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IMF warns of Fed danger as ECB reassures markets

The IMF yesterday warned that a rise in interest rates by the Federal Reserve could lead to a new crisis, with a spike in bond yields and emerging market economies particularly badly hit.

Most estimates of when the Fed will begin rate hiking, or ‘normalisation’ as it is often called, range from as early as this June to as late as the first quarter of 2016.

“We are very cognisant of the risks around liquidity and volatility in the markets, said Scott Thiel, head of the global bond team at BlackRock. “We see the potential for further volatility as liquidity issues arise once markets begin to focus on the large imbalances and crowding in certain sectors that formed during the protracted era of very loose monetary policy and when the divergence of monetary policies does become more pronounced.”

Thiel said his ‘base scenario’ remains that the Federal Reserve and Bank of England will both tighten their monetary policy stances this year. 

On the other side of the coin, the ECB moved to end speculation that it would taper down its quantitative easing programme before September 2016 in a similar way as happened in the US.

“Draghi noted that it is premature to consider an end to the QE programme before September 2016 given that it has only just commenced, effectively communicating a commitment to the full implementation of the programme,” said Thiel.

It was not all good news on Europe however, with the IMF and co taking a tough stance on the situation with Greece. The IMF reportedly declined a request from Greece to reschedule some of its impending payments, bringing the troubled nation closer to default and exit from the eurozone.

Part of the Bonhill Group.