IMF Issues $2.3trn Warning Over QE's End

By Ed Conway, Economics Editor, In Washington

Investors could be facing a potential loss of $2.3trn (£1.44trn) if the world's central banks cannot smoothly unwind the emergency measures carried out during the financial crisis, the International Monetary Fund (IMF) has warned.

For the first time, the Fund put a number on the potential impact of a messy end to quantitative easing, as central banks, led by the Federal Reserve, bring their unconventional monetary measures to an end.

The calculation comes on the very day President Obama is to nominate Janet Yellen as the first female head of the Fed, the US central bank.

Yellen comes into the job with the Fed on the brink of bringing its latest phase of quantitative easing, under which it has been creating money and buying up $85bn (£53bn) of bonds each month, to an end.

In its Global Financial Stability Report, the IMF warned that if investors took fright at the end of QE, pushing up the interest rates on government bonds around the world by a percentage point, investors would suffer a 5.6% loss on their bond portfolios – equivalent to $2.3trn.

This equates to more than half the losses on assets faced during the height of the financial crisis.

Although the Fund said that such an outcome was less likely than a smooth, gradual increase in interest rates, which would not imply as great losses, its warning comes amid consternation at the scale of the task for the Fed – and indeed other central banks including the Bank of England – in the coming years.

Ms Yellen's nomination brings to an end one of the most testy and public appointment processes for a Fed chairman in history.

The other front-runner for the job, former Treasury Secretary Larry Summers, withdrew last month after it emerged that, although he was favoured by President Obama, he was unlikely to get Congressional approval.

Ms Yellen, deputy to the current Fed chairman, Ben Bernanke, was widely seen as the favoured choice of economists – but the President had been less enthusiastic.

Her four-year term is likely to be among the most testy in Federal Reserve history, as the central bank attempts to deflate the bond bubble created around the world by quantitative easing.

In the wake of the crisis, the Fed and its fellow central banks pumped trillions of dollars worth of cash into the financial system.

This is thought to have lessened the immediate pain of the recession; however, economists fear it will be difficult to wean markets off the sugar high created by this money.

Ms Yellen, who is married to Nobel laureate George Akerlof, will become the first female chair since the Fed was created a century ago.

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