Leicester city’s rise and fall over the past year mirrors that of financial risk premiums. Fundamentals are probably average but performance can oscillate wildly. The Fed wants to see monetary conditions tighten: this can come through a stronger dollar, higher risk-free rates or increased risk premiums.
A new era has begun; what seemed inconceivable only a year ago has happened: Donald Trump has actually moved into the White House. His first week in office could be telling for the next four (or eight?) years. Disputes around the inauguration turnout aside, will we get a flurry of activity or will it be the start of Trumponomics getting bogged down in Washington bureaucracy? Alongside markets, we will be paying close attention.
Investors are constantly trying to judge the so-called “reaction function” of the Federal Reserve to understand the likely path for monetary policy. This understanding could get turned on its head in the next twelve months if Janet Yellen is replaced by Professor John B Taylor of Stanford University.
Some of the readers of Macro Matters have asked me whether I had perhaps written the last one, “The good and bad of low growth”, from a remote island during one of my shark diving trips, completely separated from markets, as I didn’t explicitly comment on all major events and headlines.