Rule-Based Monetary Policies Will Keep Volatility Low

The global economy is enjoying its first synchronized upswing since 2007. As a result, more central banks are looking to retreat from quantitative easing and other unconventional monetary policies implemented in the wake of the worst financial crisis since the Great Depression. The latest example is the European Central Bank, which will likely announce on Thursday that it will cut its monthly bond purchases by as much as half to 30 billion euros ($35.3 billion).

The ECB follows the Federal Reserve, which this month started to shrink its $4.5 trillion balance sheet by reinvesting fewer proceeds from the bonds that it holds back into the market. Despite these moves, measures of volatility have stayed low, and will likely remain so as this transition unfolds. That's not the conventional wisdom, but it makes sense when you think about how these new policies are being communicated and implemented. In other words, central banks are moving toward a rules-based playbook, and when policies are guided by rules there tend to be fewer surprises. And when policies are predictable, volatility drops and financial conditions become easier.