More Central Bank Surprises

Here are the three big surprises on yet another notable day for central banks and markets, and what they may imply for the future:

• The European Central Bank went beyond expectations by deploying a full range of policy instruments, including a more negative deposit rate and increased asset purchases.

• After the initial favorable response to the larger-than-expected policy stimulus, asset prices started to sell off, with notable moves in oil and stocks.

• To make things even more uncomfortable for the ECB, the depreciation of the euro that immediately followed its announcement isn't holding. In a counter-intuitive move, the currency has now strengthened after the central bank's steps.

All this speaks to the consequential issue I discussed in Tuesday'sarticle: That the ECB risks moving closer to the point where unconventional policies are less effective and possibly counterproductive. After all, neither the appreciation of the euro nor the selloff in stocks will help efforts to counter deflation and improve economic conditions.

The potential for surprise isn't limited to the ECB.

Today’s weakening of the dollar against the euro could even encourage the Federal Reserve to be somewhat more hawkish in the guidance it issues after its policy meeting next week.

This raises some unpleasant realities that have yet to be internalized sufficiently. For investors and traders hooked on liquidity, global central banks are becoming less reliable at suppressing financial volatility and boosting asset prices.

What's more, if politicians in Europe and the U.S. continue to falter on fiscal reforms, fail to increase infrastructure spending and decline to strengthen labor markets, central banks could find themselves going from being part of the solution to being part of the problem.

This post was originally published on Bloomberg View.

Mohamed A. El-Erian is the former CEO/co-CIO of PIMCO. He is Chief Economic Advisor at Allianz and member of its International Executive Committee, Chair of President Obama’s Global Development Council and author of the NYT/WSJ bestseller “When Markets Collide.” His most recent book, “The Only Game in Town: Central Bank, Instability and Avoiding the Next Collapse,” is also a NYT bestseller and is available now.

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