The Trouble with Stability

Capital and currency markets have broken loose from the Central Bank chains of "stability." We have always been skeptical of the stability policy mandate. Germinated in crisis mentality, stability was the out of chaos objective. The policy took on a global cache' that bloomed into the institutional suppression of the natural state of markets....flux.

Now, when prices adjust, they tend to do it harshly. Playbooks written under the smothering policy mandate are quickly rewritten when "down" predominates the net change. Markets are driven by liquidation. As the movement intensifies, Central Bankers and staffs increase words and even actions to restore the shackles. The entire scenario shows a core distrust of markets.

We would advocate getting the policy settings right and letting the markets do what they do. Exploding equity prices that retreat at the first sign of currency or rate change are, by definition, unstable. Constantly tweaking policy to the change is what race car drivers call "adjusting to the effect." Things are happening too fast to deal with the problem so you tinker elsewhere to restore temporary working balance. The driver knows the actual defect has not been addressed. Market stability is the consequence of proper monetary policy calibration not the objective.


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