Why The Central Bank Changed Its Original Intentions?

After the Federal Reserve started the rate hike in December last year, the sharp turmoil in the global market has triggered discussions about the reversal of US monetary policy.

However, Goldman Sachs believes that the central bank's policy changes are relatively rare, both for the sake of maintaining credibility and for smoothing the interest rate adjustment.

Goldman Sachs wrote in a report that Fed officials have repeatedly pmitted to the market the possibility of further interest rate hikes this year, but financial markets are increasingly concerned about the risk of monetary policy reversal.

According to Goldman Sachs definition, the so-called policy reversal is the central bank's reintroduction of the reverse policy in only 1~2 quarters after the interest rate increase or the cycle of interest rate reduction started.

For the Fed, if it cuts interest rates in the first half of this year, it can be seen as a policy reversal; if the rate cuts appear in the second half and beyond, it can not be regarded as a policy reversal.

Goldman Sachs said:

Based on this definition, the central bank policy reversal is not common: we only found a "reduction of interest rate reversal" (Sweden, 2001), and the four case of "interest rate reverse" in all cases, accounting for 6% of the total case.

Goldman Sachs said that at some point two weeks ago, the market thought that the possibility of cutting interest rates at the FOMC meeting in June would exceed the rate hike.

There is nothing wrong with policy reversal itself, if economic growth or

The prospect is obviously deteriorating, so even if the interest rate has just been raised, the best policy option is still to cut interest rates again.

However, according to the above definition, since the middle of 2009, G10 countries

6 of them cut interest rates again after raising interest rates, including two changes in New Zealand's central bank and none in the US.

Goldman Sachs believes that one reason why policy reversal is seldom seen is that policymakers tend to deliberately not fully implement decisions based on communication with the market and maintaining the credibility of the central bank.

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In addition, the central bank also prefers "gradual" action to guarantee the smoothness of interest rate adjustment.

For example, if we consider that we should cut interest rates by 75 basis points based on inflation prospects, FOMC may take three actions, 25 basis points per time, instead of one action.

The United States did not reverse this definition. Europe and Japan once appeared: in August 2000, the Bank of Japan raised interest rates, then cut interest rates in February 2001, the European Central Bank raised interest rates in July 2011, and cut interest rates again in November 2011.

In the two policy reversals, market expectations for growth have dropped sharply.