DWS KGaA Investor Relations Media Career Belgium Insights Capabilities Solutions Service Profile Search Home » Insights » CIO View » Charts of the week » Central bankers are hardly infallible Nov 19, 2021 Fixed Income Central bankers are hardly infallible Soaring inflation readings have prompted investors to price in rate hikes. Events in Australia say a lot about the psychology of the decision makers involved. 1 min to read In U.S. military jargon, a successfully executed exit strategy tries to minimize losses of "blood and treasure". The monetary equivalent might be winding down unconventional measures while minimizing market volatility and maintaining central bank credibility. If so, events of recent weeks should give policymakers and investors pause for thought. Soaring inflation readings have prompted investors to start pricing in increases. As our Chart of the Week shows, yields on two-year have recently spiked in a wide range of industrialized countries. Most spectacularly, markets forced the Reserve Bank of Australia (RBA) to effectively end its policy of yield curve control. The details of the episode are telling. Apparently, outside observers warned the RBA on numerous occasions that it might be forced to abandon its cap on three-year bond yields once markets started to doubt its forward guidance.[1] The setup was somewhat similar to various abandoned currency pegs of years gone by. Australia’s cash bond market is mainly driven by its large, highly liquid futures contract market. In case of a market attack, such derivate instruments can act as force multipliers, much as they did in the case of currency pegs. Deliberately choosing the wrong sort of battlefield without a clear exit strategy is the kind of mistake familiar from military history. Why and how do such things happen? Well, in his classic study of 200 years of military blunders, Norman Dixon describes numerous examples of it in "highly competent, intelligent, conscientious individuals when they begin to act as a group".[2] Flawed assumptions are left unchallenged and new information is rationalized away. So, what does all that mean for other central banks, such as the U.S. Federal Reserve (Fed)? Well, at least compared to caps on bond yields, asset purchases embraced can be tapered more easily as the economy improves. Still, the RBA's climbdown should serve as a reminder that central banks too are hardly infallible. Nor, though, are investors. More topics Nov 26, 2021 Politics Forming a new government was the easy bit Climate protection, digitalization and pragmatism Nov 26, 2021 Equities CIO VIEW QUARTERLY NEWS- LETTER 1. 2. Dixon, N. (1976, 2016 ed.) On the Psychology of Military Incompetence, Basic Books, p. 443 Quick Access DWS KGaA CIO View Facts & Figures Slavery and Human Trafficking Statement (PDF) Engagement Policy (PDF) Information on sustainability Copyright © 2021 DWS DWS Investment GmbH as of 11/16/21 - 082244_35 (11/2021) (11/23) Cookies Policy We use cookies and similar technologies that are essential to operate our websites. With your consent, we will use cookies for performance analysis of our websites. This enables us to detect and fix errors and usability issues as soon as possible and to constantly improve our website. Furthermore we use marketing cookies to measure the success of our marketing measures and personalize our contents to your needs as precisely as possible, potentially also outside of our websites. In the settings you can find detailed information on the different types of cookies and object to the use of cookies. As an asset manager, the security of your data is highest priority to us. You can find further information in our privacy notice. Customize Accept and proceed