Monetary Policy Advising

Former President of De Nederlandsche Bank and FSB Chair, Klaas Knot: Monetary Policy Lessons for Policymakers Just watched a very insightful presentation by Klaas Knot. What I liked is that it was not “monetary policy in a textbook.” It was monetary policy as it is actually practiced: under uncertainty, with real trade-offs, and with financial stability always in the background. A few takeaways for policymakers: 1) Monetary policy is about managing uncertainty—not forecasting perfectly. We rarely have perfect real-time data. The right question is not “are we sure?” but “is our strategy robust if we’re wrong?” 2) Credibility is a monetary policy tool. When the framework is trusted, transmission is stronger and less costly. When trust weakens, the same moves can deliver less—and create more friction. 3) Flexibility matters—but so does the anchor. A clear medium-term anchor (price stability) is essential, but implementation has to adapt when shocks hit. 4) Monetary policy and financial stability are connected. When vulnerabilities build in the financial system, they eventually show up in the macroeconomy—and complicate policy decisions at the worst time. 5) Communication is part of the policy package. Clear, consistent communication shapes expectations and improves outcomes—especially when volatility is high. Overall, a practical reminder: monetary policy is not just about rates. It’s about institutions, credibility, expectations—and resilience. Lecture: https://lnkd.in/g3rdc5J4 #MonetaryPolicy #PublicPolicy #CentralBanking #FinancialStability #Macroeconomics #Governance #IMFCEF

"Ryan is Curious" - Why is monetary policy still treated like a niche topic—when it drives every major business decision? 📍 Monetary Policy isn’t just for Economists—It’s for strategic leaders With Jackson Hole in the spotlight, central bankers are shaping the future of interest rates, inflation, and economic growth. I get asked this all the time—especially when the Fed signals a shift. 👉 “What does this actually mean for my business?” Let’s break it down: 🧠 Monetary policy is how the Federal Reserve influences: • Inflation • Interest rates • Credit availability • Economic growth 🏛️ The FOMC (Federal Open Market Committee) meets 8x/year to: • Hear economic data • Deliberate direction • Vote on policy 🔧 Their toolkit includes: • Open market operations • Reserve requirements • Discount rate changes • Interest on reserve balances These tools shape how much money banks can lend, how confident businesses feel, and how fast your strategic plans can move. 💬 Why this matters now: At Jackson Hole, the Fed is signaling a firmer stance on inflation. That means tighter conditions, slower growth, and more pressure on decision-makers. If you’re leading a business, investing in property, or planning for scale—this affects you. This isn’t just macroeconomics. It’s operational strategy. It’s your hiring roadmap. It’s your investment timing. It’s your ability to move with confidence. Let’s continue raising the bar on economic literacy. What’s one signal or concept you wish was explained more clearly—or one you rely on to make strategic moves? Drop it below. This is my public service announcement. 😊 #Finance #Leadership #Markets

The Fed did not increase rates. Is it important? The real question should be how to position financially based on Fed monetary policy. Today, we held an interesting discussion with our portfolio managers - Juan Xavier Sanchez, CFA, and Jose Luis Cova. I will share some highlights, explain how we position investment portfolios, and advise clients.   Our analysis suggests the Fed is looking at core inflation and wage growth as the key metrics for their approach to rate increases and liquidity in the economy. Why? Core inflation includes shelter (real estate), medical expenses, and transportation, which tend to be ‘sticky’ in nature, meaning they take longer to change. Food and energy are excluded because of their volatility and cyclical nature. Wage growth spiked during the last two years, fueled by low unemployment. A strong labor market is a good sign of a healthy economy, but too much growth can cause higher inflation. According to the Federal Reserve Bank of Atlanta survey, wage growth spiked in the summer last year by about 6.7% and decreased to about 5.3% this summer. How are we positioning investment portfolios? In equities, we favor companies with strong balance sheets and cash flows that help them avoid financing at high rates. In terms of fixed income, keep a relatively short duration. We are not going long because the market isn’t compensating enough for the risk; interest rate and credit risk are involved. Alternatives have been a key focus for our portfolios. We have been finding great opportunities in the private credit space, including loans to corporations and real estate. The yields are attractive, and the volatility is much lower than in public markets. How are we advising regarding family finances? With high rates, it makes sense to be a lender, not a borrower. It used to be the other way around for many years. It might sound simple; the problem is that these changes take time, and personal issues are involved. For example, families looking to buy a home with a mortgage today must spend much more. Today, it seems better to put more money down and less debt than a few years ago.   Some families had a line of credit against their investment portfolio and could get a loan for less than 2% a few years ago. The problem is that these loans have variable rates, and today, they cost about 5% more because of Fed hikes. Does it make sense to hold fixed-income securities that yield lower than the line of credit? Even equities, is the expected return worth it once you adjust for risk? In closing, the evolving monetary policy landscape requires a proactive approach to both investment and personal financial planning. We're in an era of transition, with the Fed's actions permeating multiple facets of the financial world. While rate hikes can be a tool to curb inflation, they also underscore the significance of adapting one's financial strategies in line with the broader economic climate.

The Federal Reserve just reinforced what many of us managing corporate balance sheets have suspected: more rate cuts may not be coming particularly soon. At its March meeting, the FOMC held rates steady at 4.25%-4.5%, but the bigger message was in what they didn’t say. They removed language suggesting balanced risks to inflation and employment and introduced a key phrase—“uncertainty around the economic outlook has increased.” In other words, don’t expect a clear policy direction soon. Some key takeaways… • Rate cuts are not a given. While the median projection still calls for two cuts in 2025, more FOMC participants now expect just one—or none at all. • Inflation concerns remain. Powell explicitly linked higher inflation forecasts to tariffs, underscoring how external factors are complicating the Fed’s decision-making. • Balance sheet runoff is slowing. The Fed is reducing its quantitative tightening (QT) pace to prevent liquidity stress in the Treasury market, though mortgage-backed securities will continue rolling off. What This Means for CFOs and Treasurers… For companies with floating-rate debt, this is a reminder to plan for an extended period of borrowing costs at this level. The market may still be pricing in rate cuts, but the Fed is clearly in “wait-and-see” mode. • Liquidity management remains critical. The Fed’s QT slowdown is aimed at avoiding a funding squeeze, but liquidity conditions could still tighten. • Watch trade policy closely. Tariffs are emerging as a wildcard for inflation—and, by extension, monetary policy. Powell said it best: “We are in no hurry.” Neither should we be when it comes to assuming lower rates. The best approach? Stay agile and scenario-plan rigorously. #finance #economy #policy #inflation #federalreserve #business #tariffs

🎯 𝗡𝗲𝘄 𝗴𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗡𝗚𝗙𝗦 𝘀𝗵𝗼𝘄𝘀 𝗵𝗼𝘄 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗰𝗵𝗮𝗻𝗴𝗲 𝗶𝘀 𝗮𝗳𝗳𝗲𝗰𝘁𝗶𝗻𝗴 𝗰𝗲𝗻𝘁𝗿𝗮𝗹 𝗯𝗮𝗻𝗸 𝗽𝗼𝗹𝗶𝗰𝗶𝗲𝘀 These key NGFS resources cover how climate change and the energy transition impact inflation and growth, and what that means for price stability.  Both reports are useful for anyone navigating the monetary side of the transition, especially looking at how climate risk moves through macroeconomic policy.  👉 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗰𝗵𝗮𝗻𝗴𝗲 𝗮𝗻𝗱 𝗺𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗽𝗼𝗹𝗶𝗰𝘆 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆: 𝗮 𝗴𝘂𝗶𝗱𝗲 𝗳𝗼𝗿 𝗰𝗲𝗻𝘁𝗿𝗮𝗹 𝗯𝗮𝗻𝗸𝘀 This is a practical guide that gives central banks:  • A framework for weighing climate-related trade-offs between inflation and output  • New quantitative analysis on how physical and transition impacts hit monetary policy strategy  • A look at how climate change shifts policy transmission and structural variables like the natural rate of interest  • A step-by-step process for responding when a climate shock hits 𝗥𝗲𝗮𝗱 𝘁𝗵𝗲 𝗿𝗲𝗽𝗼𝗿𝘁 𝗵𝗲𝗿𝗲: https://lnkd.in/e_iAmVMa 👉 𝗠𝗮𝗰𝗿𝗼𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗲𝗳𝗳𝗲𝗰𝘁𝘀 𝗮𝗻𝗱 𝗺𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗽𝗼𝗹𝗶𝗰𝘆 𝗶𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗼𝗳 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗺𝗶𝘁𝗶𝗴𝗮𝘁𝗶𝗼𝗻 𝗽𝗼𝗹𝗶𝗰𝗶𝗲𝘀 Using the IMF's Global Macroeconomic Model for the Energy Transition (GMMET), this report shows:  • Mitigation policies create real trade-offs between stabilizing inflation and output  • The size of that trade-off depends entirely on which transition policies get adopted, and where  • Gradual, orderly transitions minimize the pain. Policy uncertainty makes it worse  • Even so, the costliest outcome by far is no transition at all 𝗥𝗲𝗮𝗱 𝘁𝗵𝗲 𝗿𝗲𝗽𝗼𝗿𝘁 𝗵𝗲𝗿𝗲: https://lnkd.in/eXC4WWmn I really enjoyed these resources given my team's work with central banks on climate risk. NGFS guidance shapes a lot of this work in practice, we drew on their supervisory stress test frameworks in a recent project designing a best-practice stress test for a central bank, and these two reports extend that same rigor into the monetary policy side. Get in touch if you're looking for support on climate risk assessment or stress test design. Network for Greening the Financial System (NGFS) #centralbanks #monetarypolicy #climaterisk #netzero #ngfs #climatefinance #transitionrisk #stresstesting #climatepolicy

Historically, the Bangladesh Bank targeted money supply to achieve its monetary policy objectives. In doing so, it used to periodically announce certain targets for monetary aggregates such as the reserve money, M2, private-sector credit etc and tried to achieve those targets. Nudged by the IMF, the Bangladesh Bank is now transitioning to interest-rate targeting. Under the new approach, the policy interest rates will be the Bangladesh Bank’s primary monetary policy tools. Therefore, the policy interest rates must be well-calibrated and changes in them should affect the overall interest rates, asset prices, exchange rates, inflation, the level of employment, and output. For this transmission mechanism to work, the Bangladesh Bank needs to ensure that the short-term, risk-free interest rates, such as the yields of 3-month T Bills, remain in the vicinity of the policy rates. Then the market-determined credit spreads will be added to these rates to determine the other short-term interest rates and market expectations about future short-term interest rates will determine the long-term interest rates. For this to happen, the Bangladesh Bank must print money when the short-term, risk-free interest rates are higher than the policy rates and shrink its balance sheet or de-print money when the short-term, risk-free rates are lower than the policy rates. In other words, to successfully adopt interest-rate targeting, the Bangladesh Bank needs to be flexible with regard to money supply parameters. That requires a change in the mindsets of the central bankers, economic analysts and financial reporters who are used to dealing with the growths, or the lack thereof, with respect to the reserve money, M2, private sector credit etc.

Last week, the Central Bank in my country lowered its key interest rate by 50bp. The past years have been a rollercoaster for central banks worldwide. When the pandemic hit, they rushed to lower interest rates, but then inflation got out of control, and they rushed again to increase rates. There are some central banks that have been on hold for quite some time now, but a lot have initiated interest rate cuts again. Sometimes, customers ask me what I think about monetary policy decisions in the future, which in these kinds of environments are difficult to predict. I normally look at what the swaps market is implying and base my answer on that consensus. That collective wisdom is usually very powerful, and I need to have good reasons to disagree to give a different answer than the market. Normally, I state my view on future inflation and growth and apply rules like the one by Taylor or some modification of it, to get a feeling of where the policy rate might go. A few years ago, I started to add another dimension to my analysis using natural language processing. Sometimes, specific words or sentences on central bank's statements contain useful information that can give us hints on when they are going to pause/start/continue a hiking(easing) cycle. One can build a simple model as following: 1)    Get the historical statements from your central bank and build a database along with the moves they made in the meeting. 2)    Process your texts using libraries such as nltk where you can tokenize or remove stopwords, and also use regular expression libraries to remove special characters or numbers. 3)    Use functions from libraries such as sklearn that can help you transform your texts into vectors. 4)    Define a binary variable like move or no move and then apply a logistic regression using the text vectors as independent variable and the binary one as dependent.   5)    Make predictions based on that model. In the chart below you can see what my model has done in the past years. It failed to recognize the short pause from a few months ago and continues to signal some more moves in the near future. I can share the script with those of you who are interested, just direct message me or drop you email in the comments. I also have been thinking of a few possibilities to improve my model: a) Collect central bank statements across the world to have more data to train it. b) Include other independent variables like the real interest rate gap. c) Make the dependent variable multiclass instead of binary. What do you suggest? #interestrates #bonds #machinelearning

The monetary policy is due next Monday. The committee, chaired by the SBP Governor, has already eased the policy rate by 900 bps (or 41 percent) over the last five reviews, as inflation nosedived. Real interest rates (irrespective of the lens used) remain well into positive territory. Economic growth is yet to revive, although there are some early signs of demand picking up. The question is how much further easing is warranted without triggering pressure on balance of payments. It is imperative to maintain a delicate balance. The impact of monetary easing or tightening on economic demand and, in turn, inflation comes with a lag—historically, it has taken 6–18 months in Pakistan. In conclusion, a lack of domestic demand amid high real positive rates makes a case for further rate cuts. However, continuing an aggressive cutting stance is not advisable. The SBP could consider a 100bps cut, while a 200bps reduction cannot be entirely ruled out. The key element is to pause after another 200bps cut to observe the impact of reducing the policy rate by half. https://lnkd.in/dUX6uynC

When uncertainty is elevated, considering scenarios is more useful than debating a modal outlook. Today, there are at least two possible paths for the economy. In one, the conflict in the Middle East resolves quickly, oil and energy prices fall, and the impact on the U.S. economy is short-lived and muted. Under those circumstances, it likely would make sense to look through the temporary rise in energy prices, assuming inflation expectations remain well anchored.   But if the conflict becomes more protracted, a different scenario is possible. Disruptions in energy supply and associated cost pressures could persist, with increased risks for higher inflation, slower growth, and a weaker labor market. This would amplify the current tradeoffs for monetary policy, making it harder to balance the risks to both sides of our dual mandate. With all of this uncertainty, what’s the outlook for monetary policy? There is no single most-likely path. With policy in a good place, we need to remain flexible, able to respond to rapidly evolving risks. Now, this may seem vague, even dissatisfying.   But offering too much forward guidance in an uncertain world risks conveying a false sense of certainty, reducing rather than improving transparency, and making it harder for the public to clearly predict how the FOMC will react. So, for now, recognizing the uncertainty, examining potential scenarios, and staying focused on restoring price stability and supporting full employment no matter how the economy evolves is optimal communication and appropriate policy.

‘Turning pitch’ for monetary policy; RBI says open to OMO sales • The MPC expectedly kept the repo rate unchanged at 6.5% and retained the stance of monetary policy at ‘withdrawal of accommodation’ • The vegetables-driven spike in inflation in July-August 2023 has abated. However, elevated global yields, uneven distribution of monsoon and volatile oil prices pose an upside risk to inflation. Taking cognizance of this, the policy statement noted that monetary policy needs to remain ‘actively disinflationary’. Also, the Governor during his address stressed on the 4% inflation target, giving the policy a hawkish tone. • The MPC upped Q2FY24 projection to 6.5% from 6.2% previously and cut Q3FY24 projection to 5.6% from 5.7% in the Aug 2023 review. Projections for Q4FY24 and Q1FY25 were retained at 5.2%. On balance, FY24 inflation forecast remains unchanged at 5.4%. In a separately released Monetary Policy Report (MPR), the RBI projected CPI to average 4.5% in FY25 and 4.3% in Q4FY25 • The MPR also showed that supply shock was the predominant driver of inflation in Q2FY24, accounting for as high as 70% of the inflation during the quarter. On the other hand, policy shock (monetary tightening) and demand shock (lower aggregate demand) shaved off inflation during the quarter. This further gives credence to the MPC’s decision to stay put on rates this time. • Transmission of previous rates is still incomplete. Out of the cumulative repo hike of 250bps, weighted average lending rate on fresh loans and outstanding loans have increased by only 196bps and 112bps. However, the cumulative monetary tightening seems to have succeeded in anchoring inflation expectations as households’ inflation expectations have fallen to single-digit since the Covid pandemic. • The committee kept the full-year growth forecast unchanged at 6.5% (ICICI: 6.2%). The quarterly growth profile (6.5% in Q2, 6% in Q3 and 5.7% in Q4FY24) has also been retained. Domestic demand remains resilient, led by urban markets while industry indicators remain robust. Rising imports of capital goods and external borrowing for capex imply strong investment demand. • The liquidity conditions have seen a sizable change since the last policy. While 50% of the amount absorbed under I-CRR has been reversed, robust advance tax collections in September and active FX intervention by the RBI to support the INR resulted in a sizable deficit in system liquidity. In addition, the RBI conducted OMO sales worth ~INR 62bn in September which was an indication that more OMO sales (through auction process) are likely in the future to keep liquidity conditions tight. While the conclusion of I-CRR and month-end government spending will increase liquidity in the near term, pick-up in currency demand and OMO sales are likely to offset the impact and keep liquidity constrained • Given a more hawkish Fed and slow disinflation trajectory, the monetary easing cycle is likely to happen later than initially expected