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Central Bank Policy Error: Survey Finds it's Making Investors Nervous

central bank monetary policy
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EDITOR NOTE: Investors say they’re worried about a central bank policy error. But they’ve got this, the Fed thinks. It’s not unlike a person who chooses to enter a packed indoor concert venue that’s reputed to have poor maintenance, shoddy electrical systems, and hence real fire risk. That person, amid a crowd of other concertgoers packed to depths verging on suffocation, thinks he can outsmart the crowd and get to the exit door should the first sign of a fire break out. When it does, he learns that everyone was thinking the same thing. Trampling among bodies stacked to bone-crushing pressure, helplessness leads to anguish, both infused with panic and immobility. Above it all, the noxious smoke floats freely as a prelude to conflagration. The stock market is the venue. The electrical system is the Fed. And the fire is the disastrous consequence of being in the wrong place at the wrong time...despite knowing better. 

Stocks have slipped, and bonds have rallied, since the Federal Reserve unexpectedly forecast two interest rate hikes in 2023, and one regional Fed president said the first increase could come next year.

A survey now finds “central bank policy error” is the third biggest risk to the market, behind only higher-than-expected inflation and bond yields, and new variants to the coronavirus that bypass COVID-19 vaccines. The Deutsche Bank survey of more than 400 participants found the percent flagging central bank mistakes as a risk has grown to 43% in June, from 39% in May and 21% in April.

The survey found 82% still expect inflation to rise after the COVID-19 pandemic, versus just 10% expecting deflation. A fifth, 21%, say U.S. inflation will average over 3% over the next 5 years, while 17% see inflation under the Fed target.

On Monday, the yield on the 10-year Treasury TMUBMUSD10Y, 1.484% fell further, sliding as low as 1.35%.. Stocks slipped in Asia, notably in Japan where the Nikkei 225 NIK, -0.72% dropped over 3%, though U.S. stock futures ES00, -0.14% were higher.

John Williams, the president of the New York Fed, is set to become the first dovish member — outside of Chair Jerome Powell — to speak since the Fed decision, and Powell is scheduled on Tuesday before a House committee. St. Louis Fed President James Bullard, whose comments rattled markets on Friday, is also due to speak on Monday, alongside Dallas Fed President Robert Kaplan.

Original post from MarketWatch

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