More work will have to be done on this as a case study but, at face value, the fact that US Treasury yields could move by over 100bps just on speculation of a small reduction in the rate of purchases, confirms that asset purchases in the US must have been having a very sizable effect on market prices, at least as large as the quantitative estimates that have previously been made.4 And the degree of reaction in UK gilt yields makes it clear that there have been large international spillovers – a point which some previous research has also noted.5 The degree of correlation since May has been striking and for shorter-term rates, it is possible that it has been exacerbated by poor liquidity in money markets and hence over-done. Given how the recoveries have differed in scale and nature – the US economy has grown much more than the UK since the recession, and has not suffered the same collapse in productivity – one would surely expect the prospects for monetary policy to be quite different in the two jurisdictions. A final issue I want to raise is whether market behaviour has been affected by regulatory changes. Over the past year or so many of the reforms being introduced internationally have been implemented or anticipated. In particular the future rules on capital and liquidity have become clearer, and proprietary trading has largely relocated away from the traditional intermediaries as a result of the “Volcker Rule”.
Paul Fisher: Financial markets, monetary policy and credit supply Speech by Mr Paul Fisher, Executive Director for Markets of the Bank of England, Member of the Monetary Policy Committee, to Richmond University, London, 2 October 2013. *  *  *  Thank you for having me back at Richmond University. In this lecture today, I aim to review the behaviour and development of financial markets over the past year, including the period of heightened volatility since May and the introduction by the Monetary Policy Committee of explicit forward-looking monetary policy guidance in August. I will also assess the working and impact of the Funding for Lending Scheme over its first year of operation. Developments in financial markets When I spoke to you a year ago, financial markets were still scarred by the crisis years and there remained a number of significant downside tail risks to the global economy. Contacts were citing: the risks of a breakup of the euro-area; the possibility of a “fiscal cliff” in the US; a slowing in China, alongside already weak growth in the advanced economies; and tensions in the Middle East – especially around the Straits of Hormuz. But those tail risks were seen to be offset in large part by the commitment of central banks to respond. The ECB had announced its Outright Monetary Transactions programme and had been interpreted as publicly committing to do whatever it takes to keep the euro-area together.