President Trump has evinced a clear preference (an unprecedented one) for social media as a form of communication to his “100 million followers” due to its instant effect, unfiltered nature and real time broadcasting power. In recent years, the Fed too has had a preference for early and frequent telegraphing of its message and its intentions. This accords with the Bank of England’s policy of forward guidance as to its interest rate policy. But when is good communication TMI? When is it a case of “oversharing”?
That point may have arrived according to an interesting perspective in today’s WSJ. According to the article an over-reliance by the markets on the Fed’s softly, softly approach to interest rate rises and desire to manage the market reaction, has lulled markets into a false sense of security. This is reflected in the low levels of volatility in markets (as expressed by the VIX) which are pressing historic lows and again below 10%. Low levels of volatility lure investors into false senses of security and ultimately the temptation to take on more risk is hard to resist. It is suggested that an “ambush” or surprise orchestrated by the US Fed would be an essential “cruel to be kind” medicine for markets – in order to jolt them out of complacency and false sense of security. While such a move is a gamble – and the specter of another taper tantrum is always a possibility (and recent gambles have not always paid off . . c.f. the recent UK snap general election) – it would ultimately create more normal, and perhaps resilient, market conditions.
President Trump has suggested that he wants US foreign policy to be less predictable – a statement which in itself caused an uproar. But in foreign policy, as in parenting, it is said to be good to reserve an element of surprise. It leads to fewer poor habits forming and overall more readiness for the unknown. Perhaps it is time for markets to be subject to a few tough parenting tactics by central bankers?
https://www.wsj.com/articles/why-the-fed-should-surprise-us-more-1498233889