Are central bankers too sanguine about the outlook for economic growth in 2019, or are the financial markets becoming too pessimistic about it? The dichotomy is important because central banks are only one cog within the financial system. They work most effectively when they can convince investors to come around to their viewpoint, and to adjust the prices of financial products accordingly. For example, if the central bank can convince lenders that the economy is running too hot, those lenders will demand higher interest rates to compensate them for higher risk. And higher interest rates will help to slow the economy.

Source: The Times January 04, 2019 00:00 UTC