Monetary policy: It’s the success of the central banks in convincing investors they will not tolerate another systemic or growth shock that is still driving the exit from cash bunkers

The world’s major central banks may be shifting their tone subtly from ‘whatever it takes’ to ‘we can only do so much’.

Financial markets supercharged this year by the extraordinary monetary stimuli of the top four central banks are once again asking how long this can last.

Friday’s stall of this year’s global stocks market rally was blamed by many on fresh policymaker chatter about when the Federal Reserve will or should start to wind down its bond-buying and money printing programs, or “quantitative easing”.

Ironically, the latest concern about the ‘beginning of the end’ of QE is flaring after a week of data from both sides of the Atlantic showing persistent weakness in the western economies and an absence of any discernible inflation pressures.

So while few strategists reckon the end of QE is nigh, the very debate itself may now force investors to rethink the long-term horizon even if a reversal of investment flows is unlikely.

“The U.S. and world economy is probably not strong enough to end the QE effort any time soon,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets. But “the market itself has had a very steep run and so a pause or consolidation becomes more likely and would be in fact desirable.”

Yet if the big four central bankers are listening to the counsel of their monitors at the International Monetary Fund and Bank for International Settlements, then the tone of the debate has indeed changed this week.

Unconventional policies

While applauding central banks’ success in stabilising the financial system over the past five years, the two global monetary bodies on Thursday detailed the risks both of persisting with extraordinary QE for too long and also the potentially disruptive effects of turning off the taps.

And highlighting the lack of traction in boosting growth and jobs, the common theme from the IMF and BIS was that monetary policy alone may have reached the limits of what it can do and other reforms and approaches now needed to be considered.

“If the medicine does not work as expected, it’s not necessarily because the dosage was too low,” said BIS chief Jamie Caruana. “Refocusing the policy mix to rely more on repair and reform and not to overburden monetary policy is crucial because the balance of risks of prolonged very low interest rates and unconventional policies is shifting.”

Echoing that, IMF assistant director for monetary and capital markets Karl Habermeier wrote: “Monetary policy cannot do everything.”

Big 4 and draghi’s reprise

In the coming week, leaders of all four top central banks - the Fed, Bank of Japan, European Central Bank and Bank of England - deliver keynote speeches amid all the unease at a disconnect between seemingly euphoric markets, struggling economies and evaporating inflation.

Fed chairman Ben Bernanke testifies to Congress on Wednesday, Bank of Japan governor Haruhiko Kuroda speaks after the bank’s latest policy meeting earlier that day and outgoing BoE head Mervyn King speaks in Helsinki on Friday.

Pointedly, ECB chief Mario Draghi returns to the financial community in London on Thursday for the first time since July when he drew a line under the euro crisis by pledging to do “whatever it takes” to protect the shared currency.

Given that phrase also neatly framed the determination of all G4 central banks to plough ahead with extraordinary monetary easing - the Fed’s stepped up bond-buying plan to cut U.S. jobless or the ‘shock-and-awe’ tactics of the new Japanese government and Bank of Japan - they may all now be taking stock.

What’s clear is that investors, if not the real economy, have run with their plan so far. 

—Reuters