The International Monetary Fund has underlined the scale of the challenge facing Janet Yellen if she is confirmed asFederalReservechairman by issuing a stark warning on Wednesday that phasing out quantative easing could spark "fire sales" of assets, wiping $2.3tn off bond markets.
Under its "adverse scenario", the fund warned, global interes trates would jump abruptly, causing turmoil across world financial markets.
The IMF regards the phasing out of QE as a positive development, but the report warns that "managing a smooth transition could prove challenging, as investors adjust portfolios for a new regime with higher interest rates and greater volatility".
In the report, IMF analysts lay out a relatively benign scenario in which market rates adjust gradually as the Fed withdraws its stimulus. But they warn that there is also an adverse scenario, which would involve investors taking a $2.3tn (£1.4tn) hit amid "a rapid tightening in financial conditions, potentially aggravated by reduced market liquidity and forced asset sales". The IMF described the markets' so-called "taper tantrum" earlier this year, after Fed chairman Ben Bernanke mooted the idea of tapering QE, as a "mini stress test" that helped to reveal how investors might respond as monetary policy returns to normal.
Its adverse scenario involves the same increase in long-term interest rates – one percentage point – as the benign scenario, but over a much shorter time period. Because investors have flooded into bond markets and longer-term assets since QE got under way, the losses to investors would be far larger than during other recent episodes when policymakers have been pushing up interest rates.
Andrew Haldane, the Bank of England's executive director for markets, recently warnedthat Central Banks had inflated "the biggest bond bubble in history", which could jeopardise l stability if it burst.
Viñals pointed out that capital flows to emerging markets have increased by $1tn since the collapse of US investment bank Lehman Brothers.
As the flow of cheap money is turned off, which could prompt many investors to pull their capital back home, he suggested policymakers may have to intervene in foreign exchange markets "in order to maintain orderly conditions".
Source: theguardian
Under its "adverse scenario", the fund warned, global interes trates would jump abruptly, causing turmoil across world financial markets.
The IMF regards the phasing out of QE as a positive development, but the report warns that "managing a smooth transition could prove challenging, as investors adjust portfolios for a new regime with higher interest rates and greater volatility".
In the report, IMF analysts lay out a relatively benign scenario in which market rates adjust gradually as the Fed withdraws its stimulus. But they warn that there is also an adverse scenario, which would involve investors taking a $2.3tn (£1.4tn) hit amid "a rapid tightening in financial conditions, potentially aggravated by reduced market liquidity and forced asset sales". The IMF described the markets' so-called "taper tantrum" earlier this year, after Fed chairman Ben Bernanke mooted the idea of tapering QE, as a "mini stress test" that helped to reveal how investors might respond as monetary policy returns to normal.
Its adverse scenario involves the same increase in long-term interest rates – one percentage point – as the benign scenario, but over a much shorter time period. Because investors have flooded into bond markets and longer-term assets since QE got under way, the losses to investors would be far larger than during other recent episodes when policymakers have been pushing up interest rates.
Andrew Haldane, the Bank of England's executive director for markets, recently warnedthat Central Banks had inflated "the biggest bond bubble in history", which could jeopardise l stability if it burst.
Viñals pointed out that capital flows to emerging markets have increased by $1tn since the collapse of US investment bank Lehman Brothers.
As the flow of cheap money is turned off, which could prompt many investors to pull their capital back home, he suggested policymakers may have to intervene in foreign exchange markets "in order to maintain orderly conditions".
Source: theguardian
