Investor expectations shape the market reaction to new economic data and to our policy actions, and when those expectations differ from our own, they could embed information that we might wish to factor into our own analysis.
Investors' expectations are reflected in asset prices, but so are risk premiums, and inferences about future economic conditions obtained from market prices are conditional on estimates of those premiums. Neglecting or grossly misestimating risk premiums will lead to misperceptions of the market's outlook and thus potentially to market moves that we did not anticipate.