partly to the stimulus measures of the central banks.
U.S. stocks climbed recently to record highs after the Federal Reserve surprised markets by deciding not to reduce or “taper” its $85 billion-a-month bond buying stimulus measures – for now.
Looking forward, it seems that every economist or financial analyst has a different view on when — or if — the Fed will begin to reduce its stimulus, and investors remain edgy about the prospect of the stimulants being taken away.
It has rarely been so important for the central bankers of the world to mind their language.
$60 trillion of the public’s wealth is riding on those words.