The Federal Reserve’s insurance policy
Its beneficial impact comes with the usual trade-off of generous insurance risking high moral hazard and adverse selection. Specifically, markets have translated this as signalling a low risk of inflation resurgence and disorderly financial instability
It should come as no surprise that many economic reasons have been put forward for the Fed’s aggressive cycle start.
Mohamed El-Erian
If taken at face value, Federal Reserve chair Jay Powell’s justification for the unusually aggressive start to the central bank’s rate-cutting cycle reinforces the market belief that we never exited, nor are likely to any time soon, the monetary policy regime that first flourished in the run-up to the 2008 global financial crisis.
That regime of ample liquidity provided by the central bank to markets now serves as an insurance policy against an ever-broader range of risks.
It
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