Breaking Up Is Hard to Do: Markets Fret Over Central Bank Policy

Federal Reserve

Markets are watching every move coming out of central banks as any action taken could be potentially roiling to sensitive investors. As market makers continue to look for solid ground in the tumultuous global economy, the actions of head bankers continue to set the pace even more so than governments. Policy directions from a central bank can change on a whim, while lawmakers the world over can’t pass a bill without undergoing major public drama.

This is, perhaps, another way in which the European Union’s exit from recession is still in questionable territory — those in the financial and economic world hoping for a rate cut from the European Central Bank are not likely to get their wish as Mario Draghi doesn’t appear apt to lower rates as economic data gets stronger.

The Euribor, the metric used to determine interbank lending throughout Europe, remained on keel Monday with the 3-month rate at 0.226 percent. Moreover, the dollar is trading down today as speculation over Fed minutes has markets concerned that the ‘tapering’ of quantitative easing is coming next month.

Markets on both sides of the ocean are equally concerned about their respective central bank’s policy — not to mention the concern they feel for the opposite bank. Europe and the bulk of the emerging market scene have largely benefited from the easy money generated by Ben Bernanke’s quantitative easing as foreign investment in many parts of the world have depended, or at the very least, prospered because of the program.

Now, with the program’s future on the rocks, markets are starting to get nervous. The EU’s finished recession is making it look like central banks are going to let off the gas on both sides of the ocean. Stagnant economic activity in Europe could have ramifications for the U.S. as well, as both Treasury Secretary Jack Lew and President Obama have noted that Europe’s economic prosperity is intertwined with that of the U.S.

Moreover, as the continents move towards a massive free trade agreement, damage or scares caused by central banks could wound economic conditions moving forward. In 2011, the ECB raised rates as Europe looked to be rebounding — only to plunge the continent back into recession. As Bernanke contemplates the future of his pet asset purchasing program, markets rise and fall by 100′s of points in a day depending on his mood.

And yet, low rates and easy money will both have to end eventually, making the route by which these bankers are to arrive at the destination the chief complication. Markets are aware of this reality too, as is the case in Britain where continued doubts over Bank of England head Mark Carney’s promised low rates remain fresh. Eventually, central banks are going to have to break up with markets — or at the very least redefine their relationship.

Here’s to hoping they let them down gently.

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