In most walks of life, it's pretty obvious that if what you're doing isn't working, you should try something else. In the world of central banking, however, the strategy has been to do more of what isn't working, providing trillions of dollars and euros of liquidity via quantitative easing and even sending official interest rates in some countries into negative territory.
But what if low interest rates are the problem, not the solution? What if the continuous central bank efforts to add more stimulus end up suggesting that the economic outlook is so bleak that nobody in their right mind would take advantage of the largess?
In December, the Federal Reserve raised its benchmark interest rate for the first time since 2006 and suggested that the move would be followed by four more increases this year. Instead, it's almost the middle of the year, and the futures market is betting the Fed is more likely to remain inactive for the next six months than raise again. "This mismatch between what we're saying and what we're doing is arguably causing distortions in global financial market pricing, causing unnecessary confusion for future Fed policy and eroding credibility," St. Louis Fed President James Bullard said.
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