Conditioning Expectations
Expectations for what and how the Fed can deliver its tapering decision are maturing. Judging by the response in rates markets and generally robust risk performance, expectations favour a cautious Fed. On their part, a central bank may seek to avoid challenging expectations excessively either, especially with sentiment relatively fragile. Nonetheless, there is every chance that a central bank may also choose to lean against market pricing. This is the BoE’s current stance but success is generally limited. The Fed may face a similar dilemma, but more so regarding the market’s perception of economic fundamentals rather than policy per se, and addressing this issue will have implications in FX and other asset classes.
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