Liquidity Transmission Framework

Understanding liquidity propagation helps define environment-sensitive allocations, not just market narratives.

To understand how central bank policy and liquidity conditions influence risk-taking across markets.

Liquidity is the medium through which policy affects markets. Changes in liquidity conditions often matter more than the level of rates themselves.

• Central bank balance sheets
• Policy rates and forward guidance
• Funding markets and money market spreads
• Financial conditions indices

• Easing policy and expanding liquidity tend to lengthen risk horizons
• Tightening cycles compress risk tolerance even before growth visibly slows
• Markets often react first to changes in the rate of tightening or easing, not absolute levels

• Divergences between policy rhetoric and liquidity outcomes
• Stress appearing in funding markets before headline volatility
• Inflection points where policy becomes less restrictive at the margin

• Liquidity conditions improve without any corresponding market response
• Financial conditions tighten despite clear policy easing