Central bankers lurch from 'whatever it takes' to 'whatever next'

Wed Jan 21, 2015 1:54am EST
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By Mike Dolan

LONDON (Reuters) - The Swiss currency shock has raised an awkward question many investors have been fearful of asking - what if central banks become as unpredictable and fallible as they are powerful?

The Swiss National Bank's sudden decision to abandon its three-year-old cap on the franc - the "cornerstone" of its monetary policy just three days before - led to the biggest one-day move in major exchange rates in the post-1973 floating rates era. To some it was a warning sign of other U-turns, mishaps and possible failures by central banks still ahead, outcomes not fully appreciated by long-becalmed markets.

For decades the power of currency printing presses has held markets in thrall. "Don't fight the Fed" and all its international variations has been a devout belief among financial traders.

Even after the failure of Alan Greenspan's Federal Reserve to spot and headoff one of the biggest credit booms and busts in history, the ability of the Fed, Bank of England, Bank of Japan, European Central Bank and others to flood their money supply to ease the fallout helped anaesthetise fractious markets.

The subsequent waves of cheap credit, currency fixes and "quantitative easing" drove down borrowing rates and erased volatility.

The demonstrations of central bank might culminated in ECB chief Mario Draghi's declaration in 2012 that he would do "whatever it takes" to save the euro. In the face of the power of the money printing press, speculation became pointless.

So much so that one of the biggest conundrums of recent years became the persistently low implied volatility in markets even in the face of outsized economic, political and policy risks. Not everyone was pleased by the complacency.

"Monetary methadone was the best of no choice but we have become addicted to cheap money everywhere and, somehow, that central bankers are prophetic," Nigel Wilson, chief executive of UK insurer Legal & General told Reuters last week as he bemoaned the track record of central banks over many years.   Continued...

Swiss 100 franc bank notes are withdrawn from an ATM in the northern Swiss town of Kreuzlingen in this picture illustration, January 16, 2015. REUTERS/Arnd Wiegmann