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Market Insights

Why do Central Bankers speak so often?

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“I’ll just check the economic calendar to see what’s going on tomorrow”

  • CENTRAL BANK SPEAKER
  • CENTRAL BANK SPEAKER
  • Jobs Data
  • CENTRAL BANK SPEAKER
  • Manufacturing PMI
  • CENTRAL BANK SPEAKER
  • CENTRAL BANK SPEAKER

ARGGGH Make it stop!

All central banks do this. The Bank Of England, European Central Bank, Federal Reserve all communicate their policies to the markets at meetings, and then appear regularly at events to discuss the economy and monetary policy in depth..

Some days it seems there are more central bank speakers than data points!

And who even cares about their views on climate change and inequality? They’re economists (some are even lawyers...)

Next we’ll be asking Greta Thunberg if the Fed will hike at the next meeting!

OK, rant over… So, why DO central bankers have so much to say?

There’s a few things going on.

The obligatory speeches that policymakers are duty bound to make rarely yield new information.

Away from the widely discussed inflation and employment metrics of central bank mandates, there’s something that often flies under the radar.

Financial Stability

Sounds really dry and boring, but it goes a long way to explaining what’s happening under the surface.

First, let’s define the term properly. According to the World Bank:

There are numerous definitions of financial stability. Most of them have in common that financial stability is about the absence of system-wide episodes in which the financial system fails to function (crises). It is also about resilience of financial systems to stress.

A stable financial system is capable of efficiently allocating resources, assessing and managing financial risks, maintaining employment levels close to the economy's natural rate, and eliminating relative price movements of real or financial assets that will affect monetary stability or employment levels.

Let’s dissect the bolded points.

Resilience to stress

Hard to see how central bankers speaking regularly builds resilience in a financial system. We’ll come back to this point.

How about eliminating relative price movements that will affect monetary stability?

This one has legs.

See, many people believe that central banks are somehow in control of everything.

It’s most likely a comforting illusion. Now, if they chose to control everything, they could...

But (free) markets as we know them would cease to exist.

It’s perhaps more useful to see central banks & ‘the markets’ as persistent negotiators.

Sometimes, they’re both pulling in the same direction. Other times, they’re at odds with each other.

Whilst markets are a reflection of the consensus of market participants (and the top method society has found so far to objectively value financial assets), few would agree that markets are always rational.

Left to their own devices, markets might decide that a central bank should respond to a certain data point or development. This collective & sudden decision creates a domino effect: a rapid repricing in anticipation of the monetary response.

Not very stable...

This is where the constant communication comes in.

  • Humans crave certainty (therefore, markets crave certainty).
  • The speeches are all about reassurance and removing guesswork.
  • Markets will at least have one ‘certain’ thing to lean on: Monetary policy.
  • It’s not a perfect method, as markets will often resort to reading between the lines. However, it’s arguably better than only communicating with the market once per month/six weeks.
  • 2021 has been the perfect example of this.

Transitory inflation.

Even as the US hit 6.2% CPI in October 2021, markets remained calm.

Imagine the market response if the ‘transitory’ message from the Federal Reserve had not been so repeatedly and thoroughly drummed into the market psyche for the prior nine months?

When the Federal Reserve finally announced the taper, it was widely expected. The market response was relatively muted.

Maybe central bank speeches do create resilience to stress after all…

Not investment advice. Past performance does not guarantee or predict future performance.

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This page/website is not directed to EU clients and falls outside the European regulatory framework and is not in the scope of (among others) the Markets in Financial Instruments Directive (MiFID) II.
By continuing you acknowledge to view the content provided by Skilling (Seychelles) Limited, which is authorised and regulated by Seychelles Financial Supervisory Authority, and that your decision was made independently and at your exclusive initiative and no solicitation or recommendation has been made by Skilling or any other entity within the group.

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Important notice

This page/website is not directed to EU clients and falls outside the European regulatory framework and is not in the scope of (among others) the Markets in Financial Instruments Directive (MiFID) II.
By continuing you acknowledge to view the content provided by Skilling (Seychelles) Limited, which is authorised and regulated by Seychelles Financial Supervisory Authority, and that your decision was made independently and at your exclusive initiative and no solicitation or recommendation has been made by Skilling or any other entity within the group.

Continue