More Promises from ECB’s Mario Draghi and the US Federal Reserve

Central bankers continue to engage in talk therapy or jawboning the markets or manipulating the public's expectations in the hope that promises to inflate may be enough to rejuvenate the “animal spirits”.

From Bloomberg,

European Central Bank President Mario Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan.

ECB bond purchases would likely focus on shorter-term maturities, would be conducted in a way to soothe investors’ concerns about seniority, and wouldn’t breach European Union rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt today. ECB officials are working on the plan and details will be fleshed out in coming weeks, he said.

“Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner,” Draghi said at a press conference after keeping the benchmark interest rate on hold at 0.75 percent. “The euro is irreversible.” There is a “severe malfunctioning” in bond markets, he said.

This seems little different from the US Federal Reserve which has deferred from taking on more stimulus but gave a strong signal that such contingency would be used in case the economy deteriorates further.

From an earlier Bloomberg article,

The Federal Reserve said it will pump fresh stimulus if necessary into the weakening economic expansion to boost growth and reduce an unemployment rate that’s been stuck at 8 percent or higher for more than three years.

The Federal Open Market Committee “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” it said today in a statement at the end of a two-day meeting in Washington. “Economic activity decelerated somewhat over the first half of this year.”

So far markets have held on well to such promises, although as I previously admonished, eventually markets will seek the real thing.

should markets continue to rise in ABSENCE of REAL actions from central bankers, we cannot rule out that the markets could fall like a house of cards (fat tail risks) or what I would call a Dr. Marc Faber event.

The market’s deep addiction to stimulus will eventually seek REAL stimulus more than just promises or in central bank lingo, signalling channel. Reversal of expectations can become violent.

Such opaqueness in policy directions only underscores the uncertainty of the financial marketplace which only amplifies the risks of sharp volatilities.

Be very careful out there.