Macroscope | Global markets brace for exit from zero interest rates and QE policy

Calling time on the super-stimulus of zero rates and quantitative easing will be no easy task for the major central banks in the next few years. They could be sowing the seeds for the next major downturn in global markets and might risk tripping the world economy back into a new recession.

Storm clouds have been gathering over the markets for quite a while as they brace themselves for the inevitable switch away from ultra-easy monetary policy back to "normalised" settings. There have been rumblings from the US Federal Reserve for months about the need for higher rates, now that the US economy is rebounding from the winter slump and deflation risks seem to be receding. A tough line from Fed officials at this week's US policy meeting could pose a test of faith for the markets.

There is a lot at stake. Investors were spooked by the "taper tantrum" of 2013 when global markets took fright at the Fed's first hint that it might taper its monetary expansion policy. It was a chastening experience all round as stocks, bonds and emerging markets were all stung very badly by the Fed's poor exit communication.

With the markets now awash with speculation about the possibility of a "triple taper tantrum", with the European Central Bank and the Bank of Japan possibly adding a further dimension to a G3-wide liquidity drain next year, 2016 could be the year of global financial markets behaving badly.

It is all down to exit strategy now and how policymakers determine life after QE. Sadly there is no globally coordinated contingency plan. It has all the hallmarks of the central banks flying by the seats of their pants for years to come and with the outcome looking highly uncertain for global markets and for the world economy.

Central bankers are stuck between a rock and a hard place. Clearly there is a need to move away from highly stimulative monetary policies, especially when there are worries about "overcooking" recovery and ramping up inflation risks ahead. But whenever any central bank intimates the notion of exit from QE, stocks sink and bond yields rise.

It has all the makings of a perfect storm. The threat of higher interest rates and bond yields is bad news for economic growth. It will lead to tougher borrowing conditions that will dampen business and consumer confidence and weigh on stock market sentiment.