Central bankers risk swinging more adversary than friend to investors in 2016.
After bracing up financial markets with zero interest rates and debt purchases for seven years, top monetary-policy makers are becoming a less tranquiling presence as the new year approaches.
For an early taste of next year, look back to Dec. 3. The ECB’s ramp-up of quantitative easing fell short of the expectations of investors who’d been listening to dovish statements from President Mario Draghi. The euro climbed the most since 2009 against the dollar and the German 10-year bund yield rose the most in four years.
Or look at last week, when BOJ Governor Haruhiko Kuroda confused markets by announcing a new stock-buying plan without warning. Equities surged -- then slumped again when it became clear the program would only offset sales of separate BOJ holdings.
The worry is that Draghi and Kuroda are less able or willing to provide as much easy money as previously anticipated. They may also have lost some of the communication skills which have served to soothe investors.
It doesn’t have to be so, as Fed Chair Janet Yellen showed last week. While her policy makers raised rates for the first time in nine years, the shift was well telegraphed and she promised future action would be “gradual.” Markets absorbed the tightening without hiccup, with the Standard & Poor’s 500 Index barely changed on the week.
Investors may nevertheless find it harder to digest future rate hikes. Bond traders, for example, are now pricing in around two Fed increases next year, while the so-called dot plot of projections from officials points to four.
Another risk is that the Fed goes too far and is then forced to shift into reverse -- just as the ECB and every other major central bank which raised rates since 2008 ultimately had to.
Even if the Fed successfully avoids a policy error, its tightening has brought to an end almost a decade of uniform strategy by the world’s major central bankers. That too will be tricky for investors to accept.
At the same time,skepticism about whether quantitative easing even serves to boost inflation and economic growth in debt-laden nations by enough to justify side-effects such as asset bubbles and wealth inequality.
“Investors are growing increasingly wary of central bankers’ credibility and worried about the effectiveness of further stimulus," who expects central banks will struggle to tighten.