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Chapter 21, Part III. A Bit More on Monetary Policy. Page 4

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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    That speech cleared out the situation and investors calmed down, since the Fed gave them a hint that it will not change its current policy, since this is just a temporary splash in prices.

    The same could happen if, say, you’ll see that some macro indicator – inflation (PPI, CPI), Unemployment, GDP etc that will show some extraordinary change. Surely it will lead to some short-term volatility growth due to speculators’ activity, but the market will wait for reaction from the Central Bank, because the economy needs to be stable. Investors like stability, the same as Central Banks. So, as Treebeard in Lord of the Rings said “Don’t be hasty”.

    From the points that all participants like stability and we have not to be hasty, we come to the conclusion that a Central Bank will usually adjust policy very gradual by small steps. It makes it not because of just stability, but also because it needs to see how much this adjustment will impact the overall economy. Usual adjustments of the interest rate is 0.25-0.5% and cycles of increasing and decreasing could last for 1-3 years. Downward adjustment usually comes faster, as in any market and steps could be bigger - 0.25-1%. But changing rates for 0.5-1% usually happens during real problems in economy, like it was in 2008.

    When you plan some trade, you collect all the necessary data, analyze it and only after that pull the trigger. A Central Bank does the same thing, but it plans not just a single trade but the whole domestic economy. Also keep in mind that real production has some momentum, so the economy could show some lag in responding to changes in monetary policy due to this momentum for as much as 1-2 years. This is another reason for cycles appearing.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
    #1 Sive Morten, Dec 22, 2013
    Lasted edited by : Sep 25, 2016
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