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Central banks prove adept at listening to stock market voices

Published Thu, Feb 7, 2019 · 09:50 PM

THE United States Federal Reserve has made a sharp turnaround over the stance of monetary policy normalisation towards a more dovish approach that considers global economic and financial conditions, as well as muted domestic inflation.

It was done by signalling status quo on policy interest rates for the time being as well as a willingness to stop the balance sheet runoff earlier than initially envisaged.

Markets immediately welcomed the moves with higher stock prices and a weaker US dollar in view of the Federal Reserve giving up automatic plots on both interest rate hikes and the balance sheet cut.

But why did the Federal Reserve wish to have automatic plots to begin with? The answer is important to predicting what lies ahead. For one, the US economy continues to be in a favourable shape. Real GDP growth of 3 per cent in the US is expected for 2018 and 2.3-2.5 per cent growth is forecast for 2019. Notably, the US labour market is close to full employment with growing labour shortages, and core personal consumption expenditure inflation has been…

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