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Chapter 21, Part III. A Bit More on Monetary Policy. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 22, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Right, so in a few words –A tightening policy applies when a Central Bank struggles with inflation, while an easing policy is when it tries to stimulate economic growth.

    Pipruit: Sir, is it possible for an economy to stand relatively stable and not demand any shock therapy? What do Central Banks usually do in this case?​

    Commander in Pips: Of course it could. Well, they try to support current equilibrium between growth and inflation and to make it so that this balance holds as long as possible. This is called supportive or neutral monetary policy.

    Pipruit: And how they decide when and what policy to apply?​

    Commander in Pips: Well, each Central Bank has its own breakeven numbers for inflation, growth and a lot of other different indicators, such as unemployment that each calculates on its own methodology, as well as the Central Bank’s preferable values. When some of these numbers reach a breakeven number or start to change together in one or the other direction, showing some tendency in the economy, the Central Bank starts to adjust monetary policy.

    On average for mature economies, acceptable inflation should be no more than 1.5-2% per year. This number is treated as healthy inflation that is correlated with moderate growth of the economy. When something happens that leads to splashes in inflation to the upside or to the downside – it needs to be explained by Central Bank.

    For example, not a long time ago (beginning of 2011) there was splash in commodity prices. Investors have become worried, since commodity prices are a leading indicator of inflation. But Ben Bernanke, chairman of the Federal Reserve has stated in his testimony that this is a temporary event and the Fed Reserve does not expect some stable growth in commodities, and inflation will remain anemic (inflation was near zero, since there was a recession in US).
    #1 Sive Morten, Dec 22, 2013
    Lasted edited by : Sep 25, 2016
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