It is not really a good time to be a central banker. At one hand, they face political backlash over lower interest rates that so far failed to achieve inflation as well as spark growth, on the other hand, they face the silent threat from their own monetary policy experiments. In the aftermath of the Great Recession of 2008/09, a vast majority of the central banks in advanced economies, even the most conservative ones launched unprecedented monetary stimulus and have taken experimental steps such as an introduction of negative rates. Now, the recent selloffs in the bond market have exposed the bankers to a grave threat that their monetary policies could backfire.

After Republican Presidential nominee, Donald Trump secured a win in this year’s election, inflation expectations all around the world soared and bond prices have slumped. Now the bankers face several threats,

• If they continue with their easing, it would impose a greater financial risk to the system and its stability. It would also increase the possibilities of building up of asset price bubbles.
• If bond prices continue to slump, central bankers would be sitting on billions of dollars’ worth of mark to market losses that could force them to hold the securities in their balance sheet until maturity. If that is the case, central banks would be losing a major tool to fight inflation.
• If inflation gains pace from now, the central bankers might have to reverse policy easing and increase interest rates and that would be a major threat to financial stability, especially in the Eurozone, where fiscal authorities are unlikely to take the baton from the central bank.

This situation does demand close monitoring for further developments.