Great expectations and the role of central banks in managing them


When the economy stalls we turn to central banks for stimulus measures. Throw in significant sovereign debt issues and central bankers here in Europe and in the US have plenty to contend with. 

Debate and speculation around interest rates and quantitative easing programmes is widespread. Financial markets are looking for any sign of a shift in attitude from central bankers as to their views on what may be needed to turn the situation around. That is why here in Britain, the release of the monthly Monetary Policy Committee meeting minutes has become something of a media event in its own right.

We noted with interest recent analysis on the Zerohedge blog of the US Federal Reserve’s Maturity Extension Program or “twist.” The policy was introduced to combat perceived weakening of the US economy. The post demonstrates the way in which those following these announcements analyse the wording on the economic outlook:

The description of the outlook suggested Fed officials now see slower growth and have a more pessimistic view on the labor market. Committee members expect growth to pick up “very gradually” (adding “very” to the previous language) and think the unemployment rate will decline “only slowly” (as opposed to “gradually”).

 It all goes to show how carefully central banks must word their outlooks with so many interested parties looking for a guide to what is in store.

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