Glitch in Central Banking | October 27, 2017

Last week was a big week for the European Central Bank (ECB). They had a chance to out-do the Federal Reserve Bank (FRB), did it happen?

The ECB was widely expected to announce the tapering of their bond buying program last week. They currently are purchasing sovereign EU debt at a rate of €60B a month. There was much debate about how markets would respond to the taper. They announced plans to reduce purchases to €30B starting in 2018 and lasting for at least the first 9 months of the year.

Markets took the information in stride. Much because the ECB has done a great job of telegraphing these actions well in advance of the announcement.

Back in 2013 the FRB announced a very similar process as they began to taper our quantitative easing program. However, that news was received poorly by markets as the FRB was not transparent enough with their timing. The markets dubbed the subsequent volatility “The Taper Tantrum” … like we are a bunch of five-year-old children…

There was a certain amount of déjà vu this past week as we awaited the decision of the ECB, but the major difference was transparency. Whatever direction the FRB decides to go in, as we will find out President Trump’s nominee on the 3rd, it is important for them to take a page out of Mario Draghi’s play book. Make sure there is full awareness in order to avoid volatility.

 

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