If AG does it now, what will the market be "expecting" next month? nothing, and then it will drop, he spreads it so the psychological impact of easing is stretched out over time. After all, the fed could have two rates, 3% when no inflation is expected and economic growth is slow, and 6% when the economy is over heating and go directly from one to the other. If he did that, market participants (particularly bond hedge funds) will be devastated, since some of them will have the hedge wrong, and those guys deal in many billions, if they get "screwed up", the bond market will "seize" (as it did essentially during the LTCM saga), and that is a prescription for a financial catastrophe.
He need to give time to those bond traders and hedgers to adjust to a new environment over a lengthy period of time. That is of course a very simplistic explanation for gradualism, but not that far from what I believe is the truth.
Zeev |
