This article talks about how the fed has outsourced monetary policy to the financial markets which may not be a bad thing for numerous reasons. The fed has scaled back the number of interest rate increases they expect to carry out this year after investors did the same. This is because speculation can cause numerous trends that may be harmful for the economy. Yellen said the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed’s experience over the last six months also shows how difficult it can be for the central bank to align investors’ view of optimal monetary policy with that of its own. Yellen commented on the relationship between the central bank and the financial markets highly praising them. She said that “This mechanism serves as an important ‘automatic stabilizer’ for the economy,” The final decision that the fed chairman makes will be highly dependent upon how the investors in the financial market respond to changes in the economy.
Link: http://www.bloomberg.com/news/articles/2016-03-30/yellen-outsources-u-s-monetary-policy-to-the-financial-markets
We've discussed what effect such policy responses have on the overall state of the economy. If the changes encourage investment that's good for the goods and services markets and that will shift the IS curve to the right meaning consumption and income will go up which is overall a positive effect and it'll help stimulate the economy.
ReplyDeleteI wonder how outsourcing the monetary policy will affect the fiscal policy? If the financial markets are over concerned with the monetary policy, will the Fed pickup the slack? Hopefully both will be adequately pursed by the Federal Bank.
ReplyDeleteI believe the idea of outsourcing monetary policy to the financial markets is pretty creative. Since the central bank and the financial markets have a symbiotic relationship with each other. I am wondering what kind of reaction financial markets will have? And what role will the Fed play after outsourcing its monetary policy?
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