Of course, investor confidence and liquidity can shift. In the aftermath of a financial shock, if buyers and sellers of credit can no longer agree on the distribution of possible outcomes, their ability to price transactions will be severely limited.
While we cannot – and often should not – prevent all shocks or predict how they will reverberate through the financial system, we can attempt to create conditions that would lead investors to most quickly rebuild their confidence. That is most likely to occur when underlying fundamentals are solid. Monetary policy is no less challenged by the level and prospects for liquidity.