The 'what if' spooking markets: policy success

Wed Aug 3, 2016 1:59am EDT
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By Mike Dolan

LONDON (Reuters) - Voter rebellions? A protectionist wave? Looming recession? Islamic militancy? Perhaps the biggest shock to world markets now would be if central banks met their inflation goals.

After nearly 10 years of near zero or even negative interest rates and trillions of dollars in new cash stimulus, the world's top central banks have just about kindled a spluttering, sub-par expansion with jobs to boot.

But they have failed to get wages growing for large parts of the population or to sustain consumer price gains above targets of about 2 percent for any length of time.

Financial markets have stopped believing they will - in some cases not for the remainder of our working lives.

Inflation expectations embedded in interest rate derivatives and inflation-linked bond markets are below target to at least 2026 and even, where visible, 2046. Nominal sovereign yields out three and even five decades into the future for Japan, Germany, Britain, France and Switzerland are all below these targets too.

Some suspect the extraordinary bond-buying intervention used to flood banks with all that newly-minted cash - still in full flow in Japan and the euro zone, and possibly relaunched in Britain this week - has skewed all pricing to make it unreliable.

But the U.S. Federal Reserve stopped its 'quantitative easing' almost two years ago and has been no more successful in either meeting its inflation targets since or in convincing its markets it will mange to do so over time.

The Fed's favored household inflation gauge - the core Personal Consumption Expenditures index - has remained stubbornly below a presumed 2 percent goal now for eight years.   Continued...

People walk through the lobby of the London Stock Exchange in London, Britain November 30, 2015. REUTERS/Suzanne Plunkett