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The real consequences of the Fed?

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  • Asian markets seem to be a little calmer after the first frenzied reaction to the Fed's views on policy. The idea of reducing bond buying should perhaps be seen as a confirmation of real economic strength, and not some terrible omen of dark foreboding.
  • While the Fed's actions should not perhaps be considered too threatening, excess market volatility can be. The magic of banking system regulation can turn market volatility (for instance in Euro peripheral bond yields) into economic stress (less bank lending) or liquidity problems (more volatility).
  • The real consequence of Fed policy shifts may not, therefore, be the direct consequence of a more normalised liquidity policy, but the way in which more normalised policy highlights the stain of existing problems (regulation, the euro area), hitherto hidden behind the cushion of liquidity.
  • Chinese rates have been going the other way, with overnight rates falling sharply. The central bank has been administering a rebuke to banks, it seems, over excessive credit creation. Rebuke delivered, lesson learned, and rates can be allowed to reverse.

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