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Central bank stability at risk

A new report from Bloomberg has suggested that there is an increasing risk of instability from the central banks in Europe.

Citing comments from European Central Bank president Mario Draghi, and separate input from Federal Reserve chair Janet Yellen, the article indicates the long-term impact of changing policies facing both of their banks.

Both plan to react to these in a way that is in-line with investor predictions and avoids changing anything too drastically.
In two speeches, Mr Yellen has highlighted the improving economic conditions, while Mr Draghi did something very similar in his recent press conference. However, their optimistic, forward-looking policies may not be as stable as the current market suggests.

There have been suggestions across Europe and in the US that higher inflation and higher growth could be around the corner, with President Donald Trump having already committed to increase infrastructure spending.

However, both Mr Yellen and Mr Draghi remained quiet about the potential impact of a sudden shift in the US' spending and, as such, have not adjusted their policies. The two central bank leaders have instead highlighted the importance of having policies that make it easy to be flexible.

The Bloomberg report suggests that there could be potential problems with this method of policy making, which has been adopted by a lot of central banks since the financial crash in 2008.

It says that central banks must design policies, especially those in an unusually fluid global economy, that consider the mistakes as well as the successes they could end up making. By doing this, the banks are limiting the impact of the mistakes they make.

The latest policy announcement has shown that central banks prefer to "err on the side of too much stimulus rather than too little",  the report states.

In the US, market pricing related to the policy rate still suggests less tightening in 2017 than previously predicted by the Fed, which could bring its own problems. However, the more central banks' current approach could mean there is greater need for a sudden shift in monetary policy, which could interfere with markets.​