Central banks target long-term economic potential
The Federal Reserve and Norges Bank both surprised market expectations this week to the dovish side. In particular, the central banks were unwilling to take relatively solid data prints for granted and revised lower their longer-term forecasts for policy rates. Many investors will wonder whether the ECB’s recent cuts played a role; Norges Bank was quite explicit about the impact of lower external rates. However, the longer-term assumptions of the economy are just as important. The BoE targets economic slack, and although not as explicit, it is clear that the Fed and its peers have similar targets.
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