As we enter 2022, the key question on every investors mind is no longer the pandemic, but rather, when and by how much the Federal Reserve or the Bank of England will hike interest rates. Inflation runs high and the pressure on these two central banks to do something, anything, about it is increasing.
Consider: what if the central bank is not a leader but a follower by necessity. While not ignoring the impact of a large actor in the markets, when we look at short term government security rates, say 3-month treasuries, the Fed Funds rate follows changes, not leads. This of course is not sufficient, in and of itself as correlations are not causation, but what makes more sense, a $4 trillion bank reserve balance driving a $75 billion domestic debt market, or the other way around.
Consider: what if the central bank is not a leader but a follower by necessity. While not ignoring the impact of a large actor in the markets, when we look at short term government security rates, say 3-month treasuries, the Fed Funds rate follows changes, not leads. This of course is not sufficient, in and of itself as correlations are not causation, but what makes more sense, a $4 trillion bank reserve balance driving a $75 billion domestic debt market, or the other way around.