Bankers ponder shrinking trillions

After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening.

How the Federal Reserve, European Central Bank and – eventually – the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 “taper tantrum”, or the near undetectable market response to China’s run-down of US Treasuries in recent years.

Combined, the balance sheets of the three now total about $13 trillion, equating to greater than either China’s or the euro region’s economy. Assets on reserve bank balance sheets (a debt owed by the rest of the economy) have at least doubled since 2008 at all three central banks. In the US, it has more than quadrupled from $901 billion to $4.5 trillion; Japan’s is nearly five times 2008’s 107 trillion yen to 490 trillion yen; the EU’s is nearly double 2008’s €2 trillion, now standing at €4.1 trillion. Former Fed Chair Ben Bernanke – who triggered the 2013 sell-off in risk assets with his quip on tapering asset purchases – has argued for a pre-set strategy to shrink the balance sheet.

“You know what they say about mountaineering? The descent is always more dangerous than the ascent,” said Stephen Jen, chief executive of hedge fund Eurizon SLJ Capital Ltd. “Shrinking the balance sheet will be the descent.”

“Central banks need to be very cautious in starting to run down their balance sheets,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “They need to reiterate that it’s conditional on continued economic improvement, that it will be gradual and that it could be a substitute at times for rate hikes.” – Bloomberg

The descent is always more dangerous than the ascent