According to an article published today in the Wall Street Journal:
"A premature exit by the U.S. Federal Reserve from its easy money policies could cause $2.3 trillion in global bond portfolio losses, the International Monetary Fund warned Wednesday.
Although the IMF assumes in its latest economic forecasts that the U.S. central bank will unravel its policies at a tempered pace, the fund said the market's volatile reaction to Fed exit comments earlier this year show there is still a risk of moving too fast.
"Engineering a smooth transition to monetary normalization will require a clear and well-timed communication strategy by the Federal Reserve to minimize interest rate volatility," said Jose Vinals, the IMF's top financial counselor.
"Containing longer-term interest rates and market volatility has already proven to be a substantial challenge, as shown by the sharp rise in bond yields and volatility since May," he said.
Wary about higher borrowing costs choking global growth and fueling volatility, especially in emerging markets, the IMF studied how a premature exit strategy might impact markets in its latest Global Financial Stability Report.
The fund said long-term interest rates could jump one percentage point on a sharper, front-loaded winding down of Fed bond-purchases than the market expected. As that rate shock traveled around the globe, it could generate "aggregate losses on global bond portfolios [worth] 5.6%, or $2.3 trillion," the IMF said".
"That figure doesn't include other potential losses, such as in equity, real estate or currency markets".
