LONDON- Central banks were the heroes of the initial phase of the pandemic, taking multiple steps to save the financial markets and economy from ruin.
Now, as the recovery begins, they’ve become a major risk for investors.
The latest reading of the Back-to-Normal Index from BBC shows that the United States economy’s comeback is 90% complete. However, investors are worried that the Federal Reserve, analysing such promising data and rising inflation, will make a dangerous mistake, such as ignoring growing problems until they’re too late- or moving too soon to roll back unprecedented levels of support.
In a Deutsche Bank survey of 650 market professionals issued this week, 40% of respondents listed a “central bank policy mistake” as one of the top three threats to market stability, up from 22% the previous month.
Similar fears are indicated in the survey of global fund managers published by Bank Of America last week. The second threat, behind inflation, is a “taper tantrum,” describing a scenario where central banks increase yields, easing up on bond purchases sparking a panic in markets.
Investors have become fixated on easy money from central banks whose decision to buy up hundreds of billions of dollars in bonds and slash interest rates fed the market’s rapid rebound after the early coronavirus shock.
But such decisions have also handed central banks significant power to dictate market results, making it harder for them to pivot down the line.
The Fed’s revenue increased to $7.4 trillion last year, according to a new study published by the Federal Reserve Bank of New York. By 2022, it could grow to $9 trillion, it projects. That’s approximately the combined annual GDP of Germany and Japan – and means policymakers can’t afford to make a mistake.
For now, the Fed resumes to hold firm its stance that it’s observing risks but does not intend to take short-term action, even as prices rise.