Central banks’ strategies to cement dovish bias
- Fears of secular stagnation and a greater focus on inequality are leading to a new fiscal and monetary policy era, especially in the US.
- The new Fed strategy is geared to full employment and will tolerate higher realised inflation. Some aspects or metrics remain rather
vague, calling for a close monitoring of the labour market and inflation expectations. We present new tools to monitor the evolution of both.
- The ECB’s new strategy strengthens the forward guidance on rates, augments the policy toolbox and makes monetary
policy greener. In the low inflation environment, the financial conditions will be a key driver of the ECB’ s policy. We
develop a financing conditions index and find that its importance for monetary policy has increased.
- The BoJ will stick to its accommodation of fiscal expansion as its best means to overcome deflation risks.
- Persistent monetary support is a boon for risk assets but increases their exposure to the rise in yields which may follow.