Sulk but no tantrum likely as central banks sidle toward exit

Thu Jun 1, 2017 7:48am EDT
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By John Geddie

LONDON (Reuters) - History suggests that financial markets react violently when a central bank signals it is scaling back the stimulus that has kept an economy afloat - and lined the pockets of investors.

Now the world's three leading central banks, to varying degrees, are edging toward an end to ultra-easy monetary policies which have inflated the value of financial assets, and yet investors seem largely unruffled.

Policymakers appear to be learning the lesson of 2013, when former Federal Reserve President Ben Bernanke suggested the U.S. central bank might slow or 'taper' the expansion of its balance sheet.

The thought that the Fed would reduce the heavy bond purchases and other policy schemes it had used to flood the banking system with cash since the global financial crisis provoked the 'taper tantrum'.

That knocked nearly 7 percent off U.S. stocks, sent Treasury yields climbing more than 100 basis points, and sowed turmoil in world markets from Rio de Janeiro to Jakarta.

Four years on, the Fed is talking about trimming its balance sheet, rather than merely slowing its growth, and at the same time the European Central Bank and even the Bank of Japan are cautiously looking to the end of monetary easing.

Investors seem confident that policymakers can get their message over without too much drama. Financial markets are expected to sail through a couple of policy meetings this month that could in years to come be seen as the beginning of the end of extraordinary central bank support.

"It might be the beginning of a drip feed of how it's going to happen," said Tim Graf, head of macro strategy for EMEA at State Street.   Continued...

FILE PHOTO: A man walks past the Federal Reserve Bank in Washington, D.C., U.S. December 16, 2015.   REUTERS/Kevin Lamarque/File Photo