A senior European Central Bank(ECB) policymaker has issued a fresh warning that the impact of the US Federal Reserve reducing its massive stimulus programme might exceed that of 1994.
Speaking in Brussels, Jörg Asmussen, a German member of the ECB executive board, said policymakers must learn from the mistakes in communicating a shift in US monetary policy in 1994, the Financial Times reports.
His comments come as financial markets await the results of a key meeting of the Fed next week which could see a tapering of asset purchases as soon as this month.
Asmussen said: "In early 1994, when the US recovery gained strength, the Fed started a tightening cycle and bond markets crashed not only in the US but also around the world.
"If spillovers were large in 1994, we can expect them to be even larger today in an even more deeply interconnected world."
Although the ECB believes it is too early for the eurozone to exit from "monetary accommodation", Asmussen suggested clear communication will be key to a successful unwinding of stimulus policies.
"Clarity regarding central banks' "reaction functions" is crucial to avoid sharp movements in yields," he said. "This is because the impact of economic developments on yields depends on markets' expectations on how the central banks will react."
"Inflation fears amplify the impact of economic developments on yields. Therefore, it is important that inflation expectations remain well anchored."
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