> Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.
I get the simplified qualifier and I see what you’re saying but it’s more accurate to say this is not true, it hasn’t really been substantially true since February 1994.
> What happens next is that they buy and sell government bonds in the open market
Again i feel it’s better to say exactly what happens, not a model or simplification. What happens next is banks move to the new interest rate without any OMO (open market operations) - the announcement effect as it’s called. There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
Citation needed to support my statements above: https://www.newyorkfed.org/medialibrary/media/research/epr/0...
Yes, expectations and anticipation are very, very important in all markets, and especially financial markets.
But they only work, because the Fed can and will back up its announcements with large transactions at the announced prices and rates.
> There’s many reasons for this - not least that it’s futile to fight against the currency issuer.
You'd hope so, but not all currency issuers are so confident. I remember the Swiss central bank recently giving up on its exchange rate target to the Euro: they let the Swiss Frank appreciate against the Euro in the end, even though they control the printing presses and could always print enough Franks to drive their price down as much as they want to.
We saw similar reluctance to do whatever it takes for Japan since the 1990s and the Fed and the ECB during the 2010s, when they all failed comically to push inflation up to their targets, and came up with various excuses.
(The failure of the Fed is particularly funny, because one of the guys in charge had earlier written a piece telling the Japanese exactly how to get out of their own trap in the 1990s, but then did not practice his own preaching.)