The Tell: Are global markets losing faith in central banks?

There’s never been a shortage of criticism—much of it wildly misplaced—when it comes to quantitative easing and other extraordinary measures launched by central banks in the wake of the financial crisis. But recent events have market watchers worrying that central bankers are starting to lose their ability to steer markets.

While the Bank of Japan’s surprise decision Friday to push interest rates into negative territory had the desired effect of sending the yen USDJPY, +1.95%  and bond yields TMUBMUSD10Y, +0.00% lower and allowed the Nikkei index NIK, +2.80% to ultimately end higher, the market volatility that followed the move didn’t reflect the kind of market confidence the central bank undoubtedly wanted to see, said Michala Marcussen, global head of economics at Société Générale, in a Sunday note.

See: Bank of Japan negative rate decision a mark of desperation.

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The wildest predictions of central bank critics never came to pass (remember how QE was going to lead to the collapse of the dollar DXY, +0.96% and turn the U.S. into Zimbabwe?). Marcussen’s critique isn’t along those lines.

She notes, instead, that “solid central bank credibility was long taken as a given.” What’s changed is that with many central banks continually undershooting their inflation targets despite extremely accommodative monetary-policy measures, there is a growing worry that the ability of monetary policy to affect the real economy is somehow impaired.

There are a number of potential causes running from stubbornly high levels of debt, financial regulation, a “race to the bottom” in foreign exchange rates and weak global growth, she notes, adding that the collapse of an emerging-markets and commodity-credit bubble have added another obstacle.

Marcussen is hardly alone in worrying whether central banks are running out of road. In his new book, “The Only Game In Town: Central Banks, Instability and Avoiding the Next Collapse,” economist Mohamed El-Erian credits central banks with averting a global economic catastrophe in the wake of the financial crisis but lack the tools to engineer a return to high inclusive growth and financial stability.

As Marcussen notes, so far central banks have so far been highly successful in stabilizing and even boosting financial asset prices. While critics have made much of the gap between the often sharp rise in the value of financial assets and lackluster growth in the real economy, “it should be quite clear that should financial stability also be threatened, then the chances of economic recovery would dwindle into nonexistence,” Marcussen wrote.

What’s worrying, she says, is that recently, “the market response to renewed central bank action no longer seems to carry quite the same punch. The weeks ahead will bring an important test hereof.”

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