Tags: Short-Term | Thinking | Central Bank | Policies

Short-Term Thinking Infecting Central Bank Policies

Short-Term Thinking Infecting Central Bank Policies

By    |   Tuesday, 23 February 2016 08:14 AM


At least two candidates for president believe short-term thinking is a cause of many of the ills the economy. Hillary Clinton promises to reshape America and promises that “nowhere will the shift from short-term to long-term thinking be more important than on Wall Street.”

It’s easy to dismiss this as campaign rhetoric because it isn’t true that short-term trading has held back economic growth. In order to function in every investors’ best interest, Wall Street needs a combination of short-term traders to provide liquidity and long-term investors to provide capital.

But a lack of truth has never stopped politicians and advisers from pursuing bad policy.

Unfortunately, campaign rhetoric now seems to be seeping into the work of economists who should know better.

A new report from the Organization for Economic Cooperation and Development (OECD) concludes Japan has exhausted all options to stimulate growth and needs structural reforms. The basis of this conclusion is the fact that negative interest rates adopted on January 29, less than a month ago, have failed to stimulate the economy.

While chairing the Federal Reserve, Alan Greenspan repeatedly referenced the fact that monetary policy affects the economy with a lag. That lag can be as long as 12 to 18 months. This wisdom has been lost in recent years. Greenspan’s successors have watched stock market reactions to statements to gauge the effectiveness of their policies. Now the OECD is expecting rate changes to affect economies within days of an announcement.

With a focus on the short term, central banks will lose sight of their missions to ensure stable economic growth over time. This shift in focus could explain why the recovery of recent years has been lackluster. If Presidential candidates bring their misguided beliefs to the White House, global economies might never achieve their full growth potential.

Michael Carr, CMT, is a subadviser to a mutual fund family and a chartered market technician. To read more Michael Carr, CLICK HERE NOW.

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At least two candidates for president believe short-term thinking is a cause of many of the ills the economy.
Short-Term, Thinking, Central Bank, Policies
325
2016-14-23
Tuesday, 23 February 2016 08:14 AM
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