This ‘Great Unwinding’, as it is being called, has been well signalled by the Fed and its pace is likely to be very measured. Chart 1 shows how QE has bloated central bank assets as a proportion of gross domestic product (GDP) for the Eurozone, the US and Japan. Also, the European and Japanese central banks haven’t yet started their unwinding, so markets will be looking to them to keep providing liquidity. The pace of monetary policy normalisation is likely to be glacial and, if the recovery is sustained, the markets will take a benign view of policy normalisation. As the BIS said, “transparency about the path of central bank measures may unintentionally encourage greater risk-taking in markets.

Source: Mint September 21, 2017 07:52 UTC