ECB's Asmussen sees risk of large spillovers from Fed tightening

September 10, 2013
ECB executive board member Asmussen speaks during the debate "European Economic Integration: Challenges and Opportunities" in Vilnius
European Central Bank (ECB) executive board member Joerg Asmussen gestures as he speaks the debate "European Economic Integration: Challenges and Opportunities" in Vilnius July 18, 2013. REUTERS/Ints Kalnins

BRUSSELS (Reuters) - The spillover effects of the U.S. central bank unwinding its policy stimulus risk being greater now than in 1994, and that episode highlights the importance of clearly communicating exit strategies from expansionary policies, an ECB policymaker said.

The Federal Reserve is expected to start slowly reducing its bond purchases when it meets later this month, beginning to unwind a policy that has helped foster recovery in the world's largest economy and buoyed financial markets.

"In early 1994, when the U.S. recovery gained strength, the Fed started a tightening cycle and bond markets crashed not only in the U.S. but also around the world," European Central Bank Executive Board member Joerg Asmussen said on Tuesday.

"If spillovers were large in 1994, we can expect them to be even larger today in an even more deeply interconnected world," he added in the text of a speech for delivery in Brussels.

While economists believe the Fed could still announce a tapering of its monthly bond purchases at its September 17-18 policy meeting, they believe weak jobs growth data increased chances of a delay.

Even if the Fed were to begin reducing its stimulus it would still have a highly expansionary monetary policy with interest rates nailed down near zero.

Two lessons could be drawn from the 1994 episode, Asmussen said: firstly, clarity on central banks' "reaction functions" - how they respond to shifts in economic data - is crucial, and secondly, inflation expectations must be well-anchored.

"Inflation fears amplify the impact of economic developments on yields," he said, adding that while exit strategies were being debated in some economies, "for us in the euro area it is too early to start the exit."

Asmussen also said that the ECB could take further easing measures: "The ECB remains ready to act if conditions deteriorate," he said.

His comments echoed the ECB's position after its policy meeting last week, when the bank said it was ready to cut interest rates or pump more money into the economy if needed to bring down money-market rates and help the euro zone's recovery.

Asmussen said the ECB's forward guidance on interest rates remaining low was meant to achieve two objectives:

"To reduce the volatility in the corridor, in which we have succeeded so far, and to make sure that economic data do not cause overreactions in the market interest rates. On this ground we have been moderately successful," he said.

"It is still early days and it remains to be seen how this evolves in an environment of improving economic data and a generalized increase in global long-term rates," Asmussen added.

He repeated his support for the idea of the ECB joining other major central banks and publishing minutes of its policy meetings - a possibility under discussion at the bank.

"In my personal view the minutes, summarizing the main policy discussions, should include who voted for what, and the reasoning behind that vote," Asmussen said, playing down the risk of pressure being put on national central bank chiefs.

"In my view someone who takes up such a position should be able to withstand such pressure."

(Reporting by John O'Donnell; Writing by Paul Carrel; Editing by Hugh Lawson)