How to decipher central bank signals

• Published in: Professional Adviser p. 24
• Main Author: Vaillancourt, Jason
• Format: Trade Publication Article
• Language: English
• Published: London Incisive Media Limited 04.09.2014
• Subjects: Central banks; Communication; Federal Reserve monetary policy; Full employment; Inflation; Interest rates; Monetary policy; Stocks; Volatility; United Kingdom > UK; United States > US
• ISSN: 1743-3339

One of the biggest factors influencing markets is the future direction of central bank policy in the US and UK. As the Federal Reserve continues to unwind its monthly bond-buying program -- also known as quantitative easing -- any impact the reduction of this stimulus has on financial markets will have a ripple effect around the world. While the Fed is mandated to promote both full employment and price stability, its optimal control framework means it is likely to tolerate adverse moves in one area if it is far from achieving its goal for the other. For risk assets, such as equities and high yield bonds, there is the potential for rising volatility as the Fed and the Bank of England struggle to handle the communication challenges surrounding their policy steps.