Lengthy and fevered speculation preceded yesterday’s “comprehensive reassessment” by the BOJ and the Fed’s September decision on interest rates. Yet, in both instances only marginal changes took place. The Fed, for example, is moving at the glacial pace of 25bps per year! This pattern of high speculation leading up to decisions followed by very modest action has been a stable feature of markets since the Developed Market Crisis of 2008/2009. Are markets entirely rational in paying so much attention to the decisions of QE central banks?

On first appearances, markets do indeed appear to be borderline schizophrenic. After all, an overwhelming consensus maintains that the QE central bankers will move rates extremely slowly over a very long period of time, so why fret so much over every little short-term decision? A closer examination of the facts, however, suggests that there may be some method in the market’s manic machinations. While there is no reliable evidence that central banks are becoming more prone to making policy mistakes there are strong reasons to believe that the potential cost of policy mistakes have gone up sharply.