Easy monetary policy has been the most important factor supporting stock markets since the Great Recession, and so it's no wonder investors await communications from central bankers rather like a dog begging for a treat.
Rover's eyes are riveted on the desired payload. Hover it in front of Rover's nose, and the salivary glands go into overload. Snatch it behind your back, and the disappointment is palpable.
It's the same thing with investors and central banks, the holders of all tasty things. Markets have been well-trained these past few years, and their response to what monetary policymakers will or won't do or say is downright Pavlovian.
Consider, as an example, the lead-up to Wednesday's release of the minutes from the U.S. Federal Open Market Committee's July meeting.
You'll remember that at the close of that meeting on July 27, the Fed ended up holding its target interest at 0.25 to 0.50 per cent, as expected, and as it had in all the other meetings this year. In the following weeks, investors have largely expected the Fed would stand pat through 2016 — generally good news for asset prices, including stocks. Most estimates gave less than a 20 per cent chance of a rate increase in September, and less than 50 per cent of one by December. Accordingly, stock prices have done very well in August, as indexes in the U.S. and Canada reached record highs.
Yet in its comments back in July, the most influential central bank in the world hinted at something that could potentially be a fly in the Liv-A-Snap. While holding rates steady, the Fed suggested that risks to the economy had eased — a positive note that left investors to wonder whether a rate hike was more imminent than they had come to expect.
This week, those fears gained some momentum, as some Fed officials signalled that the long era of accommodation was drawing to a close. On Tuesday, New York's William Dudley suggested that a rate increase next month was entirely possible. Meanwhile, Atlanta's Dennis Lockhart also hinted that a September hike was on the table, perhaps to be followed by another one later this year.
Utterly predictably, investors initially responded like Rover when he senses his diet of yummy comestibles is in danger. U.S. and Canadian markets declined; the greenback surged while the Japanese yen and gold prices fell.
And then, suddenly, all was sweetness and light again. James Bullard, the hawkish president of the St. Louis Federal Reserve, released comments on Wednesday morning in which he suggested that low growth and low inflation mean interest rates need only rise to 0.63 per cent over the long term. In other words, if the Fed does increase its target rate this year, it won't have to do it again for a long time.
The treat was back in play. Markets salivated once more. By the time the Fed actually released the minutes (2 p.m. eastern standard time), stocks had pretty much regained what they had lost in the morning.
And what did those minutes say when they finally came out Well, Fed officials are keeping their options open. Surprise, surprise.
Some governors thought job gains had been so strong that a rate hike was justified now or later this year to combat inflation; some pointed out that inflation was so low that they still had plenty of time to act, should they need to.
Some felt confident the global economy had absorbed the shock of Brexit; others worried over the long-term consequences for British, European and to some extent U.S. growth.
Some worried that continuing low rates could be creating a mispricing of risk in financial markets (a worry supported by soaring equity and bond prices). Yet most believed they needed more data to better judge whether economic conditions merit a removal of accommodation. In the end, only one of the FOMC's 10 voting members, Kansas City's Esther George, voted against maintaining the current target. (No surprise there: George has been calling for a rate hike for some time.)
And so it goes. The Fed, like the Bank of Canada, is data-dependent. It remains in wait-and-see mode, for now. Next month, it might move. It might not. It's the same old routine.
We can expect more of the same next month, in the lead-up to the Fed announcement on Sept. 21. Before then, there will no doubt be more competing signals from Fed officials, and more reactive market moves that will probably prove meaningless.
No doubt, in this atmosphere of mixed and/or vague messages, investors can complain that central bankers are going out of their way to keep them in the dark, that there is insufficient clarity around policy, let alone any guidance as to which direction the Fed is moving in.
But here's an idea to chew on: if investors don't want to be treated like a dog by central bankers, maybe they should stop acting like one.